No General Rules About Retirement Income Strategies

“In contrast to the accumulation stage, retirement income is very personal,” Amy Cribbs, head of Participant Experience at Vanguard in Malvern, Pennsylvania, tells PLANADVISER.

“When accumulating assets, it is much easier [for retirement plan participants] to apply more general rules about savings—save 12% to 14%, have a balanced allocation to investments,” she explains. “But when they retire, they have to prepare for a variety of possibilities.”

She adds that if people have spent a lifetime not planning for how to draw retirement income, they are not necessarily equipped or comfortable at retirement making those decisions. “We think advice for many people is such a viable route, because setting folks up for that moment is really complicated. Advisers can play a really important role.”

Cribbs says advisers are in a great position to assist retirement plan sponsors with understanding the broad landscape of solutions for retirement income for participants. Advisers can also help participants think about how to compare income options they have in the plan or out of the plan.

Richard Reed, vice president and defined contribution practice director at Segal Rogerscasey, in Boston, notes that inside many qualified retirement plans, a lump sum tends to be the primary distribution option.  It’s a good option for the employer, he tells PLANADVISER, because the employer doesn’t have to worry about keeping track of former employees for decades, but choice is better for participants, because they can get better pricing and institutional treatment as opposed to retail treatment. Adding a systematic withdrawal option to the plan, with which participants can withdraw a specified amount every month or purchase an annuity, can help employees have sustainable retirement income.

According to Cribbs, Vanguard provides a tool that allows participants to set up systematic withdrawals if they choose to stay in the plan—a retirement income modeler. Advisers can sit with participants and help them sort through a strategy.

Cribbs says not many retirement plan sponsors have demanded or engaged in conversations about in-plan annuities, partly because retiring participants tend not to stay in employer-sponsored retirement plans; they tend to consolidate assets into individual retirement accounts (IRAs). She notes that research shows about 80% of people who terminate employment end up leaving the plan within five years, which is a real challenge for in-plan solutions. Vanguard has engaged in a dual strategy, supporting in-plan retirement income solutions, but also creating solutions for participant transitions out of plans.

For participants who want to transition to an out-of-plan retirement income solution, Vanguard partnered with Hueler Companies to create Vanguard Annuity Access, which allows advisers and participants to sort through annuity options, getting many quotes from insurance providers and comparing features and benefits (see “Vanguard Introduces Online Annuity Service”). Cribbs doesn’t believe participants need to or should annuitize all their retirement assets, but should be aware of what is available.

While participants are in the plan, Cribbs says they should be provided with a rich educational experience, with access to resources that give them perspectives about what is important to think about and what problems they will need to solve.

According to Cribbs, participants should consider:

  • What is their aspiration or key set of desires/objectives for their retirement years?
  • What financial demands do they have now that they will have into the future, and how do these turn into cash flow demands?
  • What do their different sources of income provide—Social Security, retirement plans and other savings—and what is their confidence level that these are predictable and stable?
  • What percentage of their portfolio needs to provide a stable amount of income, and what can be used to hedge against unforeseen circumstances, such as health costs and unexpected portfolio declines?

Then it is a matching effort between the answers to these questions and current assets, Cribbs says. Advisers should be able to help participants model different scenarios.

Reed stresses that there is no single correct formula. Retirement income strategies will be customized to each individual based on a number of factors, including what age the participant wants to retire and his or her life expectancy, what standard of living the participant wants in retirement, expected health and family health history, what insurance they have to help offset costs, and whether they will have to support anyone else while they are in retirement.

An article from Sibson Consulting’s Perspectives suggests one retirement income strategy, perhaps counterintuitive, would work especially well for employees who have a significant balance in their defined contribution (DC) retirement plan account. It involves drawing down DC plan assets more rapidly during the early years of retirement while deferring the receipt of Social Security benefits to age 70. “This option provides a means for retirees to maximize their guaranteed lifetime income from Social Security while lessening the need to withdraw DC plan assets during the later years of retirement. Further, by accelerating the drawdown of DC plan assets in the early years of retirement, retirees limit the extent to which these DC plan assets are subject to investment risk and potential loss of principal,” article authors Michael Accardo, vice president at Sibson, and Sibson consulting actuary Jared Wilson, wrote.

They note that this approach is only viable for employees who have saved enough in their DC accounts to provide several years of income at the desired level (see "Can Social Security Be a Silver Bullet?").

Reed says advisers should encourage employers to hold seminars to teach employees about strategies for withdrawing Social Security. He notes that retirement plan advisers are doing more education about this.

Reed also points out that not every retirement plan participant nearing retirement is ready for the draw-down conversation, because not all have accumulated enough savings. For these participants, the conversation should be about working longer and saving more.