Financial
Trends
First, most defined-contribution pension plans allow participants to borrow from their accounts for nonretirement expenditures such as purchasing a home or paying educational or emergency expenses. Borrowing may encourage participation in pension plans, but may also reduce savings available for retirement.
Although tax laws discourage using pension assets for nonretirement purposes, workers increasingly borrow from their plans. Others cash out their pensions when they change jobs despite penalties and tax liabilities. Also, workers who choose to receive their pensions or savings as a lump sum payment at retirement rather than a guaranteed life annuity must carefully manage their assets to make them last throughout their life.
Finally, some individuals lack the information they need to wisely manage their investments and increase both their retirement contributions and returns. For example, they are unaware that prudent investment practices such as diversification can help them spread their holdings over many investments and reduce excessive exposure to any one source of risk.
A significant number of older adults rely on employment earnings to supplement other sources of income. The AARP 2002 Work and Career Study, based on a national survey of workers ages 45 to 74, found that 69 percent of respondents plan to work in some capacity during their retirement years. In 1998, earnings from work represented about one-third of the income of households with persons aged 65 to 69.
Plunging stock portfolios have caused some older workers to postpone retirement and convinced some retirees to rejoin the labor force. Between March 2001 and August 2002, the labor force participation rate for workers aged 55 to 64 increased 2 percentage points. In contrast, labor-force participation among younger workers declined during this same period. The magnitude of this rise in labor force participation during a period of recession and rising unemployment is unprecedented in post-war U.S. economic history.
Updated: November 2, 2007
