The decline of traditional pensions and steady erosion of Social Security benefits has begun to leave most retirees without a source of guaranteed lifetime income. Plugging that hole is emerging as the most important retirement issue of our day.
Good luck figuring this one out. When it comes to the one sure-fire solution—immediate fixed annuities—retirees have a split personality. According to a BlackRock retirement survey, 77% of retirees wish they had locked in a guaranteed income stream when they retired and 86% say their employer should have helped them arrange one. Yet almost as many (69%) say they prefer to keep control of their retirement assets.
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You can’t have it both ways. No company is going to guarantee income for life without taking control of the assets standing behind the guarantee or charging mightily for the privilege. “We need a national conversation on this issue,” says David Laibson, a Harvard economics professor. “We need to learn more about what people want.” His comments came during a press conference for the annual retirement survey, which found that retirees with a guaranteed income stream tend be most confident about their finances.
Yet guaranteed income isn’t just about confidence. On a personal and policy level, it’s about insuring against the bad decisions that inevitably come with old age and loss of cognitive function. The prevalence of dementia in America doubles every five years in age cohorts beginning at 60, Laibson says. By 85, nearly a third of all Americans are afflicted and another near third suffers from cognitive loss without dementia.
That’s more than half the older population. These people can’t calculate 10% of a $1,000, Laibson says, and we are asking them to navigate the stock market, asset allocation questions and distributions from their nest egg. “Rollover IRAs are the wild west of financial products,” he says. “What people need is a check that comes every month, and that is not what they get in the defined contribution world.”
There are many reasons that retirees shun annuities. They can be confusing and some are laden with fees, and as noted people don’t like to give up control over their assets even if it means securing income for life. Another stumbling block is the low-interest rate environment, which makes annuities seem expensive. It takes $737,000 for a 70-year-old couple to buy joint lifetime monthly income of $4,000, according to immediateannuities.com.
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Another hurdle, Laibson says, is that we have a skewed notion of annuities, sometimes called longevity insurance. An annuity is essentially an insurance policy that pays off when a good thing happens—you live a long time. But we are conditioned from early adulthood to think of insurance as something that pays off when a bad thing happens—car accident, injury, or fire. Part of the national conversation should be about reframing annuities as insurance you want and expect to pay off.
In some ways, the conversation has already begun. Insurers are offering more straightforward annuities that guarantee payouts for 10 years or some other term even if you pass away earlier. This addresses a big concern, namely that you end up blowing your entire estate on a few years of income. Meanwhile, the Treasury Department is pushing 401(k) plan sponsors to allow employees to convert some or all of their assets to an annuity within the plan. Hopefully, such steps will lead more folks to lock up lifetime income—before they lose the ability to think it through.