Greetings! I trust that this will find you well and enjoying life.
A new study by TIAA found that many Americans have a misplaced sense of confidence with regard to how they are saving and planning for retirement. According to the 2016 TIAA Lifetime Income Survey, 54% of the respondents did not know how much they currently had saved for retirement. Even fewer respondents, only 35%, knew how much income their savings would generate for retirement.
Add to this, despite not knowing how much they had saved or how much income their savings would generate in retirement, roughly 58% of the respondents felt confident they could turn their retirement savings into income to meet their retirement needs. Perhaps even more troubling is that 28% of the respondents, who were not retired, stated they were not currently saving anything for retirement. The lack of savings, coupled with a misguided sense of confidence in their ability to turn their savings into sustainable retirement income is cause for concern.
The need for secure retirement income is a primary concern for most Americans. However, the challenge is figuring out a way to generate that income so that it will last a lifetime, a time period unknown to each of us. With increasing longevity in the U.S., longer retirements will put a strain on portfolios and retirement savings to last a lifetime. According to some actuarial tables, a couple retiring at age 65 has 73% chance that one of the two will live to age 90. Despite showing a strong desire for guaranteed income in retirement, only 43% of the TIAA survey respondents were willing to commit a portion of their retirement savings to receive a guaranteed monthly retirement payment. Furthermore, only 14% of the respondents stated that they planned on using annuities as a retirement income source.
The strong desire for guaranteed income streams for life which can provide a guaranteed income source for life, but the hesitancy to use an annuity, highlights a clear misconception and lack of financial literacy toward annuity use in retirement. In fact, only 20% of the respondents stated that they were familiar with annuities, closely resembling the group that was planning on using an annuity as part of their retirement income plan. Even though familiarity with annuities increased with age, the study found that millennials viewed them more favorably than older generations.
Perhaps some increased desire in millennials to use annuities comes from a concern about the future of Social Security. While 84% of the baby boomers surveyed planned to rely on Social Security, only 61% of millennials plan to rely on Social Security. While a number of factors could be influencing the higher concern about Social Security from millennials, it might also drive up the need for other sources of guaranteed income such as annuities to offset the perceived loss of Social Security.
The survey results showing that retirees want guaranteed income but are not willing to purchase it suggests that Americans just aren’t sure how to put together a retirement plan that included guaranteed income. This is not surprising because the options can be complicated, and every retiree’s situation is unique. Some retirees have access to guaranteed income through company pensions, rental income, structured settlements or even lottery winnings. Others only have Social Security, so their only option is to purchase an annuity within an IRA and then they are faced with a myriad of annuity options.
One school of thought regarding retirement income states that you should annuitize or build a floor of guaranteed income throughout retirement to meet your basic expenses. This strategy of creating guaranteed income to cover life’s basic necessities often uses a mix of annuities, pension income, and Social Security benefits to create income to cover fixed or basic expenses like housing, health care, clothing and food.
For individuals who want a secure retirement income paycheck, purchasing an annuity to cover basic expenses is one available strategy. It is usually not a good thing to fully annuitize your savings. Instead, annuitize part of your savings and invest the other part to meet some of your more discretionary retirement needs.
Converting retirement savings into guaranteed lifetime income is an important decision for America’s retirees. Annuities can be a partial solution as they can take some market risk off the table and eliminate the risk of outliving your assets. When looking at your retirement income plan, keep an open mind about the use of annuities, as they can be a good thing for your situation if used properly.
If you have questions about any of the above or feel that we can help in any way don’t hesitate to contact us.
Jeff Christian CFP, CRPC