The intricate job of converting savings into income
by Jeff CiminiMr. Cimini is SVP, Retirement Product Management, at Voya Financial. He oversees the team responsible for all aspects of the centralized retirement product functions, including product management, development, strategy, pricing, competitive intelligence and the advisory services programs that Voya offers to plan sponsors and their participants. Visit www.voya.com.
The concept of what it means to retire is changing. From early retirement to delayed retirement to partial or phased retirement, individuals today are quickly proving that the definition of retirement is not what it once was. But regardless of one’s definition, while most individuals have spent the bulk of their working lives saving and building a nest egg, saving is only one piece of the retirement-planning puzzle.
Having a sustained income while in one’s retirement is a whole other part of the equation that comes with retirement planning. And as we face a world of economic uncertainty with ongoing talks of inflation, those people nearing retirement are especially fearful of losing their hard-earned nest egg. What’s more, according to new data from Voya Financial, 68% of baby boomers agree or strongly agree that they worry about the impact of inflation on their personal finances and the ability to maintain their current lifestyle — with an even greater majority (91%) agreeing or strongly agreeing they feel like their money does not go as far as it used to go. These concerns can also cause individuals to make impulsive changes to their investment allocations — without considering the long-term view.
As a result, there are several opportunities for employers to consider when it comes to helping their workforce create a path to a comfortable retirement, regardless of what that might look like.
Solve For A Retirement Income Portfolio
Getting on the right path can start at any age, but of course the earlier individuals start planning, the greater opportunities they have to take advantage of compounding and interest. One opportunity to help ensure employees are saving — and saving enough — within a retirement plan comes in the form of plan design. Historically, employers have been successful when it comes to both getting individuals into a retirement plan and increasing savings rates through automatic features such as auto-enrollment, auto-increase and auto-escalation.
But as I mentioned before, while asset accumulation is key to saving for retirement, “decumulation” is equally as critical for those individuals getting closer to retirement who need to think about converting their assets into an income stream. It’s also important to remember that pre-retirees need to consider additional complexities — such as how to incorporate all sources of household retirement income — in developing a retirement income plan and payout strategy. As a result, decumulating assets must be done strategically and effectively to balance not taking too much money out of retirement savings while also allocating enough funds for a retiree to enjoy their retirement to its fullest. Having a comprehensive income strategy should include two broad types of income:
- Guaranteed lifetime income, including guaranteed “paychecks” like Social Security, defined benefit pensions and fixed annuities; and
- Flexible retirement income, generated by withdrawals from retirement plans and other sources. Depending on how the accounts are invested, there is the potential for investment growth to help extend the length of time the money is available and to keep up with inflation, as well as the flexibility to alter payment streams to accommodate changing goals and needs. These payment streams are not guaranteed by the government, insurance companies or employers, and there is also the potential for these accounts to decrease in value.
The reality is, though, that there is no one-size-fits-all solution for lifetime income. For example, some employers today are starting to offer annuities inside 401(k) plans to help their employees make their money last into retirement, while others might prefer to move their funds into another product. Having an array of solutions that are easy to understand and implement — including things like a guaranteed annuity or a targeted income spend-down strategy — enables employees to make choices according to their lifestyle and retirement goals while fostering a greater feeling of confidence and financial well-being.
Plan Design To Support Income And Outcome
As I mentioned earlier, while many employers today focus on designing plans to maximize participation and accumulation, many fall short when it comes to generating a retirement income stream. As a result, best practices for plan design continue to evolve to focus on both accumulation and decumulation. Giving pre-retirees and retirees opportunities to keep their money within their retirement plan (rather than taking it all out in a lump sum) can help maintain the economies of scale the plan attains based on total plan size. This is particularly important for those employers who may have a significant number of employees who are five to 10 years away from potentially retiring. To support this, many of the plan design opportunities that plan sponsors and advisors frequently talk about today include:
- Systematic withdrawals, which allow retirees to create an automated income stream through simple and convenient withdrawals.
- An expanded investment lineup, including income options for retirees such as in-plan annuities and managed-payout funds, which are strategies designed to produce steady monthly income payouts.
- Intelligent withdrawal solutions, including options that integrate a diversified multi-asset fund that balances growth and stability with a technology interface to help retirees create automated income streams specific to their needs and preferences.
- Qualified Default Investment Alternatives (QDIAs), which default participants ages 50 or over into investment options such as managed accounts, or similar, that will help support their transition from accumulation to drawdown.
- Rollovers into plans, allowing employees to more easily consolidate assets from prior employer plans to simplify account management and make it easier to calculate withdrawals and required minimum distributions.
- Partial distributions, allowing retirees more income flexibility by leaving some assets in the plan and transferring a percentage of assets to outside accounts. These plan design features will help give pre-retirees and retirees reasons to keep their money in the plan rather than taking it all out in a lump sum. Keeping retiree assets in the plan can help maintain the economies of scale the plan attains based on total plan size.
Provide Advice Through Managed Accounts
With many individuals today anticipating working in retirement, the need for educational resources has never been greater. Things like understanding how to invest, managing Social Security and covering health care expenses are also top of mind for many pre-retirees.
One opportunity that employers can offer to support their workforce is engagement through a professionally managed-account service that provides individual investment advice, retirement income planning and payout strategies that include things like Social Security. Managed accounts also come with another valuable benefit: the support of a financial professional who can provide guidance and tools such as a pre-retiree checklist so those nearing retirement have a better idea of daily spending decisions, health care costs and other living expenses well in advance of their retirement.
According to industry research, we also know that professionally managed solutions (such as target-date funds and managed accounts) continue to experience stronger adoption within the defined contribution market. Specifically, Cerulli Associates’ research has found that managed accounts are available in about half of 401(k) plans today. Managed-account solutions can offer advice and one-to-one discussions as well as education and outreach, which are all critical engagement activities for successful retirement planning, increased savings and income strategies. And, perhaps even more important is the financial confidence and sense of security that comes with ensuring one’s hard-earned savings will support them throughout their retirement years.
Education Is Critical
Once employers understand how retirement income solutions can fit within their benefits package, they need to tackle the task of educating their employees on the importance of decumulation as well as how to take advantage of their benefits options to achieve a successful retirement. In the case of decumulation, it’s also important for employees to understand the decisions that they need to make prior to retiring to ensure a smooth transition into a fully funded retirement.
Employers might consider providing access to a retirement plan advisor as part of their retirement package offering — one who can help educate and support employees with their planning needs. And when it comes to education, there’s also an important and growing population within your workforce who could benefit from broader education: caregivers.
Caregivers may have more difficulty understanding what their future needs will be, so understanding what lifetime income and investment strategies could be available to them is an important consideration.
At the end of the day, transitioning from accumulation to asset protection and retirement income strategies is not simple. Education is critical for helping pre-retirees understand how savings can translate to income in retirement, particularly when focused on the varied and unique financial needs of individuals today.
1, 2. Voya Financial survey conducted March 29-30, 2022, on the Ipsos eNation omnibus online platform among 1,000 adults aged 18+ in the U.S.
3. The Cerulli Edge, “U.S. RETIREMENT EDITION,” (Q4 2021).