As near-retirees grow concerned over market uncertainty, rising health care costs, and increasing daily expenses, a new report by AllianceBernstein finds incorporating lifetime income solutions can sustain year-to-year pay throughout retirement.
The report, “Leveling the Retirement Income Playing Field: A Comprehensive Framework for Evaluating Diverse Lifetime Income Solutions,” found that over one-third of participants could exhaust their retirement income if they don’t have explicit lifetime income insurance, and if they regularly withdraw at high rates and do not “self-insure” their income.
When asked what percentage of a $500,000 balance a 65-year-old retiree can withdraw each year, over half of respondents in the research said 7% or more, while one-third believed a 10% withdrawal rate, or more, was maintainable.
“Today, defined contribution plan participants are facing a significant challenge when determining how to spend down their savings in retirement—either overspending and outliving their assets or underspending due to market uncertainties,” said AB’s Managing Director, Head of Defined Contribution Jennifer DeLong, in a statement.
Even with a practical withdrawal rate, AllianceBernstein research further warns how unexpected market returns could derail retirement savings.
The findings add that incorporating insurance into a participant’s asset allocation can improve sustainable withdrawal rates by 70% or more, with the most effective way to deliver insurance being through a qualified default investment alternative (QDIA).
Participants want lifetime income solutions
Given today’s market concerns and overarching inflation fears, a higher rate of participants are stressed about retirement, and growing keen to the idea of lifetime income options. Another recent report by Morning Consult found that more than half of respondents in a survey said they were considering a guaranteed lifetime income product as a supportive beam during volatile markets.
Experiencing such an economic environment has led participants to wanting a steady income stream, and therefore contemplating on adding a lifetime income option into their retirement strategy.
According to AllianceBernstein, when asked about the most important factor when saving for retirement, 31% of respondents said having a steady income stream was vital to them, while 21% answered “protection of principal” and 20% responded “growth as markets rise.”
Still, participants voiced their anxieties against lifetime income, adding that they’re nervous of inflation eroding their income stream’s purchasing power (39%), giving up control of assets/lack of access in the case of emergencies (21%), and not getting the income benefit they paid for in the case that they die (13%), found AllianceBernstein.
Traditional 4% rule no longer viable
While previous reports have measured 4% as a safe withdrawal rate, AllianceBernstein argues the percentage is now obsolete due to inflation-adjusted returns. As a result, the firm estimates that the “4% rule would result in a one-in-five chance of failure.”
Instead, in its research, AllianceBernstein lowers its practical withdrawal estimate to 2.3%, adding that such a rate ensures participants won’t outlive their retirement savings.
Additional findings from AllianceBernstein’s report can be found here.
SEE ALSO:
- Talking Guaranteed Lifetime Income Solutions with Allianz Life’s Michael De Feo
- Economy has Retirement Savers Eyeing Guaranteed Lifetime Income, Financial Planning Options
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
