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Retirement Insights

Understanding Preretirees' Retirement Income Preferences

Sudipto Banerjee, Ph.D., Senior Manager, Retirement Thought Leadership

Beyond products, plan sponsors and financial professionals can offer an experience to help participants make informed savings drawdown decisions

Key Insights

  • Confusion about different retirement income products points to an opportunity for traditional advice or advice-embedded retirement income solutions.
  • Preference for managed payout solutions and annuities weaken as participants get close to retirement. Willingness to work with a financial professional increases at the same time.
  • Participant preferences suggest that retirement income solutions need to evolve beyond products to provide participants with an experience that makes them confident about their choice.

Once upon a time—as the fairy tale goes—defined benefit (DB) pension plans were the norm among employers and generated sufficient retirement income for all.

However, the past frequently appears rosier in collective memory.

Even when DB plans were more commonplace, not every worker had a DB plan, and not every plan provided a livable income. However, DB plans provide a simpler experience for participants in retirement. Money set aside by the DB plan sponsor provides a paycheck for life, and DB plan participants don’t need to make complicated decisions about how to arrange for ongoing income.

In recent years, defined contribution (DC) plans like 401(k)s have overtaken DB plans as the most popular workplace savings vehicle for most employees. Recent research from the Employee Benefit Research Institute (EBRI) found that the percentage of private sector wage and salary workers who participated in a DB plan decreased from 28% to 1% between 1979 and 2018. During that same time period, the percentage of individuals participating in DC plans increased from 7% to 40%.1

The shift from DB to DC plans has placed shared burdens on the employee and the employer for solving for retirement income. Plan sponsors are expected to offer solutions. Employees then have to decide which solution can help them generate a “paycheck” throughout retirement.

The financial services industry has put a lot of energy, education, and communication toward teaching people how to save for retirement, and it has done a lot of good. Perhaps more importantly, plan sponsors have increasingly adopted auto-services (i.e., auto-enrollment, auto-escalation, etc.) to make it easier for plan participants to save for retirement.

A similar “auto income” feature can simplify the participant experience after retirement. However, most DC plans lack a default “auto income” feature.

Because savings decisions in DC plans are often automated, saving for retirement may be an easier proposition for individuals than deciding how to spend down their nest egg. People saving for retirement need to make two crucial decisions: how much to save and how to invest the savings. Workplace retirement plans like 401(k)s have increasingly made these decisions easier by creating defaults that auto-enroll people to save and invest in investments (including target date investments) that are age- and risk-appropriate.

On the other hand, generating retirement income may require a deeper assessment of longevity risk, market risk, and inflation risk, as well as an understanding of tax implications. Yet many people are left to fend for themselves in this critical phase.

It’s almost like they’ve been dropped off in the middle of a bus route with no directions and left to their own devices to navigate the rest of the journey on their own.

While the conversation continues on what can be done to address income needs, the challenge continues to grow. More people saving in DC plans means that more will need to find their own way. DC plans may be well suited to meet this need by incorporating solutions that can help the transition to income so retirees can meet their spending needs.

How to Create the "Best" Retirement Income Strategy?

Part of the complexity in presenting a solution is that there is no such thing as a “best” retirement income strategy or an ideal one-size-fits-all approach. People have different needs and preferences, so their retirement income strategies may include a variety of solutions—such as managed payout solutions, systematic withdrawals, immediate annuities, and deferred annuities, etc.

That’s easier said than done.

Even though plan sponsors have tried to educate, research has shown that a large number of Americans still lack basic financial literacy, which affects their retirement planning.2 So introducing a plethora of complicated financial products and strategies to them at a time when they are most concerned about not making a financial mistake only increases their financial stress, which is counterproductive.

The first step to solving the retirement income needs of workers is to understand their knowledge and preference regarding liquidity, flexibility, and risk tolerance.

T. Rowe Price’s most recent Retirement Savings and Spending Study examined these topics for preretirees who are saving for retirement in a 401(k) plan.

Aversion to Some Income Solutions Increases Closer to Retirement

What Do People Really Want?

In our survey, we posed a question to preretirees age 50 and older about how they would allocate a hypothetical amount of retirement savings ($500,000) at retirement across four options:

  • Invest in a managed payout mutual fund
  • Invest in an immediate annuity
  • Invest in a deferred annuity
  • Manage on their own or with a financial professional’s help

One number immediately jumped out from the responses: One in four preretirees were not sure if they would invest in any of these products or if they should manage their money on their own. In our question, we provided detailed explanations of these investment solutions with relevant examples, but people were still confused. Explaining these products and strategies is part of the challenge.

More than eight in 10 preretirees have a goal to manage a strategy that converts their assets into an income stream in retirement. In simpler terms, they want to create a paycheck from their own savings. But when asked about individual retirement income solutions like a managed payout fund, an immediate annuity, or a deferred annuity that would meet that goal, the majority of preretirees say they are either not sure or won’t put any money in these choices.

So while the desire to create a paycheck is there, the appeal of individual retirement solutions is low—this is the gap that needs to be bridged.

There could be other reasons, beyond unfamiliarity, behind the aversion to certain retirement income solutions. For example, while guaranteed income is an appealing idea in theory, we see that consumers balk at the point of purchasing an annuity. Some aren’t sure if it’s a fair product for the money,3 and others might be concerned about liquidity. Also, the lack of knowledge and understanding of these products could be a key barrier toward the adoption of these solutions.

Product Preferences Change as Retirement Approaches

Our research also shows that there is more openness to a managed payout solution or annuity among younger preretirees who are further from retirement. However, when retirement is just around the corner, preferences change.

A few factors may be at play here:

  1. The purchase of these products is complicated and, in some ways, a final decision. For example, with annuities, the trade-off is sacrificing liquidity and, in some cases, higher returns for a predictable, guaranteed income stream. While the idea of a guaranteed income stream is appealing, these concerns are more and more manifested as people near the time of decision-making.
  2. As people near retirement and amass more wealth, they might become more reluctant to relinquish control of their assets. So, the appeal of standalone retirement income products, which demand some control over their assets, starts to weaken and they lean more toward options that give them a higher degree of control over their assets. That might be the reason why managing it on their own or with the help of a financial professional becomes an appealing option.
  3. There is more to a retirement income solution than just a product. Individuals may want an additional layer of service involving advice or education before they make a decision.

This need for advice is more apparent when we see that the interest in working with an advisor, or managing one’s finances entirely, more than doubled from 11% for the age 50–54 cohort to 25% among those in the age 60–64 cohort (Fig. 1).

1 “Putting Numbers to the Shifting Retirement Landscape,” Plans, EBRI Fast Facts,, January 23, 2020, #344.
2 Lusardi, Annamaria and Mitchell, Olivia S., “Financial literacy and retirement planning in the United States,” Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(04), pages 509–525, October 2011.
3 “The Pivotal Role of Fairness: Which Consumers Like Annuities?,” Shu, Suzanne B.; Zeithmamer, Robert; Payne, John W., Dec. 7, 2018.

Understanding Preretirees' Retirement Income Preferences
Understanding Preretirees' Retirement Income Preferences

Important Information

This material is provided for general and educational purposes only and is not intended to provide legal, tax, or investment advice. This material does not provide fiduciary recommendations concerning investments or investment management. This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of June 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

All investments involve risk. All charts and tables are shown for illustrative purposes only.

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