Big ideas that could generate lifetime retirement income

The financial services industry, boosted by federal and state programs, has made strides in getting workers to save for retirement. But after workers retire – then what? How can retirees create a sustainable stream of lifetime income to support them during a retirement that could last three decades?

A panel of financial company leaders presented some ideas during a session at a recent Employee Benefit Research Institute’s Retirement Summit. Although those ideas differed a bit, the thing they had in common is that retirement plans should have a simple way for retirees to generate a lifetime paycheck.

“My vision would be that everyone would get a paycheck for life from their 401(k) plan, optimized to their personal situation,” said Anne Ackerley, managing director and head of BlackRock’s Retirement Group.

Ackerley said that using the 401(k) as the source for lifetime income would benefit workers because of lower fees. In addition, she said, “People trust their employer and look to their employers for this type of benefit.”

A paycheck for life from the 401(k) “should be the default,” Ackerley said. “And when I say guaranteed income, I mean it should be affordable, simple, easy to use and an option.”

Ackerley also said she believes those who are approaching retirement should be able to use a technology-enabled tool to help them make better decisions such as the best age to retire and the best age to begin claiming Social Security.

Artificial intelligence can help workers do a better job of making their retirement-related decisions, said Dan Houston, chairman, CEO and president of Principal.

“We have the power to do a better job through predictive analytics to help people make better decisions,” he said. “We have employers who are demanding and insisting that we provide more comprehensive views. AI will help us do that.

“Employees need the help, and we need to have the latitude to be able to help them make those decisions.”

Ken Mungan, chairman of the board at Milliman, proposed a new default for workers’ 401(k) plans that would generate income.

Mungan suggested that when a worker turns age 55, 3% of the worker’s 401(k) balance would be moved into an annuity that pays lifetime income beginning at age 80. That 3% transfer then would happen each year on the worker’s birthday until the worker retires.

“When you retire, you would have about 25% of your 401(k) balance in an annuity that would pay you lifetime income from age 80,” he said. “Now you divided the retirement income problem into two distinct pieces. You withdraw the 75% from your mutual fund until you reach age 79 and then at age 80, the annuity would take over from there. When the person retires, targeted monthly income would be moved into their checking account each month.”

Ackerley suggested that many workers would not want to give up 25% of their retirement savings and not see a return on them until age 80. Instead, she proposed that workers start getting those annuity payments at age 65, suggesting that the payments could allow some workers to delay claiming Social Security.

A broad holistic approach to retirement saving is what workers need from their advisors, said Rich Nuzum, president of investments and retirement with Mercer.

“Think about the things people need to navigate in retirement: their health, their work, the savings and their social connections or lack of social connections,” he said. “For example, do you have a partner or a family member who will take care of you? How are you navigating housing A good advisor will know what’s going on in all of those areas.”