Needed: Retirement Income Strategies

If you fail to prepare, you are preparing to fail. – Rev. H. K. Williams, 1919.

An income strategy is a central component to any comprehensive retirement plan. Determining what income sources can be tapped and at what time, setting up systematic withdrawal plans, annuitizing a portion of assets, claiming Social Security or pension benefits, identifying the expected amount each source will provide, addressing tax exposure, and other tasks are critical for investors to ensure their income can cover all of their expenses throughout a retirement of uncertain length.

With a rising number of workers expecting to cover their basic living expenses in retirement by deploying their savings, an income strategy seems increasingly essential for safeguarding retirement security.[i] Moreover, recent LIMRA research shows that creating an income strategy is associated with greater retirement confidence. For example, investors – especially those not yet retired – who have created these strategies are more likely to agree with a series of positive statements about their financial situations, including confidence in being able to live their desired lifestyles in retirement (Figure 1).

Figure 1 – Agreement with Statement “I am Confident That I Will Be Able to Live the Retirement Lifestyle I Want”

Income Strategies Are Not Common

Despite their importance, most retirement investors haven’t created any income plans or strategies. Just over one third — 36 percent — say that they have established a specific plan or strategy for generating retirement income from their savings.[ii] ?As might be expected, certain factors are associated with the development of an income strategy. Investors who are older and wealthier are more likely to have created an income strategy than investors who are younger or less wealthy (Figure 2).

Figure 2 – Have Developed a Specific Plan or Strategy for Generating Income from Retirement Savings, by Investor Characteristics

Having an income strategy is not just a function of investor characteristics — the income sources themselves are linked to the development of a retirement income plan. Retirees receiving income from defined contribution plans, IRAs, or after-tax accounts are more likely than other retirees to have specific income strategies in place (Figure 3A). Similarly, non-retired workers who anticipate receiving income from traditional IRAs or after-tax accounts are more likely than other workers to have income strategies (Figure 3B).[iii]

Figure 3A – Retirees: Have Developed a Specific Plan or Strategy for Generating Income from Retirement Savings, by Income Sources Received

Figure 3B – Non-Retired Workers: Have Developed a Specific Plan or Strategy for Generating Income from Retirement Savings, by Anticipated Income Sources

This pattern partly reflects the tendency of wealthier investors both to have more income sources and to have created strategies. Additionally, the findings highlight the necessity for owners of qualified and nonqualified accounts to actively choose how to generate income in alignment with their retirement goals. Some investors may be guided by the IRS’s required minimum distribution (RMD) rules for traditional, pre-tax-funded qualified accounts; analyses have demonstrated that an RMD-based income strategy is generally sustainable, since it incorporates remaining life expectancy.[iv] However, such rules only apply to retirees above age 73, and no such requirements exist for after-tax or Roth accounts.

Role of Financial Professionals

In addition, investors whose households regularly work with financial professionals (FPs), such as investment brokers, financial advisors, insurance agents, and bankers, are more inclined than those without FPs to have created an income strategy (42 percent versus 30 percent, respectively). Discussions with FPs provide opportunities for comprehensive retirement planning to occur, including retirement income planning. Investors who do not work with FPs must take the initiative to begin planning, familiarize themselves with various income strategies, and make an informed selection on their own. Most Americans lack the financial discipline and knowledge to do so. As a result, some investors will adopt simple yet suboptimal strategies that risk over- or under-consumption as well as asset depletion early in retirement.

Investors who don’t work with FPs claim that they do not want to pay fees or listen to sales pitches for unneeded products, and believe that they can do just as well (if not better) on their own.[v] FPs can address these concerns by being more transparent with fees, focusing on client needs and preferences rather than product pushes, and demonstrating value through comprehensive planning and guidance that most non-professionals simply cannot achieve independently. FPs may draw in more investors by marketing their income planning services and through referrals, which are often cited by clients as what initially prompted them to work with their FPs.[vi]

Encouraging more investors to work with FPs is half the battle: Only 53 percent of investors who have created income strategies say that FPs helped to produce them. While the percentage who built their income strategies with an FP’s assistance is higher than the percentages who performed other key planning activities with an FP’s help, it still leaves 8 in 10 investors with either non-professionally-created plans or no plans at all for generating income from their savings.[vii]

Why aren’t more FPs providing income strategy planning services to their clients? Upcoming LIMRA research will explore this question, but it’s clear that many FPs have been trained with an “accumulation mindset” and have been incentivized to gather assets under management rather than helping clients to draw down assets. While outside of the comfort zone of some FPs, this kind of in-depth planning will be crucial, both for differentiating themselves from the competition and for optimizing their clients’ income strategies. It may not be easy to pivot to an income orientation, but the long-term financial security and peace of mind of their clients is at stake.

[i] Among non-retired workers, age 50 to 75, with at least $100,000 in household investable assets, and who plan to retire within 10 years, the proportion who do not expect to be able (or are not sure whether they will be able) to receive enough money from lifetime-guaranteed sources such as Social Security or pensions to cover all of their households’ basic living expenses rose from 42 percent in 2017 to 54 percent in 2023. Source: Analysis of annual Consumer Surveys and Retirement Investors Surveys (2017-2023), LIMRA, 2023. For additional information about this research, see 2023 Retirement Investors: Behaviors, Attitudes, and Financial Situations , LIMRA, 2023 [log-in required].

[ii] Analysis of 2023 Retirement Investors Survey, LIMRA, 2023. All survey participants were a) aged 40 to 85, b) had $100,000 or more in household investable assets, c) were retired or working for pay, and d) had sole or shared responsibility for making the household’s financial and investment decisions.

[iii] Anticipated receipt of income from DC plans is so widespread among workers (expected by 80 percent) across different types of investors that the creation of income plans is unrelated to this income source.

[iv] For example, see Sun, W. and Webb, A., “Should Households Base Asset Decumulation Strategies on Required Minimum Distribution Tables? ” Center for Retirement Research at Boston College, Working Paper 2012-10, 2012.

[v] Among investors who do not work with FPs, 49 percent say that they don’t want to pay the fees associated with working with an FP, 44 percent say that they can do just as well (if not better) on their own, and 29 percent believe FPs will try to sell them unneeded products.

[vi] Among investors working with FPs, 42 percent say that they did so based on referrals from a family member, friend, or colleague.

[vii] Examples of other retirement planning activities include determining what Social Security benefits would be at different retirement ages, estimating how many years assets will last in retirement, and determining health care coverage.