Lifetime Income Boosts 401(k) Spending Power by 22%, BlackRock Finds
New research from BlackRock shows that adding lifetime income is one of the highest-impact levers in defined contribution plan design, because it directly addresses perhaps the biggest unsolved problem in retirement: how to spend safely.
The whitepaper, “When Next Eggs Need a Safety Net: Who Benefits from Guaranteed Lifetime Income—and How?” explores how a single design change—embedding lifetime income—can increase participant spending power without increasing contributions. It also improves retirement confidence and outcomes while differentiating the plan as a retirement income solution—not just a savings vehicle.
401(k) participants who embed a guaranteed lifetime income solution within their target-date fund could see an average 22% increase in spending power.
BlackRock’s retirement research team ran 100,000 simulations across four income groups to measure the gap between traditional 401(k) plans and plans that include a guaranteed income component. The modeled strategy allocated 30% of a retiree’s balance to a guaranteed income annuity and the remaining 70% split between stocks and bonds. That was compared to a traditional TDF approach with a standard 40% stock, 60% bond allocation at retirement.
Notably, BlackRock’s research deliberately excluded Social Security income to isolate the impact of plan design alone on spending outcomes.
BlackRock’s whitepaper reveals 401(k) participants who embed a guaranteed lifetime income solution within their target-date fund could see an average 22% increase in spending power. For lower-income workers, it’s a 25% increase. Even higher-income earners can increase their potential spending ability by 18%.
The central finding that adding the guaranteed input component—not higher savings—can effectively reshape how much participants can spend in retirement is significant. By converting savings into “spendable income,” participants spend more confidently instead of underspending out of fear of running out of money.
Traditional 401(k)s leave participants with a lump sum and uncertainty about how much they can safely spend in retirement. The whitepaper notes 66% of savers worry they’ll run out of money while only 27% of retirees feel confident they have enough to last through their entire retirement. Further, 91% of retirees looking back said they believe employers should provide guaranteed income options in the plan.
Yet research has found that many retirees don’t spend nearly as much as they could from their retirement savings. The whitepaper cites a 2018 study showing that most retirees still had 80% of their pre-retirement savings after almost two decades of retirement. “This was true across all wealth levels suggesting that there is a behavioral element at play,” the paper’s authors write. “Simply put: We don’t like watching a leaky bank account. We like finding checks in our mailboxes.”
The behavioral shift from thinking about a “nest egg” to thinking about a predictable monthly income stream by way of annuities embedded in TDFs can be the difference between spending confidently and hoarding savings. Meanwhile, the remaining liquid assets give retirees flexibility for unexpected costs, travel, and discretionary spending throughout their post-career years.
“We believe a target allocation of 30% to a guaranteed income option provides income certainty, while the remaining 70% invested in stocks and bonds delivers participants flexibility, opportunity for growth, and inflation protection,” BlackRock’s whitepaper states. “We believe building a guaranteed income solution that works in step with a wide range of participant experiences will allow more people to not only retire on their own terms, but live it out that way too.”
License to spend
In a 2024 study, David Blanchett and Michael Finke found that retirees with assets that annuitize income spend twice as much as retirees with an equal amount of non-annuitized savings.
“Essentially, annuities with lifetime income protection give retirees a psychological license to spend their savings in retirement,” Blanchett, Head of Retirement Research at PGIM DC Solutions, said at the time. “Retirees clearly prefer to live off income, but many don’t feel comfortable depleting down assets to fund a lifestyle. This is an unfortunate paradox since funding a lifestyle is what motivates people to save for retirement, and few retirees indicate a desire to pass on significant wealth at death.”
Blanchett and Finke found that every $1 of assets converted to guaranteed income could result in roughly twice the equivalent spending compared to money left invested in a portfolio. This effect suggests that the explanation for under-spending of non-annuitized savings among retirees is likely both a behavioral and a rational response to longevity risk.
New TIAA research backs premise
New research released this week from TIAA shows that retirees can boost their first-year spending power 30% above a “do-it-yourself 4%” withdrawal in 2026 by annuitizing a portion of the retirement savings while also incorporating a 4% systematic withdrawal on the rest.
Using a model that annuitizes one-third of total savings, then applying the 4% withdrawal on the leftover one-third, TIAA found that a 67-year-old retiree who selects its most popular annuity contract option would see 30% more money. For example, with $1 million saved, retirees would earn an additional $51,867 instead of $40,000 in 2026, or $989 more to spend monthly.
Further, TIAA notes that a 67-year-old retiree who wants $40,000 to spend in their first year would need $1 million in savings under the 4% rule approach. If the same person annuitized one-third of savings, then took 4% from the remaining two-thirds, then they would only need $775,000 to get $40,000.
SEE ALSO:
• Consumers Can Lift Retirement Income by 30% When Using This Strategy
• TIAA Data Shows Momentum for Lifetime Income Solutions Among Plan Sponsors
• IRI Urges Congress to Mandate Lifetime Income Option in DC Plans
• How Annuitizing Income Gives Retirees a ‘License to Spend’ (Twice as Much!)
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.