Retirement Distributions and Lifetime Income

Fred Reish, ERISA attorney at Drinker, Biddle & Reath, told attendees of the American Society of Pension Professionals & Actuaries (ASPPA) Annual Conference that individuals need some idea of how they will pull money out of their savings in order to know how much they need to accumulate.   

Michael Callahan, vice president and operating manager of Pentec Inc., shared four methods of planning for having assets in retirement:  

• Asset allocation using modern portfolio theory – Using the same investing tools used for pre-retirement allocations, portfolios are risk-adjusted for age. For example, use 100 less age to determine the percent of assets invested in equities. 
• Segmentation – Setting up investments related to time segments. For the first five years following retirement, use very secure investments, such as cash, short-term bonds, Certificate of Deposits or a 5-year-certain annuity. For the second five years, have mid-term bonds (five to 10 years). For the third five years, have longer-term bonds and dividend-paying stocks for some growth in the portfolio. For the time in retirement past that, use long-term bonds and equities, and use modern portfolio theory for asset allocation. 
• Annuity banding – A variation of segmentation. Purchase a series of immediate and deferred annuities; immediate for the first five years, deferred-fixed for the second five years, then deferred-fixed or variable and longevity annuities. 
• Solid foundation with an upside opportunity – This includes determining lifestyle needs of the family unit, amount of savings and sources of income, and a spending rate, then developing the foundation with capital market instruments. 

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However, Reish noted that participants are not adequately equipped to make these types of decisions, so offering an in-plan retirement income solution is a best practice for employers. Reish said participants are willing to sign up for these solutions and they are cheaper for participants within the plan.  

As with any investment selection for their retirement plans, Reish pointed out that plan sponsors must use a prudent process to select the right in-plan solution. Reish also suggested plan sponsors offer retirement education for employees age 50 and older and education regarding retirement income products and services.  

Callahan pointed out that individuals would not go without car or homeowner’s insurance, and likewise, they should insure their lifetime income, whether through an asset planning method or an in-plan income solution.