Need for Help in Retirement Income Planning Grows

New reports from the Vanguard Center for Retirement Research indicate American workers increasingly need help to generate a sustainable income stream in retirement and a variety of solutions exist.

In its first report, “Spending the nest egg: Retirement income decisions among older investors,” Vanguard said its survey of older American investors (ages 55 to 75) revealed half of retired households tapped into their retirement accounts in the past year, typically as a large, one-time withdrawal. Only two-in-10 retirees are generating systematic payments from long-term accounts.

Vanguard found spenders use a variety of strategies to guide their withdrawal decisions from long-term accounts—from basing withdrawals on living expenses (37% of spenders), to using a regular dollar amount (21%), spending investment income (16%), or using other rules of thumb. Other spenders have no formal approach (21%) or use gut feelings (10%). Less than one in 10 appear to have a formal spending rule in place, and only 44% had a regular approach to reviewing their spending strategy, according to the report.

Vanguard’s research also revealed a level of complexity to the typical older-American investor household’s financial picture and goals for retirement income. The typical household owns six distinct accounts, and one-fifth hold 10 or more accounts. In addition to transaction accounts, one-third of older households held three different types of long-term accounts (IRAs, employer plans, and personal accounts), and 39% held two types, the report said.

Additionally, 94% of respondents own a home, 48% are receiving a traditional pension, and another 28% expect to receive one in the future. About half of fully retired households carry mortgage debt, and half carry credit card debt.

Vanguard said most survey respondents reported they seek to have both a guaranteed monthly income and protection of assets, while also maintaining investment control, keeping up with inflation, and having access to savings for unexpected expenses.

According to the report, the findings suggest that many investors would prefer a mix of retirement income solutions, not a single approach, and need help balancing competing goals.
In its second report, “The Retirement Income Landscape,” the Vanguard Center for Retirement Research points out that the challenge retirees face in developing a retirement income solution is not a lack of products or strategies, but how to develop a plan from both newer and traditional income options. Vanguard suggests such a plan would integrate nonguaranteed and guaranteed elements and be tailored to an individual’s preferences for return, risk, and cost.

According to the report, investors in the spend-down phase need to weigh competing objectives for their assets (regular income, spending flexibility, survivor needs, and bequests), while considering a range of risks, including longevity risk. Meanwhile, they must seek to minimize investment costs, the costs of guarantees, and the impact of taxes.

Vanguard points out that the conventional strategy for generating income from a portfolio is a systematic withdrawal plan (SWP) based on some spending rule, applied to the value of the portfolio over time. The main risk of an SWP is longevity risk—either spending too quickly and depleting savings, or spending too meagerly and leaving too much to one’s heirs.

The report says immediate income annuities eliminate market and longevity risks in retirement. However, they remain unpopular with investors for several reasons, including that the contracts are illiquid and irreversible. Vanguard suggests a new generation of living benefit annuities offers a guaranteed income, the potential for future growth, and access to underlying capital at fair market value. However, costs can be high.

Other guaranteed strategies, such as longevity insurance and reverse mortgages, remain underdeveloped, Vanguard contends.

Weighing the pros and cons of products and strategies is what presents the challenge for investors and advisers to craft a retirement income plan that integrates traditional offerings with the newer ones.

“Spending the nest egg: Retirement income decisions among older investors” can be downloaded here.

“The Retirement Income Landscape” can be downloaded here.