Pre-Retirees Want Lifetime Income Guarantees

Americans recognize the importance of having a secure source of retirement income they can’t outlive, according to the 2017 TIAA Lifetime Income Survey.

More than half (56%) of Americans surveyed who are not retired say the most important goal for a retirement plan is to guarantee money every month to cover living expenses. Given a choice between receiving a $500,000 lump sum at retirement or getting $2,700/month for life, 62% would choose the monthly income.

However, even though Americans want steady income throughout their retirement, only 32% of those surveyed say their retirement plan includes access to products that provide monthly income in retirement. Among those who don’t have access or aren’t sure if they have access to such products, half would like such an option.

The majority of American adults who are not retired support legislative changes that would help them get more information about, and access to, lifetime income products within their workplace retirement plans. Seventy-one percent support legislation to make it easier for employer-based retirement plans to include these products, such as annuities, as investment options; and 67% favor legislation that requires retirement account statements to include an estimate of monthly income in retirement.

Though many Americans would like to receive access to retirement income they cannot outlive, only half (49%) of non-retirees are familiar with annuities according to the survey. Only 13% of non-retirees have purchased an annuity, though another 31% say they plan to do so.

“Americans should give annuities a second—or, in many cases, a first—look because they can provide the reliability and security that is so critical as the average length of retirement grows,” Pressman says. “The more you know about annuities, the better you can evaluate your options and select the investment products that best suit your financial needs and goals.”

Individuals may not be choosing annuities because they mistakenly think other investments offer a similar guarantee. Nearly two-thirds (63%) of non-retirees who are invested in a target-date fund expect that it will provide a guaranteed monthly paycheck for the length of their retirement, and 70% would like their target-date fund to offer this benefit, according to the survey. 

However, the reality is that most target-date funds do not include this feature now, though recent innovations have resulted in some new investment options that provide lifetime income within the target-date structure. In the future, more participants will be able to access these types of investments.

Securing a source of guaranteed monthly income could ease non-retired Americans’ concerns about their retirement savings outlook.

• 61% worry about outliving their savings;
• 68% worry they will not save enough for retirement;
• 67% are concerned about guaranteeing they will have a steady retirement income no matter how long they live; and
• 69% are concerned about changes to Social Security.

While annuities can offer peace of mind to individuals by covering their fixed monthly expenses, people often draw upon other savings or supplemental income for discretionary spending. Most non-retirees surveyed plan to augment their retirement income with part-time (52%) or full-time (11%) work, which can provide extra income for travel, hobbies and other retirement activities.

TIAA suggests steps both employers and individuals can take to help improve retirement readiness and outcomes:

• Increase the retirement savings rate. The survey shows 73% of Americans are saving less than 11% of their current annual income (including contributions by their employer). Most experts recommend saving 10% to 15% of their annual income for retirement.

• Employers can help retirement savings rates by adding features such as auto-enrollment and auto-escalation to their retirement plans. The survey finds that a majority of Americans who are not retired would support legislation to make it easier for employers to add auto-enrollment (71%) and auto-escalation (64%) to their plans.
    
• Ensure employees understand how much income they will need to replace during retirement. Most experts agree that people should aim to replace 70% to 100% of their pre-retirement income to live comfortably during retirement, but only one-quarter (24%) of non-retirees think they will need at least 70%. These findings underscore an opportunity for employers to educate their employees about how to determine the income replacement ratio they should target for retirement.
    
• Ensure employees analyze how savings will translate into retirement income. Slightly more than half (58%) of non-retirees have analyzed how their savings will translate into monthly income during retirement, with men far more likely to have done so than women (70% versus 48%, respectively). This is a critical step in the retirement planning process, and the earlier this analysis can be done, the better. Fewer than half of those who completed this analysis did so at least 20 years in advance of their planned retirement.

The survey also finds that only 22% have worked with a financial adviser or professional to run their retirement numbers. It may be worthwhile for those who have done the analysis on their own to consult with a financial adviser and discuss the results within the context of their overall financial picture and retirement goals.

“The prospect of saving enough money to last through a potentially long retirement can be overwhelming, even for those who feel financially secure in their pre-retirement life,” Pressman says. “Ensuring all Americans have access to better retirement plans—notably, plans that can produce a stream of income that is guaranteed to last a lifetime—will go a long way in helping to bring the peace of mind we all deserve in retirement.”

For more information about the 2017 TIAA Lifetime Income Survey, read the survey results summary.