Two-pronged combo can balance retirement income and liquidity, says T. Rowe Price

Clients who are concerned about having to give up retirement income to maintain liquidity, or vice versa, may have an option that may not typically be considered, according to a new white paper from T. Rowe Price.

The investment management firm’s research found that more defined contribution plan providers are offering a retirement income solution to address a growing trend of participants staying in-plan upon retirement.

In fact, the share of plan sponsors who were considered by consultants to be offering such options more than doubled to 18% this year from 8% in 2021 while the percentage who have “no stated opinion” on retirement income fell significantly from 59% to 21% in the same period.

Given concerns about retirement income, liquidity, and longevity, the white paper suggests that combining a drawdown withdrawal strategy in retirement—where income is derived from principal and portfolio returns—paired with guaranteed retirement income (dependent on insurers’ claims-paying abilities) from a deferred annuity, can provide a high level of retirement income and while maintaining adequate liquidity for retirees.

"There is a common misunderstanding that annuities are an all or nothing decision for retirees," said Berg Cui, Ph. D., senior quantitative investment analyst at T. Rowe Price and author of the paper. "We believe that pairing annuities with a drawdown strategy could create a more balanced retirement income experience that better matches a retiree's needs for both income and access to funds."

The white paper’s analysis finds that an endowment strategy paired with an immediate annuity would provide a lower level of retirement income if allocations were tweaked to increase the amount allocated to the endowment strategy.

An endowment strategy paired with a deferred annuity improved the situation but a drawdown strategy paired with a deferred annuity provided the optimum balance between income and liquidity, although it notes there are several considerations for plan sponsors.

Due diligence is key for plan sponsors during insurer selection and when evaluating the product to ensure that it is a good fit for the plan, the firm says, with consultants and advisors able to help plan sponsors choose the right mix of capabilities that work for their participant demographic.

"T. Rowe Price is committed to empowering plan sponsors and advisors with the research and knowledge required to make the best, most impactful decisions for retirement savers at every stage of the journey," said Sudipto Banerjee, Ph. D., director of retirement thought leadership at T. Rowe Price. "Ultimately, our goal is to ensure that every retiree can approach their future with financial confidence."