Retirees face a number of challenges to their financial security, including living longer and facing the danger of depleting their savings too soon. The pandemic has further threatened retirement nest eggs, as a growing number of people need to take Social Security benefits early, before full retirement age, thus reducing those payments in the long run.
A new study released by Principal Financial Group in conjunction with the Stanford Longevity Project outlined these and other problems retirees face and provided at least one way this group can “spend their retirement savings in a predictable and responsible fashion,” the study states.
One answer to the challenge of a longer retirement was “widespread adoption of guaranteed retirement income products to supplement Social Security” that include purchasing annuities.
Fountain of Youth?
In the mid-20th century, the average American could expect to live 13.9 years after reaching the age of 65, the study stated. That figure jumped to 19.4 years by 2016. The reasons for this increase, the study stated, included medical advances, economic progress and lifestyle changes.
But living longer also means more money is needed to support an extended retirement. The study found that length of life and the state of Social Security were the second and fourth most important factors determining how much those surveyed saved for retirement (cost of health care being the first concern).
The good news, the study notes, is that several innovations over the past 15 years have helped Americans save, including auto-enrollment and auto-escalation of defined contribution savings and the growth of target date funds.
However, Principal states, “helping Americans spend their retirement savings in a sensible, measured way should be the next frontier for retirement planning.” And one answer for that, the paper states, is income annuities, which can mean guaranteed lifetime income.
Barriers to Entry
1. Lack of retiree interest: The study asked whether widespread use of annuities help retirees better manage retirement planning. Its panel of experts, the paper states, “uniformly agreed that greater annuitization of retirement income would furnish Americans with retirement predictability and allow them to make sounder judgement about what and when to spend.”
The paper also mentioned a Towers Watson study finding that among “retirees with similar wealth and health characteristics, those with annuitized incomes are happiest.” Further, Principal’s own study in the first quarter 2020 found retirees who had guaranteed income through annuities “were more likely to feel confident and accept more market volatility with other assets.“
Yet the Stanford Longevity Project found only 7% of respondents cited annuities as part of their retirement plans.
2. Too complicated: Although the paper was focusing on income annuities, it noted one barrier to widespread acceptance was other types of annuities, such as variable, indexed and fixed deferred annuities that can be more complicated.
If these products are too complicated, advisors might be reluctant to recommended annuities because of their own lack of familiarity with the products, the study states.
Further, plan administrators may not offer them. In 2019, only 2% of companies supported the “process that enables participants to convert account balances into lifetime income.” And in 2020, 75% of companies said they didn’t see offering these products in the future.
Why not? Fiduciary concerns, operational and administrative concerns, waiting to see the market evolve more, participant utilization concerns, difficulty with participant communications, cost barriers and lack of interest in making plan enhancements for terminated participants, the study stated.
3. Need for better products: With more than 10,000 Americans turning 65 every day, the study states that there “is an urgency to the need here that plan sponsors should take into account as they assess providing important new functions for their plan participants.”
The study recommends that plan sponsors and major insurance companies collaborate to develop more low-cost, easy-to-understand annuities.
They also should develop education efforts for customers, i.e. making sure advisors and their clients understand the differences in annuities.
Finally, the authors said, Congress should continue to support the development of lifetime guaranteed income products as a central feature of the American retirement system. Better data would help with all these aspects.
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