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I have expressed my opinion on the need for and desirability of a steady income stream in retirement, as guaranteed as possible. Next Friday my pension will be deposited in our bank account. On the second and forth Wednesday each month our Social Security will be deposited. All that has happened each month for the last seventeen years.
I don’t worry about withdrawal strategies, withdrawal percentages, guard rails, tip ladders or any similar strategy. The IRC tells me what I must withdraw from my IRA.
I realize that most Americans will need to deal with all that planning, but I can’t imagine it is preferred. DIY may be fine fixing a sink, but given an alternative, for life income?
We are very fortunately among retirees with a pension. Only about 19% of all current workers have a pension.
Pension coverage is significantly higher for state and local government workers (75% participation) compared to private sector workers (11% participation in pension plans).
According to data from the Federal Reserve’s 2023 Report on the Economic Well-Being of U.S. Households, 56% of current retirees in the U.S. received income from a pension.
Given the choice between any form of lifetime annuity income and managing your investments, withdrawal strategy, and with at least the possibility of running out of money, which would you choose?
It appears a large number of workers may agree that annuity income is desirable.
A new survey reports that about 90% of participants surveyed said they would enjoy the inclusion of a fixed annuity in their 401(k) plan. A majority also favored integrating fixed annuities into target-date investments.
93% of 401(k) plan participants said it is important that they have the option to convert their savings into guaranteed monthly payouts, according to a Nuveen and TIAA Institute study.
The problem with guarantees is the cost or premium. CDs offer a guarantee for periods measured for up to 5 years. Treasuries offer their own guaranteed returns if held to maturity.
I’m not ready to pay the premium an annuity demands to get a “guaranteed” return that is less than that of the S&P 500, but more than cash or certain bonds.
Guaranteed income is an underpinning of the social security system, which is backed by the U.S. government. Yet, a lot of time is spent ruminating about system failure, reduction in benefits, etc. State pensions have their problems, too. Illinois for example is chronically underfunded. From time to time the politicians attempt to get voter approval for a convention to amend the constitution. This has yet to occur because people don’t trust the legislature and are fearful of a cut in pensions.
The insurance companies holding cash and providing a “guaranteed” payout for years has risk, too. More than a government SS pension. I do recall when Universal Life policies were in vogue. These became too expensive to sustain and there were losses and bankruptcies.
As I’ve noted previously insurance companies do fail from time to time, and when that occurs annuity holders may get 50% after a few years. The retort is always the same 1) Few insurance companies fail and 2) It is usually the small companies that fail. Yes, they are relatively rare, but so are stock market crashes. AIG and Conseco failed although the U.S. government intervened.
For the curious here’s a list of 20 notable insurance company failures.
https://www.linkedin.com/pulse/20-most-notable-insurance-carrier-failures-jeff-affronti
Here’s a rhetorical question. If infrequency is a measure then why worry about stock market crashes? The really bad ones occur infrequently.
Failure over how many years and many were not issuing annuities. My former employer recently turned over $5 billion to Prudential to buy annuities for 3,000 retirees. I’m pretty sure they made sure there was minimal risk.
You come at all this from the perspective of a knowledgeable person capable of managing your money. I guarantee that’s does not represent the great majority of 401k participants many whom already put their money in a GIC.