Nearly half of investors are worried about how to best take distributions from their retirement plan, and 44% express concern that they lack any retirement income plan at all, according to a new survey from Allianz Life, called “Americans Lack Plans for Retirement Income.”
Investors’ fears are well-placed. Not having a professional plan in place can create costly errors for investors, who may generate unnecessary tax bills and incorrectly choose the wrong assets to draw down first—greatly impacting the longevity of their assets.
“If you don’t know how you will draw from your retirement assets for income, then you aren’t ready to retire,” said Kelly LaVigne, vice president of consumer insights at Allianz Life, in a statement about the study. “So much of retirement preparation focuses on accumulating assets—and that’s important—but it is critical to understand how those assets will be able to fund your life after you retire. To do that, you need to make important decisions like when to start claiming Social Security and examine what resources you have to fund your retirement.”
It's not hard to see why there’s a sudden interest in retirement income planning. We’re in the first year of the proverbial “Great Retirement,” where as many as 13,000 Americans turn age 65 every day. Already, millions of consumers are struggling to figure out how to convert their retirement plans, IRAs and brokerage account balances into income and fund a retirement that could last 30 or more years.
Without a sound income plan, Americans often pinch pennies and spend significantly less than they safely could, researchers are finding. That fear is borne out by the survey data, which found that nearly half of investors (48%) are worried about living too frugally and not enjoying their quality of life in retirement.
“When figuring out how to draw from your assets for retirement income, you want to include risk-mitigation strategies that can help address worries about running out of money, inflation, taxes, and rising healthcare costs,” LaVigne said.
With so much riding on the right income strategy, it’s key for advisors to communicate in a timely way with clients. Yet a significant number of advisors (44%) also report that they struggle with communicating the clear benefits of an income plan in terms of improved outcomes, according to a recent BlackRock survey of 300 advisors.
While advisors report that they have discussed a retirement income strategy with clients, a significant number of clients say they’ve never heard the message. In the Alliance for Lifetime Income’s “2024 Protected Retirement Income and Planning Study,” 62% of advisors said they bring up the topic of secure income with clients. But only 27% of investors report ever hearing their advisors discuss the subject.
Ninety-six percent of advisors in the survey said they discuss when clients should withdraw from certain accounts, but only 66% of clients agree these discussions are taking place.
Rarely do advisors ask clients if they plan to take income from their assets in the next 10 years, said John Kennedy, executive vice president at Lincoln Financial, at a recent conference sponsored by the alliance.
Suzanne Norman, an education fellow at the Alliance for Lifetime Income, said that advisors have to change their orientation from “investments, investments, investments to secure income planning. This is an opportunity for us to step into this space. Tremendous pressure comes off the [client’s] investment portfolio when you can solve for income,” Norman said.
Legislative changes have paved the way for retirement plans to offer guaranteed income products and annuities, which means all advisors will need to get better at income planning, said Nick Lane, president of Equitable, also speaking at the alliance conference. With or without their advisors, investors are seeking out annuities, which have boasted sales totaling $1.3 trillion in the past four years, according to Limra.
Advisors interested in client rollovers will also need to learn the ins and outs of annuities, thanks to the SECURE 2.0 Act, which gave 401(k) plans the green light to offer default annuity investment options. As a result, younger investors are putting money into annuities.
The law also gave plan participants the right to make tax-free rollovers of up to 25% of their plan assets to qualified longevity annuity contracts (or QLACs). Such rollovers would reduce investors’ required minimum distribution by that percentage. And the income from the contract can be deferred as late in the client’s life as age 85.
“Without a solid strategy, the ongoing process of deciding how much money to withdraw from which account [and when to take it] can be daunting,” LaVigne said in the statement about the survey.