Assets or income: What do retirees need?

The debate over the correct focus has emerged over the past decade with the emergence of DC plans and DB plans that offer participants lump sum distributions. “I think with the growth of defined contribution plans and more people actually facing the choice of deciding how much do they want in the form of guaranteed income in retirement versus how much do they want in the assets, the psychology began to shift, the thinking about what exactly is the purpose of the retirement plan?” he says. “Is it merely to provide inflation-adjusted income at retirement, in which case you take all your wealth and you would obviously annuitize it in some sort of CPI-indexed inflation annuity or are there other purposes to retirement savings?”

Advisors will know from experience that few clients would elect to go 100 percent with guaranteed incomes—it’s just too inflexible to deal with unexpected expenditures. As Utkus points out, retirees typically have multiple goals: income, spending flexibility, and frequently bequests. They also already have an inflation-adjusted annuity in the form of Social Security’s retirement benefits to help cover basic living expenses.

These factors are influencing the way some retirement plans and advisors are approaching the assets versus income decision, he says. But as he notes in the blog post, it’s not necessarily an either-or issue: “It’s not that we have to wholesale switch our mindset from accumulation to income payouts. Rather, participants deserve more of an “income orientation” to their defined contribution plan, without going so far as adopting a liability-driven approach in its entirety, and investing mostly in cautious investments.”