Current Thinking

Pensionizing Your Retirement Savings

A blog by Rich Rausser, CPC, QPA, QKA, Senior Vice President, Pentegra Retirement Services – March 3, 2016

The Institutional Retirement Income Council (IRIC) – commonly referred to as a non-profit “think tank” for the retirement income planning community – recently released what it considers the trends to watch in our industry this year. The IRIC’s overall conclusion, as stated by a Yahoo Finance article, is that “there is a growing need for retirement plan sponsors to help participants with retirement readiness and securing their financial future. This will drive plan sponsors to expand their financial wellness initiatives and evaluate retirement income solutions for their defined contribution plans.”

Although not unexpected, the IRIC’s comments serve as food for thought for plan sponsors and participants alike. With the shift away from defined benefit pension plans, which is likely to continue, in favor of the new retirement reality – a primarily defined contribution plan environment – the issue of how one can ensure a consistently adequate income during retirement is of increasing importance.

For years, the retirement plan services industry has generally relied upon the “4 percent rule” when it comes to the decumulation phase of retirement savings: Assuming you have accumulated sufficient assets by retirement age, it was widely accepted that if you withdraw 4 percent a year from those savings, you should have sufficient funds for approximately 30 years.

However, the 4 percent rule was introduced in the 1990s, when interest rates were considerably higher than they have been over the past several years. In addition, average life expectancy rates have increased: A male who turned age 65 in 1970 was expected to live another 13 years, while a female was expected to live another 17 years; by 2012, those figures had risen to nearly 18 years for men and about 20 ½ years for women.

There is also market volatility to consider, especially when it comes to stocks and bonds. No market did particularly well in 2015. What if your portfolio has been flat for a few years? If the cost of goods and services continues to increase, you are faced with the same issue.

Therefore, it might be a good time to reevaluate the 4 percent rule. The specter of running out of money during retirement is a very real one — but there are steps that can be taken to try to avoid such a fate.

One alternative is to purchase an annuity. By paying a one-time lump sum, you receive a guaranteed monthly income for as long as you live; death benefits, an extension of that income to your heirs, can be part of the arrangement if you so choose. Some 401(k) plans already offer annuities as an in-plan solution, while others make available an out-of-plan annuity option. You can also meet with an insurance carrier to find something that may suit your needs.

As always, comparison shopping is a good idea here. View it as you would the potential hiring of any service provider: Evaluate what each provider’s annuity plan offers, how the annuity can be customized, and assess the pricing and performance history of various options.

This is what we call “pensionizing” your retirement savings. Receiving a regular, guaranteed payment throughout your golden years is similar to how the old pension system worked. Older workers may know what a pension is, while the younger generation may have only a vague memory of their grandparents mentioning such a concept. In any event, you may wish to consider pensionizing your retirement.

Beyond purchasing an annuity, there are other means of addressing the issues that the IRIC brought up. As with anything finance-related, there is always going to be at least a degree of uncertainty as to what presents the most favorable outcome for a given person at a given moment in time. By working with a qualified retirement savings professional – whose job is to stay abreast of the latest developments as well as what may be coming down the pike – you may be able to find a solution that eases the worry of running out of money during your golden years.