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Understanding Preretirees' Retirement Income Preferences

                   

Our research found that providing preretirees with retirement experiences rather than just products can help them make informed decisions about savings drawdown.

Key findings:

  • Confusion about different retirement income products creates 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.
RSS 5 Retirement Income Infographic Thumbnail RSS5 Retirement Income Options Infographic

Article Resources:

How to create the "best" retirement income strategy?

The shift from defined benefit to defined contribution plans has placed shared burdens on the employee and employer to solve for retirement income. That means there is ample opportunity for plan sponsors and financial professionals to help participants make better choices.

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.1

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.

1 in 4 preretirees were not sure if they would invest in an annuity or managed payout fund or if they should manage their money on their own.

What Do People Really Want?

We asked 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 an advisor's help

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.

Insight 2 Aversion Chart 1

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 couple of 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 a financial professional, or managing one's finances entirely, more than doubled from 11% for the age 50–54 age group to 25% among those in the age 60–64 age group:

Insight 2 Proximity to Retirement Figure 1

What Do Participants Expect to Do With Retirement Plan Accounts in Retirement?

We know from other research T. Rowe Price has done that plan sponsors are open to retirees leaving their assets in their employer’s plan. In fact, half of plans with assets greater than $500 million prefer that participants maintain their balances in DC plans.2 But do participants feel the same way?

Eighty-three percent of all 401(k) participants want to keep their savings in the employer plan after retirement. Breaking that down:

  • Fifty-three percent would keep their savings in the 401(k) after retirement if a retirement income solution was available, and
  • Thirty percent would keep their savings in the 401(k) after retirement regardless if a retirement income solution was available.

While the desire to keep the assets in the plans might be known in institutional circles, employers are not necessarily conveying that message successfully to their plan participants. Sixty-one percent of participants say their employers have not communicated the advantages (like lower investment cost or ongoing professional oversight) of leaving the money in the plan.

Interest Spans the Generations

Participants of all ages expressed interest in keeping assets in the 401(k) plan:

  • 88% of Millennials
  • 83% of Generation Xers
  • 77% of Baby Boomers

Opportunities for Plan Sponsors and Financial Professionals

Individuals want more than a one-dimensional product. They need help with selection and planning, so how the solutions are delivered is as crucial as the solutions themselves. 

Plan sponsors and financial professionals have an opportunity to take the lead and help participants make better retirement income choices by providing participants with a variety of retirement income solutions and the right tools and education to make the necessary choices. 

 

About Our Study

The Retirement Savings and Spending Study was conducted by NMG Consulting and included a sample of 3,016 retirement plan participants, 250 eligible non-plan participants, and 603 individuals without access to workplace savings plans. It also included 1,005 retirees who have retired with a rollover IRA or left-in-plan 401(k) balance. The survey was conducted online from June 13–25, 2019.

 

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.

2 “What DC Plan Sponsors Prefer Retiring Participants Do and Why It Matters,” Latham, Lorie, T. Rowe Price, February 2019.

Contact your T. Rowe Price representative to find out how we can take your plan to the next level.