The DC industry has made great strides to help individuals save for retirement. Unlike their defined benefit (DB) counterparts, DC participants must determine how to convert their accumulated assets into a steady source of post-retirement income. This income needs to deliver against two seemingly incompatible objectives — providing flexibility and also ensuring the income lasts a lifetime.
To better understand what’s behind these objectives and potential ways to meet them, we asked Don Ezra to share his insights. Don spent his working life helping retirement plans to deliver better outcomes for their participants. Having graduated from full-time work, he now thinks about the income puzzle from a retiree perspective.
Don, what do you see as being the key income concerns faced by retirees?
The concerns tend to start in a budding retiree’s 50s, and they are of two kinds. One is psychological: 'what am I going to do?' Or sometimes even deeper, for those who are defined by their work: 'who am I?' The other is an income-related concern: 'will I outlive my savings?'
Together these are so distressing that they can affect the worker’s productivity. It’s valuable to an employer’s bottom line to help workers become more content with their retirement prospects by being more knowledgeable.
And what are the main components required to improve retirement prospects?
I believe that safety, growth and longevity insurance are the three financial goals that retirees have (even if the vast majority don’t realize it!).
These seem like very different goals, do you think they can be complimentary?
Yes they can; indeed, they must be, to reassure retirees. Longevity insurance ensures that they don’t outlive their assets. Growth gives them the chance of increasing their assets during the often long period of retirement. And safety means that they don’t have the fear of suddenly being told, ’Hey, the market’s falling, turn back your spending dial.’
In your experience, how can these goals practically be achieved?
There are three separate goals, and so ideally three separate tools are needed to achieve them. Trying to use a single tool for two or more of the goals typically just compromises the goals.
In fact, the use of separate tools is exactly what makes the goals complimentary. Of course, it’s crucial to determine what proportion of assets to devote to each tool; that’s the most important decision to make. In turn, that means the key is to determine budding retirees’ preferences and deliver a solution that simplifies the shift from working to post-work life.