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The Rough Notes Company Inc.



February 25
10:21 2019

Benefits Products & Services

By Thomas A. McCoy, CLU


Workers, retirees seek income stream guidance

The Boomers are coming … the Boomers are coming. That’s been the rallying cry of a wide range of financial products providers for the past decade—especially those that want to manage the assets of new retirees. From inside the retirement plan ranks, benefits brokers, plan sponsors and product providers might be more tempted to cry: The Boomers are leaving (long live the Millennials and GenXers).

But not so fast. Maybe plan providers should be paying attention to what Baby Boomers on both sides of the retirement divide are thinking about their retirement preparedness. What employers learn could help them strengthen the plans they offer to all generations in their workforce.

How secure older workers (the soon-to-be retired Boomers) feel about their financial readiness for retirement can be important to employers. When these workers doubt that they can afford to retire, they are more likely to want to stay on the job longer, affecting both the employer’s current wage costs and advancement opportunities for younger workers.

“More than half of current workers say they are not confident that they will know how much to withdraw from their savings and investments in retirement.”

—2018 Retirement Confidence Survey
Employee Benefit Research Institute

How confident retirees are about their financial future serves as a helpful report card on the effectiveness of an employer’s retirement plan strategy. Retirees who had a defined contribution plan like a 401(k) bear a huge responsibility for their own retirement preparedness. Still, the data on retiree satisfaction can help shape the employer’s approach to its benefits communication strategy.

For 28 years the Employee Benefit Research Institute (EBRI) has been conducting its Retirement Confidence Survey, examining retirees’ and workers’ attitudes on retirement preparedness. Last fall, EBRI presented two webinars highlighting the results of the 2018 survey, which is based on interviews conducted by Greenwald & Associates of approximately 2,000 people. Respondents are split evenly between retirees and workers and are spread across age and other demographic categories. The Baby Boomer demographic is well represented, straddling both the retiree and worker groups.

Not surprisingly, retirees are far more likely than current workers to have estimated their retirement expenses (56% to 29%) and their monthly income needs (57% to 33%). What may be surprising is that one-third of the retired group has not made these estimates.

Craig Copeland, senior research associate at EBRI, pointed out that people who make these estimates and also have a strategy for their retirement asset withdrawals are more likely to be confident they can live comfortably throughout retirement. “Workers are more likely to think about these things as they get closer to retirement.”

Toni Griffin, vice president of retirement income solutions at MetLife, a webinar panelist, pointed out that workers are less likely to make retirement income planning decisions when they intend to do some work for pay in retirement. The EBRI study finds that two-thirds of workers plan to work for pay, whereas only 25% of them actually wind up doing so. “The best laid plans don’t always work out,” Griffin noted, “especially if a healthcare situation stands in the way.”

Work-in-retirement surprises also can take the opposite turn. The survey finds that two-thirds of those who worked for pay in retirement had not planned to do so.

Another strategy that some employers have tried is phased retirement. EBRI webinar panelist Aliya Wong, executive director of retirement policy, United States Chamber of Commerce, addressed this trend and its impact on both employers and employees.

She noted that although phased retirement offers retirees many advantages, “as with all flexible work arrangements, not every job is suitable for a phased retirement plan.” She cautioned that employers need to be sure the arrangement doesn’t discriminate against employees and that phased retirement is implemented in a way that is fair to everyone and is still productive for the employer and the employee.

Overall, EBRI’s Retirement Confidence Survey indicates a general optimism among both today’s workers and retirees. About 80% of each group is “confident they’ll be able to manage their day-to-day finances as they age.” But when the survey asks more specific questions about retirement preparedness, the responses are less sanguine.

A key area of uncertainty for both groups is how to draw down their assets. How much should be withdrawn each month in retirement? Will they have enough money to get through retirement with their defined contribution plan assets and other investments? Should some of their retirement assets be converted to an annuity?

The stress over these questions is understandable. Ever since 401(k) plans became the dominant form of retirement plan, the only guaranteed lifetime income stream most workers are carrying into retirement is Social Security. They have to use their 401(k) nest egg to create an income stream, making a multitude of decisions about investments, and apportion it over an unknown number of years, factoring in other unknowns including the big one—healthcare expenses.

Current workers, although they haven’t yet begun the withdrawal process, are less confident about it than are the retirees. More than half of current workers (51%) say they are not confident that they will know how much to withdraw from their savings and investments in retirement; only 23% of them have thought about how much income they’ll need from their retirement savings.

“Workers are facing a critical need for education about how to convert retirement assets into income,” said Griffin.

Among retirees, fewer than half (46%) say they have thought about how much money they should be withdrawing from savings, and one-third report that converting their assets into income is “difficult.”

The EBRI survey examines how retirees are currently handling the withdrawal of their retirement funds.

The highest percentage (41%) report that they are “trying to maintain their current asset level.” The next highest percentage (25%) indicate they are “trying to increase their asset level,” while only 11% describe their approach as “spending down their assets as needed.” A high percentage of employer retirement account money is rolled over into IRAs, with retirees withdrawing only their required minimum distributions (RMDs).

Matthew Greenwald, president of Greenwald & Associates, explained this withdrawal behavior of the majority of retirees like this: “There’s an emotional reaction to watching your assets go down. One retiree put it this way: ‘It’s my assets that produce my income, so if my assets go down, my income goes down.’ ”

The uncertainty that both workers and retirees express about creating a retirement income stream seems to point toward opportunities for annuity providers, both stand-alone annuities and those offered as part of an in-plan annuity. Further data from the EBRI survey bears out this supposition.

Workers and retirees were asked: “To what extent do you expect a product that guarantees monthly income for life to be a major or minor source of income in retirement?” More than a third of workers (35%) and 21% of retirees said they expected such a product to be either a major or minor source of income. The actual purchasing behavior of retirees was lower, with only 7% of retirees reporting that they had purchased a product that guarantees income for life.

Further, workers were asked two specific questions: “How interested would you be in putting some or all of your retirement savings plan into an investment option within your plan today that would guarantee you monthly income for life when you retire? Or rolling money out of the plan when you retire and into a guaranteed income product?”

Interest in both products was almost identical, and overwhelming; 80% said they were either “very interested” or “somewhat interested” in purchasing the in-plan guaranteed product; 79% said the same about the out-of-plan product.

Just under half (48%) of the workers also expressed at least some interest in longevity insurance—taking a portion of their retirement fund assets to purchase a deferred annuity.

An employer can learn a lot by studying the financial well-being concerns of its employees who are closest to retirement, as well as those of all employees. By highlighting some of these concerns as well as the behaviors of retirees, the EBRI survey is a good start.

The employer’s goal should be to have employees take their defined contribution plan assets into retirement with confidence in the financial security built up during their working years.

The author

Thomas A. McCoy, CLU, is an Indiana-based freelance insurance writer.

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