The Rx For Income Planning? More Education And Tools
To ensure retired employees have a steady income stream in their post-employment years, it will take more than including an income option in their qualified retirement plans, cautioned Dallas L. Salisbury at a meeting here.
Workers also need enough education to make informed decisions about their choices, contended the president and CEO of Employee Benefit Research Institute, Washington, D.C. Without such education, most employees take the lump sum option, he explained.
Speaking here at the annual retirement income conference of the Reston, Va.-based National Association for Variable Annuities, Salisbury allowed that many people do receive savings education and encouragement to save. However, he continued, they receive “extraordinarily limited” education about protecting their assets from risks they face in retirement (e.g., longevity, inflation).
Another speaker at the meeting, Matthew Greenwald, president of Matthew Greenwald Associates, Washington, D.C., said he believes people are not totally content with a retirement plan that focuses only on accumulating a sum of money.
However, new steps will be needed in the retirement planning field to ensure that plans address workers income needs once they retire, Greenwald maintained. Specifically, he called for more education about annuitization as a distribution option, more retirement income management tools, more product innovation and enactment of related legislation (see chart).
Salisbury also said education is important. But even when plans put emphasis and education on income options, he added, plan data shows that “getting people to take the income option is very difficult.”
He cited the experience at TIAA-CREF. This plan offers a range of retirement income options, including lifetime annuities, an interest-only option, systematic cash withdrawal, transfer payout annuity and a minimum distribution option, Salisbury noted.
In addition, it details the options on its Web site and also asks questions about the employees health and whether the employee expects to live at least another 5 years.
These things suggest TIAA-CREF is “attempting to get people to think clearly about the questions they will face,” Salisbury said. In fact, he added, it is “aggressively pushing people to face what they will actually spend in retirement.”
Even so, just 45% of TIAA-CREF retirees now choose the life annuity option with the insurance component protection, he said. Thats down from 100% in 1988, which was the last year that TIAA-CREF offered only an income annuity option.
Once the organization started offering multiple income options in 1989, he noted, people began making other choices.
Some retirees may not take the annuity option because they are postponing the decision to take any form of income stream, Salisbury speculated. Also, a “significant number” of retired faculty in the TIAA-CREF plan still receive income from other paid employment, and still others are participating in other forms of “phased retirement.”
Other plans may not even offer income annuity options, the EBRI president said. And, when plans do offer such options, many workers still dont take them. Perhaps the people think there is so much money in their accounts that it will last forever, Salisbury suggested. Or, maybe they may already have wealth tied up in annuities elsewhere.
That is not all there is to the story, however. Using simulations derived from modeling software, Salisbury showed that people actually can reduce the savings they need to build for retirementif they annuitize their individual accounts at retirement rather than take the money as a lump sum.
Greenwald noted that research he has conducted indicates that most people who retire do want a regular stream of income for life, sufficient to maintain their lifestyle.
They want this because they realize they will have bills to pay for the rest of their lives, he said, and because they are accustomed to living paycheck to paycheck.
This preference is so pronounced that having a “guaranteed lifetime income” ranked as the top retirement plan feature in a survey published in January 2004, he said. Called the Retirement Plan Preferences Survey, it was sponsored by the Society of Actuaries and the American Academy of Actuaries and conducted by Matthew Greenwald & Associates in early 2003.
Among other things, the survey found that 82% of 600 retiree respondents ranked guaranteed lifetime income as being a “very important” retirement plan feature.
Also, 59% of 790 respondents who are still working ranked guaranteed lifetime income as very important.
“I didnt expect the numbers [in favor of guaranteed lifetime income] to be that high,” Greenwald said, “especially since people act so differently” when it comes time for making retirement income decisions. By acting differently, he said he meant that people often do not take the annuity option when they have the opportunity to do so.
Despite the fact that people value this objective, he said, research shows that people tend to underestimate several factors that impact the income decisions they make. For instance, they underestimate their financial needs at the older ages, their personal life expectancy and the impact of inflation on their finances, he said.
Of retirees responding to a 2003 SOA survey, for example, 67% of 151 female retirees and 63% of 122 male retirees underestimated how long the average 65-year-old male/female can expect to live, said Greenwald.
When asked to estimate their own personal life expectancy, he said that one-third of respondents underestimated this by 5 years.
Financial planning for old age has psychological impediments, too, Greenwald said, citing other research his firm has done. People may experience anxiety, for example, and that can lead to avoidance and denial. Or the mathematics of planning may be less clear and deterministic than it should be. Some will have a reduced ability to understand the long term, and some may not want to defer gratification now in order to have more financial security later on.
With the development of the necessary retirement planning tools and education, “well all be better off,” Greenwald concluded.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 3, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.