As Americans get older and potential retirement timelines get longer, savers have legitimate concerns about how to make their money last once they’re no longer working. A May white paper released by American Century Investments outlines products that give retirement plan participants some options.
[Related: 401k ‘Decumulation’ Dilemma Could Devastate DC Participants]
In “The Decumulation Conundrum: Solving for Income in Retirement,” authors Rich Weiss, CIO, and Vidya Rajappa, vice president of portfolio management, write that the progress made in helping investors save for retirement has not been matched by progress in helping them spend their savings wisely.
“Data show that plan participants want income solutions but don’t know how to manage their assets in retirement to achieve this goal,” they wrote.
The authors point to data from the Employee Benefits Research Institute that show participants don’t spend down their assets in retirement, despite saying their employer-sponsored plan is an important source of income.
“It’s not clear why many plan participants hoard their retirement assets,” they wrote. “Is that their preference, or is it a matter of not knowing how to manage their portfolios to produce the income they say they want?”
Investment-based solutions
Investment-based income solutions use liquid, inexpensive investments that will grow over time to sustain retirement income. Investors retain control of the assets, but they lose any guarantees about they income they will receive. Examples include:
Income funds. These funds invest in high-yield asset classes and provide income through dividends and interest payments. They are designed to be stable, but are subject to market volatility, Weiss and Rajappa note.
Managed payout funds. These funds pay either a fixed amount or a fixed percentage of the portfolio’s value. Unlike income funds, they may draw from the principal to meet payout obligations, although they may be designed to avoid that outcome by setting payments below the expected return, according to the authors.
Spending or drawdown solutions. These funds spend down a portion of the assets in a portfolio over a specified period of time. Investors who haven’t saved enough to live on investment income alone may need to dip into their savings to avoid lowering their standard of living, according to Weiss and Rajappa.
“These funds may be appropriate for plan participants willing to balance their standards of living with their preferences for bequest and for whom bequests aren’t a strong motive,” they wrote.
Insurance-based solutions
Savers who want to trade control for certainty may be more interested in insurance-based income solutions. Weiss and Rajappa note that these products’ historic complexity and cost have kept adoption rates low, but protections included in the SECURE Act might facilitate their use in defined contribution plans.
Fixed annuities. Weiss and Rajappa say that fixed annuities provide the highest guaranteed income options thanks to features like mortality pooling.
Guaranteed withdrawal benefits. This option leaves some control in investors’ hands, according to the authors. Income may be lower, but assets can continue to grow in strong markets, they say.
Longevity annuity. Qualified longevity annuity contracts are deferred annuities are typically used later in retirement, after other income streams have been exhausted, according to the authors. The annuity can be purchased with funds from a qualified DC plan or IRA, and provides an income stream when the retiree reaches a certain age.
Stable value. Stable value portfolios combine investments and insurance. Weiss and Rajappa note that they feature both the control and liquidity of investment-based solutions, and the assurance of insurance-backed solutions, but may offer lower returns than traditional fixed-income funds.