Income is the outcome for a secure retirement
The retirement industry is facing a challenge: reorienting how people think about their financial futures in and throughout retirement. A critical element of this challenge is the need to create a “paycheck for life” beyond the working years that will be there regardless of longevity and market fluctuations and downturns.
Whether you call it “a paycheck for life” or “retirement income,” the concept is gaining positive mindshare across plan sponsors, consultants, and participants:
Guaranteed lifetime income and annuitization have been on our radar, and in our area of expertise for a while now. If you know us, you know we have some thoughts on the subject.
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Lifetime income: where it comes from and why it matters
Lifetime income is a stream of payments that lasts for the rest of your life. It can be sourced from a variety of channels, such as Social Security, pensions, annuities, and structured settlements.
Lifetime income delivers important benefits in and through retirement:
Protects assets and lifestyle from market fluctuations and inflation. The stock market can go up and down, and a sudden downturn could have a significant impact on retirement savings. If people have not diversified or have a long-time horizon, they could lose a lot of money in a market crash. Inflation erodes purchasing power over time, so savings will be worth less in the future than they are today. This is especially risky for retirees, who may be on a fixed income. In fact, currently 87% of Americans are extremely, very, or somewhat worried about the impact of inflation on their retirement savings.*
Ensures a steady stream of income, even with longer life spans. Longevity risk is the biggest risk for most Americans, as we are living longer than ever before. If people don't have enough savings to last the rest of their lives, they could run out of money and must rely on Social Security or other government assistance.
With longevity often comes cognitive decline. As people age, cognitive decline could make it difficult to manage finances. This is especially risky for those living alone or who don't have family members who can help them.
Accurately estimating healthcare expenses is another challenge which comes with longevity. Recent studies have estimated that an average 65-year-old couple retiring today would need more than $325,000 to pay for healthcare expenses throughout their retirement. But what about today’s younger workers retiring decades from now, and potentially living longer lives?
Traditional retirement income sources, such as Social Security and pensions, are becoming less reliable. While Social Security benefits are indexed to inflation, the increases, if awarded, typically do not keep pace with rising costs. Many pensions are underfunded, and there is a risk that retirees will not receive the full benefits they were promised.
Lifetime income can do much to alleviate concerns that financial futures are secure for a longer lifetime.
The mindset of Americans when it comes to retirement saving
Americans believe they are at risk of running out of money in retirement.
·?????? A majority (51%) of consumers feel they do not have enough retirement savings to last their lifetime and 32% are not confident they will have enough to cover basic monthly expenses throughout retirement.
·?????? 16% of Americans ages 45 to 75 have retired and returned to work in some capacity.?
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·?????? For 53%, one of the three reasons they retired were “circumstances beyond their control,” such as health-related concerns, job loss, mandatory age requirements, and the impacts of COVID-19.
·?????? 43% believe the 2022 market setback represents a longer-term change that negatively alters their retirement outlook.*
What can we do to help:
Initial education around lifetime income is as much a conversation around setting expectations as it is anything else. Many participants are looking for the security of lifetime income which, in part, comes with knowing they will have monthly income—and roughly how much—when they retire. A recent TIAA Institute study found that 69% of young adults think that their retirement plan includes a guaranteed minimum income after they retire.*
* TIAA Institute. Young adults, their attitudes and outlook toward retirement and the future. June 2023.
A new retirement plan model seems to be evolving in the 401(k) market. In addition to the current tax-advantaged savings plan, we are seeing a “retirement income” plan model which provides a comprehensive view on retirement income strategies, the tools needed to optimize their outcomes, and the option to allocate a portion of their balance to guaranteed income that acts like a paycheck in retirement, for life.
We believe a solid solution lies within the second approach. Creating “diversified retirement income plans” will help participants think through retirement risks and build approaches for their unique situations. But education is needed to win over financial professionals: Investors are more likely to be extremely interested in owning an annuity that guarantees income (49%), than financial professionals perceive (19%).*
Here is a simple, straightforward approach:
·?????? Put in-plan annuities on menu lineups so participants can have choice in their contributions allocations with a product that does provide lifetime income.
·?????? Develop communications strategies that promote “diversified retirement income” plans and use segmented messaging and behavioral economics to inspire participants to action.
·?????? Explain the building blocks for a smarter retirement income plan where guaranteed income covers basic needs.
·?????? Debunk the myth that annuities are problematic: illiquid, expensive, and complicated.
·?????? Demonstrate the compounding effect of modest investment allocations to lifetime income.
·?????? Encourage participants to meet with a financial advisor to review goals and develop a suitable strategy to identify an appropriate amount of savings that could be spent each year to live on during retirement.
At TSG, we have deep experience helping plan sponsors tell the story of guaranteed lifetime income. We can help you help your participants become accustomed to thinking about lifetime income, and to view annuities in a positive light. You can turn to TSG to help you communicate about income in retirement, educate employees about products, and drive the kind of engagement that inspires action and improved outcomes. With the right product, the right flexibility for their situation, and with expert guidance, your participants can aspire to the peace of mind in retirement that earlier generations with DB pensions could depend on.
* ALI Cannex Protected Retirement Income and Planning (PRIP) Consumer Report June 14, 2023
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