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Pensions, which provided financial security in retirement for previous generations, are all but a thing of the past today, leaving employees looking for the best strategies to ensure they have sufficient savings and income in retirement to last them for as long as they live.
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Saving in 401(k) and individual retirement accounts is the primary tool today's savers are using to achieve financial stability in retirement, but guaranteed income is also appealing. Social Security provides one guaranteed income stream that many pre-retirees hope to pair with retirement savings to sustain them through retirement. But almost three-quarters of consumers thought having an additional guaranteed income beyond Social Security would be highly valuable, according to the 2020 CANNEX/Greenwald Guaranteed Lifetime Income Study.
That guaranteed income can be achieved with annuity products, some of which can be incorporated into defined contribution plans.
"Annuities — in particular, deferred income annuities (DIAs) — can help," said Tamiko Toland, head of annuity research for CANNEX, which provides analysis of annuities, in a report published by Georgetown University's Center for Retirement Initiatives.
"While their value is well understood within the industry, they still have not made their way into the mainstream of today's defined contribution (DC) 401(k) plans, where they could serve an important role by replacing a portion of the guaranteed income that pensions used to provide."
A DIA is an annuity that is purchased today with a promise of a guaranteed income stream in the future. When included in an employer-sponsored plan, a DIA option would allow employees to gradually contribute to the DIA, escalating the payment as they get closer to retirement and guaranteeing a post-work income stream, potentially making it a suitable replacement for the bygone pension.
According to Toland's report, a DIA strategy can be incorporated into a target-date fund (TDF) or other structure such as a managed account. TDFs are a natural vehicle to add lifetime income components to a DC plan, either by combining multi-asset funds with a deferred annuity or through a variable annuity with a guaranteed minimum withdrawal benefit, according to CANNEX.
Annuities, including DIAs, face challenges to adoption, however. Significantly, savers are reluctant to cede control over their saved funds and instinctively cling to liquidity as superior to guaranteed income down the road.
"Too often, a lump sum payout of retirement savings at the time of retirement is alluring, but the funds are much less likely to be converted into a guaranteed income stream," said Toland. "We know that in this scenario, too many workers run out of assets very quickly after retirement. Many people intuitively overestimate the lasting power of this money and fail to appreciate the devastating effect that an ill-timed market downturn can have on a portfolio."
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM's Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics. Kristen graduated from the University of Missouri with a degree in journalism.
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