One of the paradoxes that retirement specialists are trying to solve is how to satisfy an investor demand for guaranteed income in retirement even though consumers are seemingly put off by annuities.
And consumers do indeed want some kind of base guaranteed income, says Michael Finke, a professor at the American College of Financial Services. In a recent paper Finke wrote with Jason J. Fichtner, vice president and chief economist at the Bipartisan Policy Center, the two found that 81% of respondents in a survey of plan participants said they were either somewhat or very likely to prefer a retirement plan that puts guaranteed income on the table. And most of the respondents said they wanted a mix of investments or lifetime income rather than a traditional pension or investments alone.
“I think what was most interesting to us was the general consensus among participants that they want a blend of both and they don’t prefer the old system of a pension,” said Finke in an interview with Financial Advisor. “I think what a lot of people believe right now is that we used to have a better system when we had a pension. Today’s employee says, ‘Actually, I like having some money in an investment account, but I also want to have part of that money be in the form of a lifetime income. Some blend of the two is what’s going to make me the happiest.”
The white paper that has emerged from the survey (under the auspices of the Alliance for Lifetime Income’s Retirement Income Institute) is called “Participant Attitudes Toward Guaranteed Income in a Defined-Contribution Plan.” As part of the study, the alliance sent out a 25-question survey to DC plan participants in September and October of 2020. The questions were sent through a record-keeper serving plans in different industries and reached people of different ages and wealth levels.
Careful Language
Among the questions the alliance asked participants was how much they would want to allocate to stocks and bonds after retirement and what would their choice be if they could buy a lifetime income stream, even if that meant handing over a portion of their money to a financial services company that would never be paid back.
The survey designers were careful to use the word “lifetime income” and any products that might follow that definition.
“We don’t use the ‘A’ word in the survey,” Finke said. “Because annuities—obviously there are a broad range of financial products. People have different perceptions of the product itself.”
“To better understand whether workers prefer to allocate a portion of savings to an income annuity,” said the authors in the white paper, “we develop questions that elicit preference for a hypothetical retirement portfolio that contains stocks, bonds, and an income annuity. We evaluate preference for annuitization using current annuity income quotes, but also provide information about the opportunity cost of failing to annuitize by demonstrating the probabilities of outliving assets and the income that could be produced from bond assets.”
Finke said there was a question in the survey that asked people what was most important to them in their retirement savings plan, and the answer given most often (by 31% of the respondents) was that they want to understand how much they can spend from their savings that they have. The next closest answer was that they wanted the potential for growth (named by 23%), and the third most common answer was that they didn’t want their assets to fall during a market decline (named by 22%).
He said that risk tolerance goes down as people get closer to retirement. “If things go south, or if they feel like they don’t understand how much they can spend, that creates a certain amount of anxiety that may have not existed for them when the market fluctuated when they were in their 30s and 40s.”