When you should, or shouldn’t, recommend more protected lifetime income

Here are some of the key characteristics that may make some clients better candidates for such a solution than others.

Figuring out how much your clients need to save for retirement can be tricky. Figuring out how to utilize those savings to optimally fund their retirement lifestyle can be even trickier. One approach to simplifying the income generation process in retirement is to allocate savings to a product or strategy that provides income that is protected, or guaranteed, for life.

Delaying Social Security retirement benefits is one way clients can generate protected lifetime income. Understandably, the underfunded status of the Social Security trust fund and the cost of funding the bridge period may make some clients wary of this approach.

An alternative approach to generating lifetime income would be to purchase an annuity. While early annuity products were relatively straightforward and required the irrevocable transfer of some amount (the premium) to the insurance company for some income benefit for life (often called single premium immediate annuities, or SPIAs), annuities today come in a myriad of shapes and sizes, many of which aren’t really focused on lifetime income at all.

Interest in annuities has increased considerably in recent years in concert with the rise in interest rates, which resulted in better payouts. It’s worth considering the potential role these products can play a role in a client’s retirement plan. The table below summarizes some of the key characteristics that may make some clients better candidates for a protected lifetime income product than others.

Key client characteristics	Consider more lifetime income if the client …	Don’t consider more lifetime income if the client …
Income stability	Wants more income that will last, no matter how long retirement lasts	Is OK funding spending through existing savings and lifetime income levels
Essential expenses	Has a gap in existing lifetime income levels and essential expenses	Has all essential expenses already covered with lifetime income
Funded status	Has just enough to fund retirement lifestyle, with little to no excess	Has more than enough to fund spending in retirement
Health spending flexibility	Is in relatively good health, and is not OK adjusting spending levels (especially portfolio withdrawals)	Is in relatively poor health and is OK adjusting spending as situations warrant
Financial decision-making	Wants an automated way to generate lifetime income	Is comfortable making financial decisions themselves
Accessing savings	Is not comfortable depleting savings given uncertain longevity and future market returns	Is comfortable spending down assets to fund retirement lifestyle
Bequests	Focused on maximizing lifetime income	Interested in leaving as much as possible to heirs
Risk tolerance	Is a relatively conservative investor	Is a relatively aggressive investor

Importantly, I wouldn’t make the decision to purchase lifetime income based on this table alone, since certain aspects can mean more or less to different clients. The key is thinking about how clients want to utilize their savings to achieve the best retirement possible.

If a client decides more protected lifetime income isn’t for them today, think about what would have to potentially change for them to consider it. Even if you think they would benefit from allocating to more protected lifetime income, whether it be delaying Social Security retirement benefits or buying an annuity, you don’t necessarily need to do it today. While the rise in interest rates has made the payout rates on annuities more attractive than they were a few years ago, the longevity benefits of annuities tend to increase at older ages, so waiting a few years before making a purchase (assuming that’s an option) could be the smart play.

No two clients are the same; therefore, deciding whether to allocate savings to protected lifetime income is a very personal one. The most important thing is actively addressing the topic with clients and determining which approach is best for them.

David Blanchett is head of retirement research at PGIM DC Solutions.