Annuities Give Participants Head Start for Decumulation

A survey last July from State Street Global Advisors (SSgA) found a significant majority of participants (80%) believe a guaranteed monthly payout benefit is a “must have,” even if it means compromising some access to their retirement savings (see “Monthly Income Guarantee a ‘Must-Have’ for Participants”). “Annuities are financially engineered to maximize a monthly paycheck in retirement that one cannot outlive,” Tim Walsh, managing director of Institutional Products at TIAA-CREF in Boston, tells PLANSPONSOR. “Annuities can offer more monthly income than a straight draw down rate for participants because they pool risk across participants.”

As an example, Walsh says, a 60-year-old who annuitizes $100,000 in retirement savings, assuming a 3% interest rate, will receive $6,000 per year for the rest of his life, regardless of his lifespan, from an annuity. A participant with $100,000 in savings, who decides to use the traditional 4% withdrawal rate, will only receive $4,000 per year, and over the life of their retirement may have to adjust that amount to account for market volatility or personal needs, and may outlive their money.

“If retirees make withdrawals from their retirement plan trying to duplicate a payment from an annuity, there is a greater than 50% probability they will outlive their savings, but an annuity will last as long as they live,” Walsh states.

Participants do not have to give up all of their savings to get a monthly income guarantee with an annuity. According to Walsh, many participants only annuitize enough assets to pay for their core living expenses, and they let the rest of their savings continue to accumulate. An annuity bridges the gap between Social Security and an accumulation strategy. Any time a retiree needs a one-time withdrawal for a health emergency or big vacation, she can withdraw from her accumulation strategy and it will not affect her monthly income.

There are also options to increase monthly income after a retiree begins receiving annuity payments. Walsh says he’s seen some participants annuitize a portion of savings at 65, then annuitize another portion of savings at 70 or 75. “Over the last five years TIAA-CREF has found about 40% of participants partially annuitize to pay for living expenses in retirement, during retirement, at least 70% partially annuitize. It’s not a one-time decision,” he says. In addition, longevity insurance is available that can kick in a higher annuity payment at age 85 or so.

Walsh notes many participants are concerned about annuitizing their savings then passing away sooner than expected and giving up that money. But, there are strategies available for continuing payments to a spouse or leaving an inheritance for children.

At or following retirement, participants can sit down with an adviser to discuss different scenarios, but until then, being able to annuitize at least some of their savings can give them peace-of-mind.