The next step in the transition from defined benefit (DB) to defined contribution (DC) retirement plans is for the latter to offer retirement income programs that retirees can use to convert their account balances to periodic retirement income. So say the Stanford Center on Longevity and the Society of Actuaries Committee on Post-Retirement Needs and Risks in a new research paper.
The report offers strategies to help plan sponsors, advisers and retirees achieve this and other specific retirement planning goals, by demonstrating an analytical framework and criteria for helping them evaluate and compare a variety of possible retirement generators (RIGs). They found there are several ways for defined contribution plans, advisers and participants to approach planning for lifetime retirement income.
The first strategy focuses on straightforward RIGs that can currently be made available in DC plans, including single premium immediate annuities (SPIAs), guaranteed lifetime withdrawal benefit (GLWB) annuities, and systematic withdrawal plans (SWPs) using invested assets. Within a defined contribution retirement plan, an SWP can be implemented as an administrative feature using the plan’s investment funds.
The report notes that SPIAs provide higher expected lifetime retirement income than investing approaches that self-fund longevity risk. As a result, dedicating more savings to annuities guarantees that retirees cannot outlive their income and actually increases expected lifetime retirement income. But devoting savings to annuities reduces accessible wealth and can affect inheritances.
RIGs that invest savings provide access to unused savings throughout retirement, whereas annuities generally do not provide such access. As a result, dedicating more savings to investing solutions increases accessible wealth and potential inheritances but decreases expected lifetime retirement income. Having access to savings provides flexibility and the ability to make mid-course corrections throughout a lifestage that can last 20 to 30 years or more. However, there will be no further income and no accessible wealth and inheritances if retirees outlive their savings due to longevity and/or poor investment experience.
GLWBs are hybrid solutions that both guarantee lifetime retirement income through longevity pooling and provide access to savings. These products project less lifetime retirement income than SPIAs and less accessible wealth than pure SWP strategies, but they may represent a reasonable compromise between competing retirement income goals.
The second strategy—using retirement savings to enable delaying Social Security benefits—increases projected average retirement incomes for all retirement income solutions studied, the report notes. Researchers’ projections assumed retirement at age 65, with the retiree withdrawing from savings the amounts sufficient to replace the Social Security benefits being delayed to age 70. The estimated amounts needed to replace Social Security benefits between ages 65 and 70 were assumed to be set aside at 65 and invested in cash investments.
The third strategy is to combine qualified longevity annuity contracts (QLACs) with SWPs. A QLAC is a type of deferred income annuity (DIA) that delays the start of income until an advanced age such as 80 or 85. The potential attraction of a strategy that combines SWPs and QLACs is that it tries to realize the best features of both systematic withdrawals and annuities. This goal is achieved by keeping a large portion of assets invested to generate retirement income, and also accessible and liquid. A relatively small portion of initial assets is devoted to the QLAC to guarantee a lifetime payout, no matter how long the retiree lives. —PS