It’s Time to Rethink Retirement, Says T. Rowe Price

The conventional image of retirement—in which workers stop working entirely at age 65 and exit the workforce for good—is no longer the reality for most Americans. Yet decisions about employment, benefits and savings often still assume this traditional path, according to T. Rowe Price’s latest white paper, “The Success of Defined Contribution Plans and the Road Ahead.”

Employers need to rethink how and when they shift full-time employees into a “transitioning to retirement” workforce, the paper suggested. Compensation and benefits must adapt to the shift. Some workers may prefer to have reduced hours while maintaining health coverage. Others might prefer forgoing benefits in exchange for more flexibility. Still others may want to switch roles and work in a more limited capacity. Employers must figure out how to accommodate these varying needs, T. Rowe Price stated, and should design a transitional workforce model and appropriate benefits.

Sudipto Banerjee, director of retirement thought leadership at T. Rowe Price, says plan advisers and plan sponsors do not directly identify the “transitioning to retirement” group.

“Ultimately, it is on the employee to decide when they are ready to take the steps toward transitioning into retirement,” he says. “Employers can best support this transition by offering flexibility in their policies around hours, compensation and benefits. Flexibility is key to retaining talent who are considering retirement.”

In addition to transitioning workers, there is a growing need to prevent “leakages” from retirement accounts. When emergencies arise, many workers dip into their retirement savings, jeopardizing their long-term financial security. The SECURE 2.0 Act of 2022—legislation aimed at boosting retirement savings—introduced some solutions, such as permitted hardship withdrawals and the creation of a new account type specifically for emergency savings, the pension-linked emergency savings account, or PLESA. However, the complexity of these options can make them difficult to implement and navigate.

The paper recommended an alternative approach, offering out-of-plan emergency savings accounts. These accounts allow workers to set aside money specifically for emergencies, reducing the need to tap into retirement funds prematurely. By nudging workers to contribute small portions of their salaries to these accounts, plan sponsors can help individuals build a financial cushion for unforeseen circumstances while preserving their retirement savings.

Retirement Income

Retirement income is also evolving, the paper explained, with new products emerging to help individuals manage their money in retirement. However, simply offering products like annuities or structured payouts is not enough; participants need help understanding how these products fit into their overall retirement strategy, the report’s authors argued. Deciding when to retire, when to claim Social Security and whether to downsize or relocate are all interconnected decisions.

Employers and plan advisers should focus not only on offering the right products, but also on providing education and guidance. Retirement planning needs to be comprehensive, showing participants how each decision impacts their long-term financial health, the report contended. By helping workers choose the right products for their individual needs, employers can empower them to make informed decisions that will secure their future.

As retiring becomes a more fluid and complex process, employers and policymakers must work together to develop new strategies for compensation, benefits and retirement planning, T. Rowe Price concluded. This will mean designing flexible workforce structures, addressing financial emergencies and offering personalized retirement income solutions.