Guaranteed income strategies have emerged as underutilized methods to not only help people save for retirement, but also provide a stream of income to sustain them during potentially longer life spans.
A study from the Longevity Project, in collaboration with Principal Financial Group®, explores the implications of longevity in retirement and potential policy and industry recommendations.
According to the white paper, Lifetime Income to Support Longer Life: Retirement Innovation and the New Age of Longevity, people entering retirement tend to either overspend and withdraw funds at unsustainable rates, or they underspend, denying themselves basic needs because they’re afraid of running out of money.1
“There’s been a significant improvement in life expectancy over time,” said Sri Reddy, senior vice president, Retirement and Income Solutions at Principal®. “At the same time, many retirees are significantly underestimating how many years they’ll spend in retirement. This uncertainty, combined with variables including declining pension benefits and rising costs, can make it difficult to plan for spending one’s assets in retirement.”
The average American turning age 65 today can expect to live 40% longer than someone who turned 65 in 1950.2 Furthermore, the number of Americans retiring every day has more than doubled over the last 20 years.3
“While helping Americans save enough for retirement must continue to be a critical priority, our research points to the next frontier for retirement—helping Americans spend their retirement savings in a sensible, measured way,” said Ken Stern, Chair of the Longevity Project. “Income annuities have emerged as a viable and immediately realizable vehicle to help many Americans generate guaranteed lifetime income. However, expanding the role of guaranteed lifetime income will require a concerted effort to educate consumers.”
Solving the puzzle of longer life and longer retirement
According to a Longevity Project – Morning Consult poll featured in the study, only a small percentage of retirees and pre-retirees (7%) are counting on annuities to be an important part of their retirement portfolio. This compares to much higher reliance on Social Security benefits (64%), personal savings and investments (38%), and 401(k) or 403(b) plans offered by employers (35%).
The new white paper attributes these low adoption rate to several factors:
- Consumers may not see income annuities as simple or easy to understand. Variable annuities and indexed annuities have a reputation of being more complex and sometimes more expensive.
- Consumers don’t want to “lose” money by putting it in an annuity and possibly dying before getting their money back. They may value access to their money over the promise of not running out of money.
- Financial professionals are still warming up to annuities. Some may lack understanding of how annuities work and may not position them with clients.
- Retirement plan sponsors are the gatekeepers of America’s defined contribution plans—the retirement savings vehicle for millions of Americans. Since very few plans currently offer guaranteed lifetime income options in their plan’s lineup, people may just not be familiar with them.
Product innovations such as automatic enrollment and automatic escalation and the growth of target date funds have helped many Americans to save for retirement. But at retirement, many find themselves in a financial world with little to guide them on how to spend down their retirement savings, facing a wide variety of complicated decisions and few ways to protect themselves financially if their retirement lasts longer than average. These factors underscore the value of working with financial professionals.
1 Longevity Project interview with Steve Vernon, March 6, 2020
2 CDC, National Center for Health Statistics, Health, United States, 2018, “Life expectancy at birth, at age 65, and at age 75, by sex, race, and Hispanic origin: United States, selected years 1900–2017”
3 U.S. Census Bureau / Deutsche Bank https://finance.yahoo.com/news/americans-retiring-increasing-pace-145837368.html