Because of the extended life expectancy many baby boomers expect to have, about one-fifth of boomers surveyed by Lincoln Retirement Institute speculated they would fall short or just meet their basic living expenses with their current resources.
They have other concerns too: the long-term viability of the Social Security system, the dwindling number of defined benefit plans and rising health care costs.
Taken together, these forces are spurring boomers to look for retirement savings solutions that will provide opportunities for long-term growth through quality investment options at time of distribution.
Opting to invest distributions from a retirement plan in a variable annuity with a guaranteed lifetime income benefit is one way to ensure retirement income lasts.
For years, employers and employees have grown accustomed to having defined parameters around the distribution of retirement income from pension plans.
More recently, however, economic and regulatory changes, such as the Pension Protection Act of 2006, will make defined contribution plans the primary vehicle for retirement income for most employees.
The growth of these plans has created an impetus for the evolution of retirement plan distribution options that will offer growth and protection of assets well into retirement.
Annuitization of DC plans allows retirees to make assets from 401(k) and 403(b) plans or other retirement programs work for them at the end of their careers.
More time in retirement means assets have to work harder to offset the effects of inflation and market volatility, both of which can diminish purchasing power and significantly erode value of savings. Even modest inflation can have a profound effect on purchasing power; and a market downturn, particularly in the early years of taking income, can quickly deplete savings.
VAs with a guaranteed income benefit rider can protect participants from market downturns and ensure that their income payments will not fall below a certain percentage of the initial payment.
In addition to downside protection, VAs also offer growth potential by allowing participants’ retirement income benefit to grow with gains in the equity market. Because many retirees have many years in retirement ahead of them, the VA’s opportunity for future growth is an important advantage that can help combat the effects of inflation.
All these features effectively allow people to create wealth and grow assets and enjoy these assets in retirement.
But retirement can be an unpredictable road with unforeseen detours unrelated to the markets. For this reason, boomers are reluctant to relinquish complete control of their funds.
Some guaranteed income benefit riders can offer participants the ability to take withdrawals in addition to their regular income payments. Naturally, withdrawals will reduce the subsequent income and guaranteed minimum income. Still, access and control are important advantages to look for when annuitizing a DC plan.
Another type of distribution option is a guaranteed minimum withdrawal benefit. With GMWB options, participants have the ability to accumulate retirement income with protection against downside market risk and to maintain the right to withdraw a maximum percentage of their entire investment each year.
Most GMWB options will guarantee a level of growth and allow that guarantee amount to be paid out over installments for life. This type of guarantee protects participants against losses that have been incurred without losing any upside potential.
To make the most of retirement plan assets, retirees need flexible, yet secure, retirement income plan distribution options. These options should ensure that their money–and quality of life–lasts and is protected throughout retirement.