Historically there has been a two-track approach to retirement income planning. One track focuses on the accumulation of assets—save enough money and your nest egg will spin off sufficient income to support your lifestyle. You might recall Lee Eisenberg’s 2006 book, “The Number: What Do You Need for the Rest of Your Life and What Will It Cost?” More recently financial services firms have asked this question in their marketing campaigns. It’s likely that many of your retired clients used this approach exclusively through defined contribution (DC) savings plans at work and other accumulation accounts, such as IRAs.
The other track focuses on guaranteed retirement incomes, often provided by defined benefit (DB) pension plans or annuity-type investments. Although fewer workers have pensions nowadays, the idea of planning to create a steady income still has numerous proponents. The attempts to instill DB-like guaranteed retirement incomes into DC plans continue, and the emergence of deferred annuities (“longevity” annuities) shows that at least some retirees value guarantees.
So what’s the correct goal of retirement planning: accumulating assets, building income streams or both? Steve Utkus, director of the Vanguard Center for Retirement Research, discussed this idea in an Oct. 6 blog entry for institutional investors. It’s an important issue because the chosen focus influences retirement plans’ selection of assets. DC plans and participants favor equities over fixed income, he writes, while DB plans and income-seekers focus more on fixed income.