Like so many Americans, my dad retired with a plan. But, his six years in retirement so far haven’t gone as planned.
After a couple of years of retirement, my dad started doing some part-time consulting work to stay busy. Then, late last year, my mom passed away. Both of these unexpected circumstances changed how much of his retirement savings he needs to access now and how he will use those savings in the future.
For decades, I have been thinking about how the financial services industry can work better for people in retirement. This situation reinforced for me how real people’s retirement plans and strategies need to evolve over time. And how the products in those plans and strategies can better serve them.
While many people use the same vehicle to prepare for retirement—an employer-sponsored 401(k) invested in a target date fund—they retire at varying ages, with varying income needs and savings levels, and with distinct visions for their retired years.
These plans can be effective at helping people accumulate the savings they will need in retirement, particularly in the earlier working years. However, as retirement draws near, and needs and circumstances of participants start to vary, target date funds are not designed to account for these realities. Nor are they prepared to change as circumstances evolve throughout retirement.
Many of us worry about having enough money to last through retirement. A guaranteed lifetime income solution (GLI), like an annuity, can help people address this concern. There are different types of annuity features and benefits available outside of defined contribution plans. An annuity is a contract with an insurance company that can provide income for life. The options within an employer-sponsored retirement plan, such as a 401(k), are much more limited and historically haven’t been designed to accommodate these varying circumstances.
As a financial services and retirement industry, we have the opportunity to do better.
More and more retirement plan participants are interested in GLIs. In a 2022 Allianz Life study, 80% of respondents said they would be interested in a product that can serve as a supplemental source of guaranteed income along with Social Security. A majority of people with retirement plans through their employer (60%) said they would consider adding an annuity to their employer-sponsored plan if it was available.
Nearly three in four Americans (74%) said having an option that allowed them to build a protected foundation for lifetime income would increase their loyalty to their employer in the Allianz Life study.
In-plan GLIs will be most effective when they have been designed with real people in mind. In addition to providing an income stream that cannot be outlived, these solutions need to have six characteristics to work for real retirees. These are flexibility, accessibility, portability, increasing income potential, protection from market loss, and fees that are in line with other plan investments. In this article, we will focus on flexibility, accessibility, and income increasing potential because of recent retirement trends and inflation concerns.
For an in-plan GLI to meet the reality of retirement today, it needs to be flexible enough to accommodate participants in when they want to start, stop or just pause the lifetime income they receive from it.
People’s life paths are not as linear as they once were from school to work and then retirement. Instead, many pursue non-traditional tracks or are returning to school later in life. This includes people like my dad who started consulting after he technically retired.
More than half (54%) of people who are more than 10 years from retirement are interested in exploring a non-traditional life path where they try different things at different times in life, according to an Allianz Life study. That would change their need for income from a guaranteed source in the short- and long- term.
In-plan GLIs should be flexible enough to reflect these retirement trends. Yet, solutions that require participants to annuitize the guaranteed portion of their retirement savings, whether within a target date fund outside of it, are rigid and irrevocable. The need for that income may be more dynamic.
The decision of when and how to take money from the in-plan income guarantee should be made by the participants themselves or as guided by professional advice based on their personal circumstances. This flexibility allows people to make the best decision for their financial future at the time and adjust that decision as their circumstances change.
People should be able to access the funds they have accumulated in an in-plan GLI like their other retirement investments.
For example, a retired homeowner facing a costly repair to their residence might want to use some of their retirement savings to avoid going into debt. Or, a retiree with a serious health condition and associated medical expenses may prefer accessing their savings instead of receiving lifetime income payments at the same level or at all. An accessible solution should have the liquidity needed to address these financial emergencies.
Potential to Increase Income
A GLI provides a stream of income—often through a rider either built into the product or purchased at an additional cost—that cannot be outlived. But, that income can be outgrown if it doesn’t have the opportunity to increase and keep up with the rising cost of living. With inflation increasing at a rate faster than we’ve seen in 40 years, this concern is top of mind for savers and retirees.
The vast majority of Americans (82%) said they worry about rising inflation continuing to have a negative impact on the purchasing power of their income in the next six months in an Allianz study. Baby Boomers are particularly worried that they might not be able to afford the lifestyle they want in retirement because of increased cost of living.
The need for GLIs to provide the opportunity for income increases each year, particularly for those deep into retirement when all other retirement savings may have been exhausted, is appreciated now more than ever.
Never Outlive Assets
For the majority of plan participants, outliving their assets is the primary concern and GLIs for a portion of their assets ensure that their retirement income will never fall to zero. New GLIs within employer-sponsored plans offer income guaranteed by the insurance company that issued the annuity, but many have been designed to work within a target date fund and therefore, have the same one-size-fits-all pain points.
Every participant’s circumstance is unique, particularly in the 10 to 15 years before and during retirement. These solutions need to have the right characteristics to ensure they can work for the real people who use them.
With flexibility, accessibility, increasing income and other personalized characteristics, in-plan guaranteed lifetime income solutions can lead to better outcomes for plan participants and the employers that offer them. I can see how my dad could have benefitted from this type of product design. And so many other retirees could too.
Matt Gray is the assistant vice president for worksite and middle markets at Allianz Life Insurance Company of North America.
Allianz Life Insurance Company of North America has been keeping its promises since 1896 by helping Americans achieve their retirement income and protection goals with a variety of annuity and life insurance products.
 Allianz Life conducted an online survey, the 2022 Q2 Quarterly Market Perceptions Study in June 2022 with a nationally representative sample of 1,004 Respondents age 18+; of which, 605 currently have an employer sponsored plan.
 Allianz Life conducted an online survey, the 2022 Retirement Risk Readiness Study, in February 2022 with a nationally representative sample of 1,000 individuals age 25+ in the contiguous U.S. with an annual household income of $50k+ (single) / $75k+ (married/partnered) OR investable assets of $150k.