Roberta Rafaloff, vice president, institutional income annuities, MetLife, clearly spends a lot of time in the complex world of retirement income planning products.
She recently told PLANSPONSOR her 29-year career at MetLife has been dominated by annuities design and “thinking about the transition to retirement income from defined contribution (DC) and defined benefit (DB) plans.”
“In the last three decades we have seen a real evolution in how retirement income planning has been looked at and thought about,” she suggested. “If you look at the prevalent reasons why people aren’t accessing income in the DC planning context, in particular, you see some participants who say they like to maintain control of their money, and others who say they will have separate sources of lifetime income. But there is also a significant group who thinks they can achieve better investment outcomes in the end if they manage the money on their own rather than annuitizing.”
Rafaloff called this last statement “extremely problematic” from her point of view.
“Income annuities are not investments and they really should not be compared to an investment, because in a lot of participants’ eyes the comparison won’t be favorable,” she said. “Income annuities are more properly considered as insurance—insurance that guarantees an individual will not run out of money no matter how long they live. That is an entirely different idea from, say, buying a mutual fund to attempt to increase your net wealth over time.”
Rafaloff went on to observe that many who fail to purchase any lifetime income when they have the option to do so later end up regretting their choices. They are paralyzed at the time by the unfortunate possibility that they could die earlier than expected—perceived as the main risk of annuities as investments. But once investors think about annuities more in the vain of insurance, comfort can increase dramatically.NEXT: Giving up the pot of gold isn’t easy
“If you think about it, when people look at their defined contribution plan at the point of retirement, they tend to look at it as that proverbial pot of gold. Nobody really gets excited about taking that pot of gold and turning it into a sustainable paycheck,” Rafaloff said. “Taking that lump sum can be tempting; it’s probably going to be more money than the individual has had access to ever before in the past. But for so many people the better course of action is going to be at least considering partial annuitization.”
Of course, for some people it may make sense to take large cash distributions to pay down credit card debt or housing debt.
“But our data clearly shows a lot of people actually take their DC plan money and don’t do anything productive with it, either spending it on a major discretionary purchase or even giving it away in a significant number of cases,” she warned. “It speaks to the personal responsibility ethic that really needs to be driving successful DC plan outcomes. We all think it would be great to be able to give some of your wealth away when you die, but if you’re going to become a burden on other people or on the government later in life because you preferred not to buy annuities, that’s not something most people are going to want to experience, either.”
Again, this is the sense in which annuities should be discussed in a way that is different from DC plan investments, Rafaloff concluded.
“The other thing people should think about is, how well will [participants] be able to manage those assets as [they] grow older and older? Even if [they] are financially savvy now in [their] 50s and 60s, [they] may want to consider carefully how [their] cognitive ability to manage those assets and make optimal decisions may shift over time. I know it might be hard for people to want to think about, but they really do need to consider this. There are many research reports showing most people do suffer material cognitive decline as they age. And so building an insured, stable income plan at the point of retirement or, better yet, in advance of retirement—that’s going to drive the best outcomes for most people.”