By Jennifer DeLong and Christopher Nikolich
Jennifer DeLong: In the industry, over the past number of decades, we’ve done a pretty good job on helping participants understand that they need to be saving, they need to save early and often, and try to save as much as they possible can. But what the missing piece really is, is that we haven’t done enough as an industry to help participants understand now how to take that savings and translate it into a retirement income stream.
One of the things we ask participants in our research work is how much do they think they can take out of their account per year in order to create an income stream? And the results were really very troubling. About half actually said that they can withdraw 7% or more per year without running out of money.
Chris Nikolich: And nearly a third think they could take 10% or more. Those answers are nowhere close to reality, and they’re virtually guaranteeing themselves that they’re going to run out of money in retirement.
JD: And that’s what the retirement industry needs to address now.
CN: Absolutely. Let’s make retirement plans about retirement.
JD: Gone are the days of the old defined benefit pension plans, where somebody was just able to go to work and do their job and not have to worry about whether they were going to have an income stream at retirement. And defined contribution has many positive things, but also some may say that having everything automated has made participants now think less about their retirement plan and what to do with it.
So Chris, participants do tell us that they’re interested in having certainty of income or guaranteed income, but is there anything from our research that helps us to determine what participants really want in terms of how to have guaranteed income?
CN: We asked a very specific question, Jen, about what would you rather have? First of all, you can’t have guaranteed income without enlisting the balance sheet of an insurance company. But once you do that, we asked people, would you rather have $50,000 a year in guaranteed income but not have any access to your funds and not be able to participate in the stock market when it grows? Or would you rather have $40,000, but have some potential for growth and have the ability to access your funds?
And typically participants always choose more money. Here, an overwhelming majority – two-thirds – said they wanted $40,000 a year, but they were unwilling to give up that growth and unwilling to surrender their assets. So participants are telling us they want income, but there are some caveats or requirements that go along with that that our research shows are really important.
JD: We’ve seen it throughout the industry in many DC plans that have offered an annuity option, where there is that irrevocable choice that the participant has to make, the response or the take-up rate is usually very, very low. And our research does really now show that point, and we’re hearing directly from participants that they want to continue to have that access.
CN: There are structures such as a guaranteed lifetime withdrawal benefit that provides you a withdrawal rate, it provides you income for life. If and when you die, the money is paid by an insurance company or better yet, multiple insurance companies. But you have access to your funds for those late in life spending needs. Your beneficiaries have access to those funds if you don’t die at 90 or 100 and you happen to die at 70. Those are all the reasons why people aren’t buying what is typically referred to or understood as an annuity today, and there are ways to address those concerns with a guaranteed lifetime income solution.
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