What You Need to Know
- As bond yields have remained low, retirees and advisors are increasingly seeking out income sources more reliable than stock returns.
- Social Security, pensions, annuities and even reverse mortgages can provide income for life.
- Relying on total return isn't the best, choice, retirement experts state.
A recent survey found that 78% of advisors reported that predictable income is more important to clients than asset growth. Although the study is from DPL, an annuity platform, the company isn’t alone in seeing a rise in the pursuit for guaranteed income as bond yields have dropped.
As DPL’s CEO, David Lau, told ThinkAdvisor in September, advisors have increasingly excluded bonds from total assets as part of their 1% fee because bonds aren’t yielding that much return.
Further, BlackRock, the largest asset manager in the world, recently announced it was adding annuity options with its new target date retirement product for 401(k) plans that will provide workers a stream of payments through their lives.
Reliable, predictable or guaranteed income can include:
- Social Security: Although “guarantee” is relative, depending on Congress’ ability to finance this in the future, a majority of Americans rely on this income for retirement. However, one guarantee is that each year a person doesn’t tap into Social Security after full retirement age, the amount of their benefit increases 8% until age 70.
- Pensions: A dying breed of savings, as the Labor Department found that the number of pension plans offered by companies plummeted by about 73% from 1986 to 2016, although many retiring boomers have these savings programs.
- Annuities: DPL’s survey found that 38% of advisors allocated some of a client’s portfolio to an annuity, up from 29% the prior year.
- Life insurance: Payment typically is in a lump sum.
- Home equity/Reverse mortgages: Not guaranteed income for life, but as an individual remains in the home and continues with upkeep, they can live there for life.
Here are some thoughts from retirement experts on potential paths to retirement income:
Steve Vernon, a research scholar from the Stanford Center on Longevity, in his book “Retirement Game-Changers,” states that four key “paychecks” individuals can set up to guarantee funding for life are 1) Social Security benefits, 2) an employer pension plan, 3) a low-cost payout annuity and 4) a monthly tenure payment from a reverse mortgage on one’s home.
“In addition to lasting the rest of your life,” he states, “another nice thing about these four retirement paycheck sources is that they’re very user-friendly and worry-free. The checks for each of them come automatically in the mail or are deposited electronically. You won’t need to make decisions about investing your savings or calculating withdrawal amounts.”
David Blanchett, head of retirement research at QMA, told ThinkAdvisor that the “guarantee doesn’t necessarily need to be for life. For example, if you bought an annuity that paid out over a fixed period, that would be guaranteed income. … I’m not sure it necessarily includes life insurance, because [that] is more of an income replacement vehicle (where you get a lump sum) verses some type of regular ongoing income.
“Given today’s low interest rate environment and the unique payout structure of Social Security retirement benefits, that’s generally going to be the first place retirees should look for guaranteed income. Beyond, there does appear to be greater interest among advisors given the rise of fee-only/fee-friendly annuities and the growing interest among plan sponsors after the passing of the SECURE Act.”
Wade Pfau, professor of retirement income at The American College of Financial Services, prefers to use the term “reliable income,” and says there are basic strategies retirees can use to fund expenses, depending on which retirement style “resonates” with them, he told ThinkAdvisor.