Today, Americans bear more financial responsibility for their retirement than ever.
The days of receiving monthly pension checks are gradually fading. According to Willis Towers Watson, only 16% of Fortune 500 companies were offering pensions to new hires in 2017, down from 59% of firms in 1998.
Defined-contribution plans like 401(k) accounts are taking their place. And this shift is huge. Now, people must count on them, IRA assets, and personal savings to create income streams that might need to last for a very long time.
How long? Potentially decades. The Society of Actuaries estimates that among married couples who are 65, there is a 72% chance that one spouse will live to 85. Not just that, one of them has a 45% chance of reaching age 90.
In other words, someone may spend as much as one-third of their life in retirement. In the face of that, how do you ensure your nest egg lasts for the rest of your lifetime?
While the answer is different for everyone, a new study offers some fresh insights. The Georgetown University Center for Retirement Initiatives partnered with Willis Towers Watson to explore different ways to generate income in defined-contribution retirement plans.
Their findings show how various lifetime income options, whether as a combination or as stand-alones, can help retirees better enjoy lifelong financial confidence.
A Lack of Retirement Guidance Awaits
As the study acknowledges, the shift from pensions to self-managed retirement accounts has brought large change for retired and working-age people.
Currently, more than 50% of all global retirement assets sit in 401(k) accounts and other defined-contribution plans, says Willis Towers Watson.
That means “the responsibility for making complex savings and investment decisions” falls to each of us – decisions that “will significantly affect the amount of money available for retirement,” as the Georgetown report notes.
Further compounding the challenges are the risks that come with people living longer. Life expectancy in the U.S. has gone up drastically in the past several decades. That has led to growing national demand for reliable lifelong income streams.
Scrutinizing Different Lifetime Income Solutions
To help investors make the most of their money and convert savings into reliable lifelong streams of monthly income, the study analyzed six different lifetime income solutions:
- An immediate annuity
- A laddered bond portfolio
- A target date fund using a systematic withdrawal plan
- A managed payout fund
- A deferred fixed annuity with a target date fund
- An investment portfolio in conjunction with a guaranteed minimum withdrawal benefit (also known as an income rider)
Each strategy was tested to see how, when someone retired, a starting asset balance would:
1. Generate and protect annual income for retirement.
2. Conserve some or all of the starting asset balance.
3. Impact the risk of running out of money at any time over a 30-year period.
In the third case, the researchers tested each solution’s risk of running out of money in wide-varying conditions. Those ranged from worst-case to best-case scenarios according to market performance and different withdrawal decisions for income.
Securing Lifetime Income for a Comfortable Retirement
The study’s assumptions included:
- Having a salary of $80,000 before the investor retired.
- Setting a goal of replacing 70% of salary income in retirement.
- Having a retirement account balance of $640,000 (i.e., 8x their salary amount).
The analyzed outcomes included:
- How much annual income each solution paid out at ages 65 and 85.
- The remaining account balance at 85 for each solution.
- The potential for running out of income at any point from 65 to 95.
For the goal of 100% income certainty, an immediate annuity would be purchased at age 65 with the $640,000 balance of all retirement savings. This immediate annuity solution was the “benchmark” which all of the other lifetime income solutions were compared against.
In the case of the fixed deferred annuity with a target date fund, annuity payouts would start at age 80. The investment portfolio with an annuity providing a guaranteed minimum withdrawal benefit would start at 65.
Which Lifetime Income Solutions Performed Best?
Among scenarios that were halfway between worst-case and best-case situations, the study’s findings were:
- At age 65, the immediate annuity and the fixed deferred annuity provided the highest initial income of $43,000 per year, as did the systematic spending and the managed payout solutions.
- At age 85, the changing market conditions and account withdrawals clearly had an impact on different lifetime income solutions’ performance.
- At 85, the immediate annuity, systematic spending solution, and fixed deferred annuity still generated an annual $43,000 payout, outperforming the other three options.
- Even so, the lifetime income solution with an annuity guaranteed minimum withdrawal benefit paid out up to $6,000 more than the laddered bond and managed payout options.
- The fixed deferred annuity (which also included a target date fund) and the systematic spending solution were at risk of running out of money at any point from ages 65-95.
- Keep mind that the deferred annuity solution had the guaranteed income start at 80 -- and depended on the money in the target date fund performing well.
- The immediate annuity and the guaranteed minimum withdrawal benefit option weren’t at risk – as weren’t the laddered bond or managed payout options.
Overall, the study findings show that in the uncertainty of how markets and the economy might perform, adding sources of guaranteed lifetime income to a portfolio can beneficial in a few ways.
Not only can they offer dependable income streams that don’t change from month to month. They can also help maximize the amount of monthly income paid out over a decades-long retirement.
Lifetime Income Solutions Better Than Nothing
Summing up the findings well, the study authors wrote:
“The purpose of lifetime income solutions is to convert accumulated savings into a stream of income in retirement… A paradigm shift must occur in the role DC plans play in building and strengthening retirement security. It is time to move away from a myopic focus on wealth accumulation to emphasize generating and protecting lifetime income.”
And it's as the Georgetown University Center for Retirement Initiatives director Angela Antonelli observes. Lifetime income options give retirees more choices and flexibility.
In a column on Forbes.com, she writes how a MetLife study captures the challenges of people self-managing their retirement accounts:
“A recent MetLife study found that one in five individuals who took a lump sum distribution from their retirement plans ended up spending it all in just over five years. That leaves those retirees with nothing more than a Social Security benefit for the rest of their lives — unless they return to work to make ends meet.”
The conclusion? “Workers should seek to implement a lifetime income solution to meet their retirement spending needs,” Antonelli recommends, “rather than taking an ad hoc approach to spending down a nest egg in the golden years.”
Creating More Income Certainty for You in Retirement
Do you think that you could enjoy more peace of mind by exploring different lifetime income strategies as part of your retirement plan?
Would you like to explore how these lifetime income options might be able to offer a more worry-free, financially confident lifestyle? Financial professionals at Jennifer Lang Financial Services, can assist you in analyzing your options and seeing if any guaranteed lifetime income options make sense for your situation. Contact us today.