How long will your workplace retirement plan nest egg last? Florence Knapp, who was recognized as the world’s oldest living person at the time of her death at age 114 in 1988, had been receiving TIAA fixed annuity payouts since age 63–for 51 years! She taught at the all-girls Baldwin School, in Bryn Mawr, Pa. Forget planning for just 20 years in retirement.
At TIAA, which serves up 403(b) retirement plans to the non-profit sector, out of 250,000 annuitants in payout mode at the end of last year, 31,000 were more than 90 years old; 7,500 were 95 and older; 700 were age 100 and older; and 30 people were 105 and older. The oldest living annuitant on TIAA’s books today is a 108-year-old woman.
“The secret of an annuity is that you can’t outlive it,” says TIAA chief executive Roger Ferguson, Jr. He gets handwritten thank-you notes from centenarian clients.
Courtesy of The Baldwin School
The upside of a lifetime fixed annuity is that if you live a long time, your income stream is guaranteed. The downside is if you die young, you’ve left your kids a little less money than you would have otherwise. Generally, you want to annuitize enough to meet your basic needs–beyond what your Social Security payouts and any defined benefit pension payouts you’re due (those are annuity streams) will cover.
In a typical workplace 401(k) retirement plan, the focus is on building your balance. “The conversation tends to be: ‘What is your number?’ without saying how much lifetime income are you likely to get,” Ferguson says. Saving in an annuity wrapper makes retirement income a natural part of the financial planning conversation and results in a higher take-up rate of annuities upon retirement, he says.
While 403(b) plans have historically offered annuities, just 5% of 401(k) private sector retirement plans do. “Let’s adopt that 403(b) heritage and bring it to the 401(k) model,” says Ferguson. In a new white paper, Closing The Guarantee Gap, TIAA lays out steps to restore the role of lifetime income in private sector workplace retirement plans (now, 401(k) plans are the norm, and traditional defined benefit plans with lifetime payouts are the exception). Steps for policy makers and employers to take include simplifying the safe harbor rules for employers to select an annuity provider, enhancing the portability of annuity contracts, providing annual lifetime income disclosure statements to retirement account holders, and offering more flexible income distribution options.
Think you don’t need an annuity? Under current Social Security mortality tables, 65-year-olds today have a life expectancy of 85 (for a man, it’s 84; for a woman, it’s 86). That means that about half die before then, and half die after. So, if your plan is to have only enough money saved to spend down in 20 years, half the time you’ve made a whopping mistake, says Benny Goodman, a TIAA actuary.
TIAA expects their 65-year-old annuitants to live on average to 89—because white collar, better educated, higher paid folks (and those who buy annuities) live longer. Without an annuity, and to be a bit more certain about not outliving income, a single person should be planning to make it last until age 95. A couple should go out to 100. You can check your life expectancy with this SSA calculator.
More Info: www.forbes.com