Now that Baby Boomers are getting older, those in defined contribution plans such as (401 (k) and 403 (b), are finding that they aren’t sufficient to provide income for the duration of the retiree’s life. Although 403 (b) plan annuities are better, the problem still may exist.
Although plan sponsors have focused on the need to save for retirement, but have been lax in preparing Baby Boomers to address needs after retirement commences. Plan sponsors are not required to provide post retirement help, however, when they do, they face fiduciary responsibility.
Some of the risks Baby Boomers risk in retirement are:
Because they are living longer, retirement savings need to last until end of life. From 2000 – 2014, the life expectancy of a 65 year old has increase by 3 years. There is a great probability that at least one spouse will live to be 95 or more. Kevin Thompson says “I have come to appreciate that if you allow it, Western Medicine will extend the duration of your life. And, if you let them in, the Western Medicine Practitioners (Your Doctors) will extend the QUALITY of that life.”
There are market challenges that could affect their retirement income. If a serious downturn were to occur, either right before or after retirement, the retiree may be forced to use up investment income to pay expenses and has less of a chance to recoup.
They may not be sure of how much they can withdraw in order to make sure they have enough left for life. Many experts recommend that a 65 year old retiree withdraw no more than 4 % per year (adjusted for inflation) in order to have a 90% chance of their money lasting for 30 years.
Their mental state may decline as they get older. A person 85 or older is often not capable of making smart financial decisions on their own.
Traditional annuities have a fixed monthly payment that is guaranteed for the life of the retiree and spouse. With an annuity, the retiree pays some or all of his account balance to the insurance company and they in turn pay the retiree for life. There are no market fluctuations and they know how much they will take in each month and for how long.
GWB’s (Guaranteed withdrawal benefits) also guarantee income for life under certain conditions. The retiree invests all or part of his account in a managed fund. (Usually a target date or balanced fund) The GWB has two parts. An Equity factor in which the account grows with contributions and investment gains, and the protection factor. As long as the retiree’s withdrawals do not exceed a certain percentage of the highest account balance, the insurance company pays at the same rate if the investments are consumed. The retiree may take larger withdrawals from investments to pay expenses if needed, although this reduces later payments. Thompson goes on to say “there are many annuities that exist that can provide fixed monthly payments just like old school pensions did for our parents.”
Sometimes the fiduciary concerns of considering the retiree’s needs and recommending products to meet those needs are overwhelming. Because of this the Department of Labor has created a regulatory safe harbor.
The regulation stipulates that a fiduciary must be able to conclude that at the time the selection of the product is made, the insurance company is capable of making all future payments. This requires monitoring. Cost of the product is also considered but mostly the financial integrity of the provider.
Taking into consideration the risks that Baby Boomers face and the need for in-plan solutions, fiduciaries must consider offering products that are guaranteed lifetime income and do so in an informed manner. Thompson adds “be open to the power of annuities. When appropriately inserted into your plan, they can be o’ so powerful.”
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