Participants Need a Retirement Income Plan

Whether employees will have enough income in retirement is the hot topic of the industry.

But, while retirement plan providers and plan sponsors are offering information, calculators and retirement income products, this is not enough. Individuals need a process for converting their resources into income in retirement, contended Bryan Hodgens, SVP and director of sales at Wells Fargo, speaking at the 42nd Annual Retirement & Benefits Management Seminar, hosted by the Darla Moore School of Management of the University of South Carolina, and co-sponsored by PLANSPONSOR.   

Hodgens suggested six steps in the process for participants: 

1. Estimate duration of retirement assets; 

2. Identify retirement risks and ways to manage risk; 

3. Identify distribution, tax and estate issues and opportunities; 

4. Identify options for filling the gaps; 

5. Convert resources into income; and  

6. Throughout retirement, evaluate and maintain or update the plan. 

Participants need help understanding how their investment allocation should be different in the distribution phase than it was in the accumulation phase. Diversified income planning includes stable income, growing income and guaranteed income, Hodgens said. Stable income could include government, corporate or municipal bonds and/or certificates of deposit. Growing income could include dividend-paying stocks, mutual funds and closed-end funds. Guaranteed income could include fixed and index annuities, immediate annuities, variable annuities and Social Security.

There are several approaches to income distribution: 

  • A systematic withdrawal plan, whereby a participant takes a certain percentage of assets from accounts periodically, is easy to understand and calculate for participants, but it is subject to “sequence of return” risk—the percentage withdrawn may be acceptable in an up market, but may be too much in a down market, Hodgens noted. 
  • An “income-only” approach to distribution, whereby the participant lives off the interest and dividends from his portfolio is also subject to “sequence of return” risk, as well as inflation risk.  
  • A bucket approach, whereby a participant establishes phases for income distribution, could include a 10-year phase for using short-term investments for income, a second 10-year phase for using income and growth investments for income, and a third phase using guaranteed income. 

Annuities are one way to address retirement risks and close retirement savings gaps, according to Hodgens. He mentioned that the downsides of an annuity are a lack of liquidity and higher expenses. However, Hodgens believes retirement income products will only get better in the years to come.  

Hodgens noted that many providers are beginning to take a more holistic approach to retirement income and include planning services as well as products and tools. Planning early and being realistic is important for participants, he concluded.

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