Combining a deferred annuity with a drawdown strategy in retirement can balance retirement income and liquidity, according to a new a new white paper published this week by T. Rowe Price.
The paper says a drawdown withdrawal strategy, where income is derived from principal and portfolio returns—paired with guaranteed income from a deferred annuity—can provide a high level of retirement income while maintaining adequate liquidity for retirees.
“There is a common misunderstanding that annuities are an ‘all or nothing’ decision for retirees,” said Berg Cui, Ph.D., senior quantitative investment analyst at T. Rowe Price and author of the paper. “We believe that pairing annuities with a drawdown strategy could create a more balanced retirement income experience that better matches a retiree’s needs for both income and access to funds.”
Key insights from the paper include:
- There is a growing trend of defined contribution (DC) participants staying in-plan upon retirement, and more plan sponsors are exploring in-plan retirement income solutions to support them. T. Rowe Price’s 2024 DC Consultant Study found that the percent of plan sponsors that consultants categorized as currently offering or planning to add a retirement income solution more than doubled in recent years, from 8% in 2021 to 18% in 2024.
- Pairing a drawdown strategy with an annuity may be a better match for retirees who need to maximize income and maintain adequate liquidity. Providers have been known to pair endowment strategies, where income is sourced from portfolio returns and the principal is mostly preserved, with annuities. However, the paper argues that annuities are better matched with drawdown strategies where income is sourced from both the portfolio returns and principal. This pairing can deliver a high level of income without significant loss of liquidity.
- Due diligence is key for plan sponsors during insurer selection and when evaluating the product to ensure that it is a good fit for the plan. Consultants and advisors can help plan sponsors choose the right mix of capabilities that work for their participant demographic.
“T. Rowe Price is committed to empowering plan sponsors and advisors with the research and knowledge required to make the best, most impactful decisions for retirement savers at every stage of the journey,” said Sudipto Banerjee, Ph. D., director of retirement thought leadership at T. Rowe Price. “Ultimately, our goal is to ensure that every retiree can approach their future with financial confidence.”
Baltimore-based T. Rowe Price serves millions of clients globally and manages $1.61 trillion in assets under management as of Aug. 31, 2024. About two-thirds of the assets under management are retirement-related.
T. Rowe Price Investment Institute launching in 2025
T. Rowe Price also announced this week it is forming the T. Rowe Price Investment Institute for the dual purposes of enhancing the firm’s investment talent development and strengthening the delivery of T. Rowe Price’s proprietary investment insights to clients.
Justin Thomson, head of International Equity and a chief investment officer, has been named to head the Institute, which is scheduled to launch on Jan. 1, 2025.
The work of the Institute will include curating and highlighting insights generated by T. Rowe Price’s investment research organization and developing educational content to help clients and T. Rowe Price investment professionals augment investment decision-making. As progress accelerates into next year under Thomson’s leadership, the Institute will pursue engagements with experts in business and academia and with other institutions on topics such as portfolio construction, behavioral finance, geopolitics, and others. The Institute will facilitate collaboration between these experts and T. Rowe Price investment professionals, developing insights that can be shared with clients.
Thomson is a 26-year veteran of T. Rowe Price who helped conceive the firm’s International Small-Cap Equity Strategy and managed it for many years before stepping into his current leadership role in 2020. He has also been an important contributor to T. Rowe Price’s Asset Allocation Committee for the last nine years. Thomson is based in London, and his total investment experience spans more than 33 years.
“Justin has a demonstrable record of success throughout his long tenure at T. Rowe Price,” said Eric Veiel, head of Global Investments and a chief investment officer. “He was a talented portfolio manager, and he has always been an influential voice within the investment organization. He is valued as a leader and mentor, and he’s highly respected by his colleagues and clients. The impressive skill set he has built over the course of his career makes him the perfect match for this important new role.”
Thomson added that the T. Rowe Price Investment Institute will be an important educational resource for the company’s investment professionals and their clients. “Risks are everywhere in the markets today. More than ever, investors and advisors need a place where they can find timely and actionable insights from people who are on the ground asking the right questions of the companies that are shaping the present and future of the financial markets and global economies,” Thomson said. “That’s why the time is right to establish this Institute and it’s why I also believe the time is right for cost-effective, skilled active asset management. Our intent with the Institute is to help investors do more than keep pace with markets by enabling better, more informed investment decisions.”
SEE ALSO:
• Retirement Income and Personalization Among Key 2024 DC Trends
• T. Rowe Price Forms Global Retirement Strategy Team
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.