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Retirement Planning > Retirement Investing

Partial annuitization: A useful planning strategy

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There’s an interesting and well-known dichotomy between researchers’ view of income annuities’ value and retirement plan participants’ behavior. 

Researchers correctly argue that guaranteed income annuities are excellent tools for covering retirees’ basic expenses and securing a lifetime income for one or two lives. Participants in defined contribution (DC) and defined benefit (DB) plans might agree with those points, but they vote otherwise with their funds.

It’s estimated that between 50 percent and 75 percent of DB plan benefits are taken in the form of lump sum. Even though an annuity is the plan’s default option and lump sum withdrawals involve the completion of more forms and waivers, most DB-plan participants nonetheless take the money and run. 

Even fewer DC-plan participants choose to annuitize their balances: only an estimated 10 percent of retirees age 65 or older go the annuity route.

One possible reason for the low annuitization rates is that retirees tend to think in either-or terms and overlook the partial annuitization plus lump sum combination. In some plans, however, this combination is widely used. 

Ed Moslander is senior managing director and head of TIAA-CREF’s Institutional Client Services organizationin New York City. He estimates that about 40 percent of the firm’s DC participants start an annuity payment upon retirement and the majority of them do it with a partial annuitization. Among that group, 57 percent will annuitize again in the future in a form of “serial” annuitization.

So how does TIAA-CREF manage to get such a high percentage of its DC-plan participants to partially annuitize? Moslander cites several factors. Many of the participants work in higher education and do not have DB plans. Consequently, they become accustomed to thinking of their DC plan as their pension plan, not an additional pot of money. 

TIAA-CREF also encourages them to focus on lifetime income by illustrating in their statements how the plan balance will translate to an income stream. “In partnership with the plan sponsors, (we) have always tried to keep the participants focused on this as an income replacement vehicle, very much like we’ve always thought of defined benefit pension plans as an income replacement vehicle, not kind of a wealth accumulation, lump-sum vehicle,” he explains.

Another factor is TIAA-CREF’s emphasis on pre-retirement consultations with plan participants before their retirement date. Those consultations between clients and the firm’s financial consultants consider how much income the retiree would receive based on the amount annuitized. It’s an iterative process, he says, and the parties go back and forth over illustrations until the participant decides the level of guaranteed or variable retirement income they want to receive.

Partial annuitization is attractive for several other reasons, Moslander adds: “One is to maintain access to funds in case they need it for an emergency, especially of course, a medical emergency. And, the second, although this used to be a little more prevalent perhaps than it is today, is as an inflation-protection matter; that I can serially annuitize, if you would, in an inflationary environment to maintain purchasing power.”


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