It’s not uncommon for retirees to worry about spending down their accumulated retirement savings in retirement. Seeing one’s retirement account balances steadily decline due to spending can create a real sense of anxiety. But what if there was a solution that could help retirees feel more comfortable and confident about spending their accumulated savings in retirement?
Two prominent retirement income experts, David Blanchett and Michael Finke, believe guaranteed income can help provide retirees with a “license to spend.”1 So, what is guaranteed income? Guaranteed income is income in retirement that comes from sources such as a pension, Social Security, or an annuity.2
Understanding the psychological benefits of guaranteed income
Using data from the Health and Retirement Study (HRS)3, Blanchett and Finke examined households with at least $100,000 in savings and compared how much money they could be spending in retirement to how much they are actually spending based on existing guaranteed income sources and assuming financial assets are annuitized (that is, converted to guaranteed income). They paired these findings with those of a proprietary survey of 2,051 adults nationwide regarding behavioral tendencies that may influence their spending in retirement.
Their analysis centered on the challenge Americans face when figuring out how much they’re able to spend from their investments each year in retirement―an inherently difficult task given that both the length of retirement and returns on assets are unknown. A retiree can either spend generously and risk outliving their savings or spend conservatively and miss out on the lifestyle they envisioned. A retiree who is concerned about outliving their savings will spend less.
Blanchett and Finke found strong evidence that households holding a greater share of their wealth in the form of guaranteed income spend more each year than retirees who hold more of their wealth in the form of investments. A household with a generous pension and no savings will spend more than a retiree with enough savings to buy an annuity that provides the same income as the pension. By holding household wealth constant, the analyses showed that households are spending more not because they are wealthier (since financial assets can be converted to guaranteed income through actions such as purchasing an annuity4), but rather it is the form of the wealth they hold that impacts spending in retirement.
Their analyses revealed that retirees spend twice as much each year in retirement if they hold guaranteed income wealth instead of investment wealth. Therefore, every $1 of assets converted to guaranteed income could result in roughly twice the equivalent spending compared to money left invested in a portfolio.
“Essentially, annuities with lifetime income protection give retirees a psychological license to spend their savings in retirement,” said Blanchett, Head of Retirement Research at PGIM DC Solutions. “Retirees clearly prefer to live off income, but many don’t feel comfortable depleting down assets to fund a lifestyle. This is an unfortunate paradox since funding a lifestyle is what motivates people to save for retirement, and few retirees indicate a desire to pass on significant wealth at death.”
Finke, Professor and Frank M. Engle Chair of Economic Security Research at the American College of Financial Services, added: “Increasing the share of wealth allocated to annuitized income [guaranteed income] can not only reduce the risk of an unknown lifespan, it can also allow retirees to spend their savings without the discomfort generated by seeing one’s nest egg gradually get smaller.”
Overcoming the fear of spending
The survey of 2,051 Americans included in Blanchett’s and Finke’s analysis found that nearly 60% (59.4%) of respondents would feel more comfortable spending on nonessential activities such as going on vacation or eating dinner with friends in retirement if they received an additional $10,000 of income for life than if they had an additional $140,000 of retirement savings (40.6%). The wealth amount represented the average cost of $10,000 of annuitized income (guaranteed income) at retirement. Of note, the increased willingness to spend from income was just as high among retirees who had saved $500,000 or more.
Blanchett’s and Finke’s analysis corresponds with findings in the Alliance’s 2024 Protected Retirement Income and Planning (PRIP) Study, a new survey of 2,516 consumers in the U.S. ages 45 to 75 regarding their attitudes and behaviors toward retirement savings.5
Nearly half of retirees (46%) acknowledge that spending their savings gives them anxiety. The level of discomfort is tied to asset levels: 55% of those with less than $100,000 in assets are anxious about their spending in comparison to 48% of those with assets between $100,000 and $500,000. Nearly a third of retirees (32%) indicate they are spending money faster than they anticipated.
The bottom line
Those seeking more income security and income predictability in retirement may want to consider including an annuity within their overall retirement portfolio. Annuities can provide a source of guaranteed lifetime income that cannot be outlived. What’s more, guaranteed income from an annuity can help retirees feel more confident about their spending with less worry about running out of money—and that could very well lead to a more comfortable and enjoyable retirement.
Take the next step: Learn more about annuities today and ask a financial professional if incorporating an annuity into your retirement portfolio for more guaranteed income in retirement may make sense for you.
1 David Blanchett and Michael Finke, “Guaranteed Income; A License to Spend,” Alliance for Lifetime Income – Retirement Income Institute, May 2024.
2 Annuity guarantees are backed by the claims-paying ability of the issuing insurance company.
3 The Health and Retirement Study (HRS) is a longitudinal household survey conducted by the Institute for Social Research at the University of Michigan that surveys a representative sample of approximately 20,000 people in America over the age of 50. It is supported by the National Institute on Aging and the Social Security Administration and has been administered on a biennial basis since 1992.
4 Annuities can provide guaranteed lifetime income through annuitization―a process that converts the contract value, or principal, into a series of guaranteed income payments. Once a contract has been annuitized, the annuity owner no longer has access to the contract value or principal. Alternatively, for those seeking more flexibility, many of today's annuities offer income benefits, such as guaranteed lifetime withdrawal benefits and guaranteed living benefit riders. These income benefits provide guaranteed lifetime income and the annuity owner retains access to their contract value. Annuity income benefits may be standard or optional. Additional fees, age restrictions, withdrawal parameters and other limitations may apply. The contract value will decline due to fees and withdrawals or income taken within the terms of the rider or benefit, and excess withdrawals may terminate the income benefit. There is no guarantee that income will keep pace with or protect against inflation.
5 Alliance for Lifetime Income 2024 Protected Retirement Income and Planning (PRIP) Study.
Corebridge is a founding member of the Alliance for Lifetime Income.
Annuities are long-term insurance products designed for retirement. In the growth stage, they can help build assets on a tax-deferred basis. In the income stage, they can provide protected lifetime income through standard or optional features. A contract can be annuitized in order to receive lifetime income payments for no additional cost if a lifetime annuity option is chosen. Income protection features may be optional or standard. Additional fees, age restrictions, withdrawal parameters, and other limitations apply. With variable annuities, certain investment requirements also apply.
Early withdrawals may be subject to withdrawal charges and a Market Value Adjustment (MVA) may also apply to certain fixed annuities and index annuities. Partial withdrawals may reduce benefits available under the contract, as well as the amount available upon a full surrender. Withdrawals of taxable amounts are subject to ordinary income tax and, if taken prior to age 59½, an additional 10% federal tax may apply. An investment in a variable annuity involves investment risk, including the possible loss of principal. The contract, when surrendered, may be worth more or less than the total amount invested.
All contract and optional benefit guarantees, including any fixed account crediting rates or annuity rates, are backed by the claims-paying ability of the issuing insurance company. They are not obligations of or backed by the distributor, insurance agency or any affiliates of those entities and none makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company. Products and features may vary by state and may not be available in all states. The purchase of an annuity is not required for, and is not a term of, the provision of any banking service or activity.