People are living longer, which means they may need their retirement savings to last decades. As a result, nearly half (48%) of participants are concerned about outliving their retirement savings. [1] Many Americans don’t know how to transform their savings into retirement income. Guaranteed income offerings can help ease this concern by providing consistent, predictable payments for life.

Research shows a majority of 401(k) participants (75%) are “very” or “somewhat” interested in putting some or all of their savings into a guaranteed income option. [2] Employers are on board, too — 4 in 5 believe employees want guaranteed income products in their retirement plans. [3]

However, with new retirement strategies comes opportunities, uncertainty and risks. Here are some of the benefits and risks of in-plan guaranteed income.

What is Guaranteed Lifetime Income?

Think of it as a “paycheck for life.” Essentially, it is a guaranteed monthly income stream that commences once a 401(k) participant reaches retirement age (generally 65 years old). These investment solutions are gaining in popularity because they are easy for employees to understand, which helps instill more confidence in their retirement outlook.

Retirement Income Hurdles

For decades, workplace plans have helped workers save, invest and accumulate as much as possible. Yet, few plans offered a decumulation strategy to provide a steady, predictable flow of retirement income.

Guaranteed income solutions aim to solve three primary participant concerns:

1. Running out of money: The average American retiree could potentially outlive their savings by nearly 10 years. [4] Guaranteed income products help address this risk by delivering a steady, predictable lifetime income stream.

2. Reducing or eliminating early withdrawals: Taxes and penalties alone may not discourage participants from tapping into their retirement savings early.
   Guaranteed income products may be a deterrent, as pre-retirement withdrawals will notably reduce retirement income.

3. Lacking flexibility: Guaranteed income options can be tailored to an individual’s needs, i.e. who is covered, the way they receive payments, and for how long.

Key Benefits and Risks of Guaranteed Lifetime Income

Potential Advantages Include:

• Increased retirement confidence among participants.

• Enhancing motivation and desire to save because participants will know their real monthly payouts.

• More employees retiring on time.

• Reduced employer healthcare costs since older employees may retire earlier and, thus, exit the health insurance plan.

• Improved competitiveness, recruiting and retention.

Potential Disadvantages Include:

• Each guaranteed income contract is different and the terms need to be clearly understood.

• Most contracts can not be ported (moved from one employer to the next).

• Participants must elect guaranteed income far in advance of retirement; this decision typically cannot be reversed.

• Payouts may end when the participant dies.

• Participants may incur additional costs.

Lifetime Income Illustrations

On a related noted, illustrations that translate participants’ retirement account balances into a projected monthly income figure in retirement will begin appearing on statements this year. These projections may motivate your employees to save, or they could instill a sense of dread if the illustration paints a bleak picture. Either way, this may prompt some employees to knock on your door and ask questions about the company’s retirement plan as well as the idea of guaranteed income alternatives.

How We Can Help

If you are curious about guaranteed lifetime income options or other ways to enhance your retirement plan, we can help. Just give us a call or shoot us an email to learn more.

[1] Nationwide Retirement Institute. “2021 In-Plan Lifetime Income survey.” Sept. 2021.

[2] Employee Benefit Research Institute. “2021 Retirement Confidence Survey.” June 2021.

[3] Nationwide Retirement Institute. “2021 In-Plan Lifetime Income survey.” Sept. 2021.

[4] World Economic Forum. “Investing in (and for) Our Future.” June 2019.