The COVID-19 pandemic is making many Americans — whether they’re approaching retirement age or just starting out in their career — anxious about their finances, and retirement savings and plans. As a result, people are increasingly looking for lifetime income products that are less susceptible to factors like market volatility, retirement longevity, and challenges created by cognitive decline in order to secure their income in retirement.
So, how do we balance our uncertainty about our financial futures amid a pandemic, concerns about outside forces impacting our retirement plans, and choosing the right lifetime income products to provide financial security in retirement?
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First, consider investing a portion of your assets during your accumulation years to a fixed annuity, particularly if it’s offered as part of your employer’s sponsored retirement plan. This strategy helps solve for the risks that keep preretirees and retirees up at night. When you invest in a fixed annuity, you’re signing up for a guarantee that your account will never decrease in value, even in the most volatile market environments, like the ones we’re experiencing currently. In addition, you receive a minimum rate of return, which will never be lower than the stated amount and has the potential to be higher than the guaranteed minimum. A drawdown strategy such as a 4% withdrawal a year in retirement, can put retirees at risk for exhausting their savings as they age. The right fixed annuity never runs out. It can provide peace of mind as you near retirement and no longer receive a regular paycheck. Investing a portion of your savings in a fixed annuity also gives you the flexibility to allocate money to other asset classes. This could mean investing in an equity mutual fund or a low cost variable annuity where an individual not only gets market exposure, but the added benefit of lifetime income.
Earlier this year, the SECURE Act was passed with the goal of strengthening retirement security in America. A provision within this legislation, enables employers to offer annuities as an investment option within 401(k) plans. Now more individuals will likely gain access to these investment options.
Individuals continue to tell us that certainty of retirement income is what they are trying to achieve with their retirement savings. In fact, a majority of respondents in the TIAA 2019 Lifetime Income Survey believe guaranteed lifetime income – like an annuity – provides a feeling of security (83%) and facilitates better planning by enabling them to know how much they can spend in retirement (74%). And, if the need arises to dip into other assets, you will know your fixed lifetime annuity will continue to pay you through retirement.
And second, while the traditional 60/40 rule-of-thumb is for an investor to hold 60% of their retirement savings in equities and 40% in bonds, investing in bond funds to fund your retirement does not necessarily provide steady income and can leave you exposed to market volatility with interest rate fluctuations. Some retirees who must use their fixed income investments for income needs can end up with increasingly less income, creating a dynamic where they could also completely run out of assets. In contrast, some retirees fear outliving their savings and may be overly conservative. These individuals may spend very little and are not achieving the quality of life that is possible in their retirement years.
Those who incorporate annuities into their retirement plan can also protect against one of the most challenging risks to solve for: longevity risk. While no one can predict how long they will live, using fixed annuities mitigates the risk of spending your nest egg too quickly or, conversely, stockpiling all your savings and not fully enjoying retirement. Instead, fixed annuity products can provide certainty about how much income you will receive, allowing you to plan and make financial decisions accordingly.
Most people remain unsure of where lifetime income comes from or how to get it. The TIAA survey found that one-in-three (32%) didn’t know if lifetime income is a feature of their employer-sponsored retirement plan; of those who thought it was, many incorrectly believe it is offered through mutual funds (35%) or target-date funds (20%).
We believe annuities should be offered in employer retirement plans because they can insulate employees’ retirement savings from the most pressing risks, while helping them receive lasting income. Retirement plan annuities or those sold as in-plan options to participants in retirement plans are typically low-cost options. They may actually have lower costs than many other investment options because they utilize economies of scale to keep pricing low.
But investors should be aware that all annuities are not the same. Retail annuities—available outside of group retirement plans—may have higher fees and are the ones that can have high sales loads (commissions), high surrender charges, and high investment expenses.
No one knows how long their retirement will be or if market fluctuations, global pandemics, or other outside forces will impact their retirement savings. But investors can hedge against these uncertainties with lifetime income products like annuities to ease concerns about their financial futures and to help ensure financial security in retirement.
Any claims are backed by the claims paying ability of the issuing company. In this piece, guaranteed lifetime income references fixed annuities.
Patrick Rowan is senior managing director and head of fixed annuities at TIAA.