Saturday, June 9, 2018

Expressing Projected Accumulated Savings as Lifetime Retirement Income—Good News for Defined Contribution Plan Sponsors

We are pleased to announce the release of a new workbook—The Actuarial Lifetime Retirement Income Estimator (ALRIE).  Like our other workbooks, this Excel workbook may be downloaded at no charge from the “Spreadsheets” section of our website.   This workbook is a pared-down version of our Actuarial Budget Calculator (ABC) workbooks and is focused on developing an estimate of the amount of real dollar monthly lifetime retirement income (in today's dollars) that may be generated from an individual’s (or couple’s) current and projected accumulated savings.  Unlike the ABC workbooks, it is not intended to help individuals or couples develop a sustainable annual spending budget, but it does employ the same basic actuarial and financial economic principles in its calculations.

We believe ALRIE is a more robust tool for retirement plan providers (including defined contribution (DC) plan sponsors, DC plan administrators and brokerages) who want to give plan participants a better idea of how much lifetime retirement income their account balances may provide.

This post will discuss:

  • The general inspiration for release of ALRIE, and 
  • Why we believe ALRIE is more robust than other approaches we have seen
Inspiration for ALRIE

The general inspiration for release of our new workbook comes from two sources:

  1. The September 19, 2017 article by Carla Fried in the UCLA Anderson Review entitled, “Save-Save-Save, But Then What?  Financial Structure and Spending in Retirement,” and 
  2. The 2018 Voter Guide on Lifetime Income & Retirement Risk issues recently released by the American Academy of Actuaries
In the UCLA Anderson Review article, Ms. Fried discusses current research by noted behavior scholars who are “delivering research to help drive the creation of systemic nudges directed at helping retirees navigate the decumulation stage of their DIY retirement odyssey.”  Ms. Fried notes, “The research suggests retirement plan sponsors and brokerages that are the keepers of the $15 trillion sitting in defined-contribution and IRA plans would do investors a solid if they accentuated the annuity value, not the net worth lump sum.”  She goes on to quote the research authors who say, “to help people reason better about spending in retirement, retirement plan providers should provide people with their projected monthly income at retirement based on their current saving behavior instead of the current practice of providing only account balances.” 

The American Academy of Actuaries 2018 Voter Guide covering Lifetime Income & Retirement Risk asks the question, “What can be done to…better prepare current and future retirees to secure and manage their lifetime income needs?  They indicate that “solutions require participation from all stakeholders:  policymakers, actuaries, employers financial planning advisors and financial product and service providers.  We agree (especially the part about participation by actuaries—or at least two of us anyway). 

The Academy noted several possible approaches for educating individuals and increasing their financial literacy.  The two that struck a chord with us were:

  1. “Improve information provided to workers to raise their understanding about how to prepare for retirement, and focus on the concept of lifetime income by expressing benefits in terms of monthly lifetime income in periodic retirement plan statement,” and 
  2. “Expand existing initiatives of the U.S. Department of Labor and other public entities that currently disseminate objective retirement information.”
Sufficiently inspired by these two sources, we humbly concluded that we could apply the same basic actuarial and financial economics principles that we apply in our Actuarial Budget Calculators to help defined contribution plan participants determine approximately how much lifetime retirement income their current and projected account balances may generate.

Why do we Believe ALRIE is More Robust Than Other Approaches?
We have certainly not seen all the approaches that plan sponsors and others have used to express account balances as equivalent lifetime retirement income.  We have seen the DOL website approach, and we were not particularly impressed. 

Here are some of ALRIE’s features that we don’t normally see in other lifetime retirement income calculators:

  • It shows estimated real dollar (inflation-adjusted) monthly lifetime retirement income in today’s dollars. 
  • It provides default (recommended) assumptions that may be overridden 
  • It uses lifetime planning periods from the Actuaries Longevity Illustrator 
  • It is more closely tied to current inflation-adjusted annuity purchase rates (the market value cost of retirement income) 
  • It can handle pre-retirees, retirees, couples and single individuals 
  • It uses actual ages for both members of a couple and permits input of desired percentage reduction in income upon first expected death within the couple 
  • It has more functionality for determining future non-investment additions to accumulated savings 
  • It calculates an implied “withdrawal rate” from projected accumulated savings in first year of retirement (or current year if already retired).

As suggested by Ms. Fried in her UCLA Review article, plan sponsors and plan providers can do investors (plan participants) a ‘solid’ by accentuating the annuity value and not the net worth lump sum value of participant accounts.  We believe ALRIE is a robust tool that can be used for this purpose.  You can download a protected version of ALRIE from our website, or if you contact us, we can make an unprotected version of ALRIE available to you at no charge.

To the American Academy of Actuaries and its Lifetime Income Task Force:   If you are truly serious about the profession’s mission to serve the public and about having actuaries participate in the two items discussed above intended to increase the public’s financial literacy, we ask, in the spirit of cooperation, that you kick the tires on ALRIE and take one (or a combination) of the following actions:

  • Endorse it 
  • Suggest changes to us for ways to improve it  
  • Develop a better alternative to it with or without our input 
  • Make it (or an improved version) available on your website just as you do with the Actuaries Longevity Illustrator