What will spur people to increase their saving for retirement?
There is a documented belief that individuals in the United States are failing to sufficiently save for retirement. Financial authors and planners continue searching for the emotional trigger that will spur people to save more. On May 4, Jamie Kalamarides of Prudential Retirement proposed that the possibility of a lifetime income will motivate people to save more aggressively.1 Citing Prudential and Aon Hewitt studies, he said individuals increase retirement savings by 38% when a lifetime income solution is a part of their plan.2
One lifetime income option is disappearing and another has risk.
“For many years, American workers have had a guaranteed income option as the foundation of their retirement plans, providing them with security and confidence.”3 Defined Benefit plans have increasingly disappeared from the scene in favor of Defined Contribution plans. Employers chose this route because it reduced their risk. Employees embraced this option because they enjoyed having control over their retirement destiny resulting in the loss of this “reliable source of lifetime income.”4
In an attempt to mimic a guaranteed lifetime income, Defined Contribution Plan sponsors instituted systematic withdrawal plans. Individuals were given the option to set up a regular monthly withdrawal of a set amount from their IRA, SEP-IRA, 401(k), 403(b), or other savings plan. Unfortunately, research has concluded retirees electing systematic withdrawals of equal monthly income payments face a, “Greater than 50% chance that they will run out of money.”5
Bill Bengen created the 4% rule to help people have a predictable income stream in retirement. The rule held that someone could reasonably expect their savings to last for 30 years by withdrawing 4% during their first year of retirement, adjusting the annual amount for inflation thereafter.6 Wade Pfau came to prominence in 2010 when he challenged the validity of the rule.7 Walter Updegrave also challenged the validity of the 4% rule in 2016 in a CNN Money article writing, “Many people still aren’t sure about the particulars of the strategy.”8
If lifetime income helps me save more aggressively, where can I turn?
There are alternatives that will provide an income for life. One option is to seek an immediate or deferred annuity from a financially strong insurance company. An immediate annuity provides a set income for life beginning shortly after a lump sum portion of savings is transferred to the insurer. In the case of a deferred annuity, a comparatively smaller portion of savings is surrendered for the promise of a monthly income beginning at some future date. Prudential Insurance offers a guaranteed life withdrawal benefit in some of the retirement plans they administer.9 TIAA-Cref has also provided annuities in retirement plans for nearly a century.10
Recently a ministry director posed this question to the Christian Churches Pension Plan, “Can ministers really afford to do this on what most churches can afford to pay?” Our response was, “Of course they can.” Ministers and missionaries often approach retirement with little or nothing for retirement. Missionaries have consistently decided whether to allocate funds for retirement, family needs, or ministry opportunities. How can these afford to secure a lifetime income that might motivate them to save more?
The Christian Churches Pension Plan is a defined benefit plan specifically designed to serve those in the lower paying ministry, mission, and nonprofit professions. For a minimum contribution of only $750 annually, servants can provide a monthly income for life. The precise monthly income is determined by the age of the participant when they join the Plan. Additional units of the Plan may be subscribed as income and opportunities present themselves. The plan is designed to be affordable, easy to understand, and financially reliable. More information is available on the Plan website, ccpension.org.
A lifetime income encourages people to save more aggressively, because they begin focusing on replacing income in retirement rather than accumulating a seemingly unrealistic sum of money. Thankfully, a lifetime retirement income is affordable and available to many who would only dream of this benefit.
1 How the promise of lifetime income encourages retirement savings. Stolz, Richard. Employee Benefit News. May 2, 2017.
2 Stolz, ibid.
3 Investing for a Lifetime. Guaranteed. TIAA-CREF Financial Services. 2013.
4 US Bureau of Labor Statistics 2010 Consumer Expenditure Survey.
5 The Role of Guaranteed Income in Improving Retirement Security. Richardson, David P. TIAA-CREF Institute working paper. 2012.
6 4% Retirement Rule is it Still Applicable? Dowd, Casey. foxbusiness.com. July 11, 2013.
7 Retirement Rules: Rethinking a 4% Withdrawal Rate. Kapadia, Reshma. Barrons. April 11, 2015
8 Should you follow the 4% retirement rule? Updegrave, Walter. money.cnn.com. April 20, 2016
9 Stolz op.cit.
10 Investing for a Lifetime. Guaranteed., op. cit.