Americans have been facing greater pressure to shoulder the responsibility for their own retirement. The safety net is shrinking, as fewer workers have access to guaranteed pension plans when they retire, funding for Social Security has come under threat, and costs for everything from housing to health care to long-term care continue to rise. Now, with the economic fallout from the pandemic, the uncertainty is growing.
According to Nationwide’s sixth annual Advisor Authority study, powered by the Nationwide Retirement Institute, roughly three-fourths of investors (72%) say the COVID-19 pandemic has had a negative impact on how long they are able to live off their current retirement savings. Nearly two-thirds of investors (63%) expect to require 20 to 30 years of income in retirement — but less than half (47%) think they can live off their savings for that long.
If you’re concerned about saving enough for retirement, and not sure how you’ll secure retirement income that is guaranteed for life, the Setting Every Community Up for Retirement Enhancement (SECURE) Act could help.
What the SECURE Act Means for Your Retirement Savings
The SECURE Act was signed into law with strong bipartisan support in December 2019. It is considered the most comprehensive retirement legislation since the Pension Protection Act of 2006. A new bill expanding on the SECURE Act, often referred to as SECURE 2.0, was introduced in late 2020. While SECURE 2.0 is subject to change as it moves through the legislative process in 2021, it has the potential to provide even more ways to help individuals save for retirement and generate retirement income.
Among its many provisions, the SECURE Act provides new opportunities for you to save more, for more years, for a more secure retirement. It removes the age limit for making traditional IRA contributions — previously required to stop at age 70½ — as long as you can demonstrate earned income. It raises the age for required minimum distributions (RMDs) from age 70½ to 72 — and may be raised to age 75 with SECURE 2.0 — giving you more years to save before you’re required to start withdrawing retirement income.
If you work for a small business, the SECURE Act makes it easier for your employer to set up a 401(k) for you and your fellow employees. If you’re a part-time employee, the regulation may allow your employer to now offer you a 401(k).
What the SECURE Act Means for Your Retirement Income
Employer-sponsored qualified retirement savings plans, such as 401(k)s, 403(b)s and 457(b)s, have become a leading way to save for retirement. The challenge? It has been up to you and your adviser (should you have one) to develop a strategy to turn those savings into retirement income.
A solution? Now, through the SECURE Act, it is easier for your qualified savings plan to offer in-plan annuities, to help you convert a portion of the savings in your 401(k) plan into a retirement paycheck that is guaranteed to last for life, so you never run out.
Understanding In-Plan Annuities: The Value of Having a Guarantee
Annuities are long-term, tax-deferred investment vehicles designed so that you can save for retirement, including a range of different asset protections and income protections guaranteed by an insurance company. In-plan annuities are specially designed to be offered only inside your qualified plan.
You may have heard some warnings about annuities — that they can be expensive and complicated. But the industry has been changing. More products are simple and low cost, with more choice and flexibility. And the good news is that the SECURE Act makes in-plan annuities even more simple and accessible, so more investors can use them.
In-plan annuities are designed for you to make regular tax-deferred contributions through payroll deductions, with low or no minimum investment requirements. They can be structured like a target date fund, which allows you to accumulate more when you’re younger by investing more aggressively, and automatically shifts more of your savings into asset protection and income guarantees as you get closer to retirement. In-plan annuities also offer greater liquidity and portability should you change jobs and need to move your in-plan annuity to a new qualified plan.
If you’re an investor who’s 55 or younger, this is especially important. You’re probably well aware that securing guaranteed income in retirement is more challenging for you than it was for your parents and previous generations. You’re more likely to face greater responsibility to save for your own retirement than they were, less likely to have a pension, and likely to live longer and spend more years in retirement.
According to the Advisor Authority study, investors who are 55 and younger are far more likely to adopt in-plan annuities. In fact, two-thirds of both Millennial investors (65%) and Gen X investors (66%) say that as a result of the SECURE Act, they are likely to incorporate in-plan annuities within their defined contribution plans, compared to only 28% of Boomer investors.
Understanding Annuities Outside of Qualified Plans
You may be hearing more about annuities lately, and not just because of the SECURE Act. Investor interest in annuities has been growing, especially after the COVID-19 pandemic led to an extreme market drop and ongoing volatility.
In fact, Advisor Authority revealed that given the impact of the pandemic, nearly six in ten investors (57%) said they would feel more secure if a portion of their portfolio was invested in an annuity to protect their investments against market risk. More than half of investors (53%) also said they would feel more secure if a portion of their portfolio was invested in an annuity to protect against outliving their savings.
So how does that work? Once you’ve maxed out your qualified plan — meaning your 401(k), 403(b)s or 457(b) — your traditional IRA and your Roth IRA, if you’re looking for more tax-deferred savings with greater protection, your adviser or financial professional may be able to recommend an annuity to meet your unique needs.
There are many types of annuities. An immediate annuity can provide “income now,” if you’re in or near retirement and looking to convert a lump sum into immediate guaranteed income. Deferred annuities offer “income later,” if you’re looking to maximize tax-deferred accumulation with downside protection, before turning on your retirement income spigot. While some annuities generate income through annuitization, others generate income through living benefits. They may also include liquidity features and spousal protection.
Annuities can be selected to match your risk tolerance. Variable annuities (VAs) may be a good fit if you’re an aggressive investor looking for greater growth potential, while willing to accept some level of market risk — or even possible loss. Registered index linked annuities (RILAs) may be suitable if you seek some growth potential based on the performance of an underlying stock market index, but also seek a more defined level of protection through a “buffer” or “floor.” Fixed Index Annuities (FIAs) offer somewhat less growth potential and somewhat more downside protection. Fixed Annuities offer a guaranteed rate of return for the most conservative investors.
Keep in mind, annuities are long-term investments for retirement, so you may be charged a penalty if you take your money out early, or a 10% tax penalty if you’re not yet age 59½, or both. Annuities may fluctuate in value based on the performance of underlying investments or index, and can involve market risk, including possible loss of principal. All guarantees and protections are subject to the claims-paying ability of the issuing insurance company, so look for an insurance company that is highly rated and financially stable.
Planning for a More Secure Retirement
Whether inside or outside of your qualified plan, annuities can help to protect your assets against market risk and guarantee retirement income that you can’t outlive. Speak with an adviser or financial professional to get the answers you need and review the best options for you. By helping you calibrate your risk tolerance and time horizon, and balancing your current spending and liquidity needs with your long-term financial goals, an adviser or financial professional can keep the big picture in check.
There’s no doubt about it. The retirement income challenge is real. The pandemic makes it more complex. And if you’re concerned about COVID’s impact on your retirement savings or your retirement income, the SECURE Act’s provision allowing for in-plan annuities could help you save more, for more years, including new options for guaranteed income, for a more secure retirement.
Craig Hawley is a seasoned executive with more than 20 years in the financial services industry. As Head of Nationwide's Annuity Distribution, Mr. Hawley has helped build the company into a recognized innovator of financial products and services for RIAs, fee-based advisers and the clients they serve. Previously, Mr. Hawley served more than a decade as General Counsel and Secretary at Jefferson National. Mr. Hawley holds a J.D. and B.S. in Business Management from The University of Louisville.
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