Study Finds Lifetime Income is ‘Missing Link’ to Global Retirement Security
A new study released today from Prudential Financial and the Global Aging Institute concludes that lifetime income can significantly strengthen retirement security, helping people spend more confidently while reducing the overall cost and strain on retirement systems.
Today, during the Spring IMF World Bank Meetings in Washington D.C., Prudential unveiled global research conducted by the GAI showing that while retirement savings have grown in many countries, most systems still leave individuals on their own to manage the risk of outspending or outliving their savings. But it also finds that countries could potentially deliver the same retirement security at a roughly 20% lower cost when benefits are paid as lifetime income rather than lump sums.
“Our analysis shows that when countries fail to make adequate provision for lifetime income, it greatly reduces the efficiency and increases the cost of their retirement systems while needlessly leaving individuals at risk of outliving their savings.”
Richard Jackson, Global Aging Institute
The Case for Lifetime Income research highlights the essential role of lifetime income in enhancing retirement security for individuals and society. It notes the industry collectively needs to make it easier for retirees to turn appropriate portions of their savings into an income stream that lasts their lifetime.
“Retirement security is one of the most defining issues of our time and solving for it will require collaboration across employers, financial institutions, and policymakers,” said Phil Waldeck, head of U.S. Businesses at Prudential Financial. “For Prudential, our role in addressing this new era of longevity is helping individuals, financial advisors and workplace plan sponsors move beyond just account balances and savings to meet today’s critical income planning and decumulation needs of aging populations.”
GAI studied economic trends in Australia, Japan, the Netherlands, the United Kingdom, and the United States, showing the evolving retirement systems. While retirement savings are trending upward among defined contribution-style systems, following the shift from defined benefit to defined contribution plans, many systems still rely on purely voluntary withdrawal or income strategies that, by their nature, contain fundamental risks of inaction.
“Our analysis shows that when countries fail to make adequate provision for lifetime income, it greatly reduces the efficiency and increases the cost of their retirement systems while needlessly leaving individuals at risk of outliving their savings,” said Richard Jackson, co-author of the study and the president and founder of the Global Aging Institute.
Policy guidelines
The report provides a set of policy guidelines that would protect lifetime income by normalizing or defaulting to longevity pooling, while preserving flexibility and helping manage market volatility, inflation, or interest-rate concerns. While there are not “one-size-fits-all” lifetime income and retirement security solutions, the study offers broad policymaker guidelines, which, among others include:
• Lifetime income should, at a minimum, be made the default option in all employer pension systems or workplace retirement plans.
• To minimize costs, standardize products and increase the scale of annuity purchasing pools by centralizing delivery of lifetime income, potentially using exchanges to connect employers with providers.
• State pensions, in combination with other tiers of the retirement system, should consider adopting a universal recommended replacement rate of 75%, a sensible target for average-earning workers.
• The collective industry needs to continue to innovate and offer flexible solutions, such as access to financial advice, as well as mechanisms to help manage inflation, interest rate, and other risks to protect against volatility, allow higher returns and provide exposure to inflation-sensitive assets.
• Translate account balances into equivalent lifetime income payments when communicating with participants during the accumulation phase and guarantee them access to an appropriately qualified and objective advisor as they approach retirement.
• To plan for the decumulation phase, participants should be guaranteed adequate financial advice with a qualified and objective advisor to build holistic financial plans for retirement.
The report concludes by saying that with the right policies in place, it is possible to integrate lifetime income into DC systems in ways that balance longevity protection and spending flexibility while protecting against inflation risk and interest rate risk, and that it is also possible to minimize or even eliminate adverse selection, limit delivery costs, and redress potential inequities.
- Read the full report The Case for Lifetime Income.
SEE ALSO:
• Lifetime Income Boosts 401(k) Spending Power by 22%, BlackRock Finds
• Consumers Can Lift Retirement Income by 30% When Using This Strategy
• IRI Urges Congress to Mandate Lifetime Income Option in DC Plans
• Prudential, LPL Expand Partnership to Offer Lifetime Income Strategies
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.