Retirees Looking for Income They Can't Outlive

After spending years accumulating enough money for retirement, baby boomers are now grappling with their next step: turning that money into an income stream that will guarantee a comfortable retirement.

A recent study by Prudential Retirement found that regardless of a person’s level of investing savvy or the amount of money they’ve saved, “people are pretty confused on how to convert a lump sum” of retirement money into an income, says Scott Sleyster, executive VP of Prudential Retirement’s full-service retirement business. Those nearing retirement, the study found, are desperately seeking help in managing the “payout phase” of retirement. But their biggest obstacle “is a lack of education or not having someone to talk to that they can trust,” Sleyster says.

This is the fourth year that Prudential Retirement, a division of Prudential Financial Inc., has conducted its Workplace Report on Retirement Planning. In the latest study, which focused on pre-retirees age 55 to 64, 83% of those polled said that it was “very important” to generate an income during their retirement years, but only 20% said they know how to do so. When asked if they’ve considered using an income annuity to create a retirement paycheck, the study found that fewer than half of the participants, 44%, even knew about the option, and only 9% said they would use it. The study also found that a large percentage of pre-retirees are still focused on accumulating assets or achieving better returns when they should be figuring out how to generate income.

Pre-retirees have two major concerns, Sleyster says, losing the balance they’ve accumulated, and converting their money into income. Later this year, Prudential Retirement plans to release to plan sponsors a separate account product that will “give people a guaranteed return of principal but allow them to keep some equity upside,” he says. Retirees fail to garner optimal returns because they often become too conservative and “move completely into an intermediate bond fund or 100% into stable value,” Sleyster says.

Sleyster says plan sponsors are more focused than ever on addressing “the challenges the baby boom generation faces,” and are “thinking a lot more about having the best investment lineup and open architecture.” Many “larger [defined contribution] plans often opt for separate accounts.”

Prudential is also developing a deferred annuity–or income annuity–which will be available to plan sponsors as well as retail clients of advisors. The deferred annuity will allow retirees to convert a portion of their 401(k) balance into an income stream to supplement Social Security. “We’re trying to remind people that if they’re going to annuitize, they may not want to do it all in one bite; they may want to do it in thirds or fifths,” Sleyster says. “We’re designing a product where people, as they are approaching retirement, could lock in their interest rate in advance by buying a deferred annuity.” At least the way it stands now, Social Security is really the only income that retirees can’t outlive. “Most financial planners will tell you that it makes sense to take some portion of your IRAs or savings or DC balance and supplement Social Security so that 50% to 60% of your replacement ratio is guaranteed and you can’t outlive it.”

Wilmington Trust is also helping retirees generate an income by combining a single-premium immediate annuity from a AAA-rated insurance company with a life insurance policy from another AAA-rated insurer. Joseph Godfrey, managing director and national markets insurance specialist at Wilmington Trust FSB in New York City, says if structured properly, meshing these two products cannot only double a person’s income stream, it can also increase the money they leave to their heirs. “Nobody has ever really put these two [insurance products] together before,” Godfrey says. But the results “almost seem too good to be true when you see the numbers.”