A quiet, influential congressional research arm — the Congressional Research Service (CRS) — recently gave members of Congress, and the members’ aides, a quick guide to saving for retirement.
One short section in that short guide is “Converting Savings Into Retirement Income.”
- A copy of the CRS saving for retirement report is available here.
- An earlier article about annuities and behavioral finance is available here.
Given that many congressional aides are about 31, and that typical members of Congress have to think about everything from COVID-19, to military budgets, to running for reelection, the CRS income planning guide may account for a large share of what some people on Capitol Hill will hear about income planning this year.
Cheryl Cooper, a CRS analyst in financial economics, and Zhe Li, a CRS analyst in social policy, are listed as the report authors.
Here’s a look at five things Cooper and Li said about annuities in their report.
1. Annuities may be good alternative to asset-withdrawal-based retirement income strategies.
“Withdrawals mostly are taken in the form of lump-sum distributions or periodic withdrawals,” the analysts write. “Households may face the risk of either outliving their resources by withdrawing too much during earlier years or consuming too little by spending too conservatively. People may also have to make investment decisions on the remaining assets in their retirement accounts.”
2. Annuities take different forms.
“A life annuity — also called an immediate annuity — is an insurance contract that provides guaranteed income payments for life in return for an initial lump-sum premium,” the analysts write. “A life annuity pays income to the purchaser for as long as he or she lives and,in the case of a joint and survivor annuity, for as long as the surviving spouse lives. Another annuity product, the Advanced Life Deferred Annuity, can be purchased at retirement with a smaller share of accumulated assets and payments beginning at a later age,such as 85.”
3. The U.S. annuity market is relatively small.
“Some people may already feel they have a sufficient amount of annuitized income from Social Security,” the analysts write. “In addition, about a third of people aged 65 and older have annuity income from [defined benefit] pensions. Another reason may be that the relatively high fees and expenses charged by insurance companies deter people’s willingness to purchase life annuities. Further, annuity contracts are not easily canceled, and many individuals fear that after purchasing an annuity, they may later need a large sum of money to pay for unexpected expenses (e.g., long-term care or health expenses). In addition, some people might be reluctant to purchase an annuity because they desire to leave a bequest to their heirs.”
4. A new SECURE Act annuitization provision will encourage more employers to offer annuitization options to participants in 401(k) plans and similar types of retirement plans.
“Some researchers suggest that defaulting some portion of 401(k) plan assets into an annuity would likely result in more account holders using an annuity investment product, rather than offering annuities as an option,” the analysts write.
5. Timing might matter a lot.
“One recent study finds that the [annuitization] take-up rate would be higher if participants were required to make annuity decisions a decade before retirement,” the analysts write.
Correction: The current CRS approach to distribution of its reports was described incorrectly in an earlier version of this article. The CRS publishes its reports on the web.
— Read 7 (Polite) Life and Annuity Player Whoops of Joy for the Return of the Secure Act, on ThinkAdvisor.