Page 16 - Investment Advisor June 2023

ReTIRemenT/AnnuITIeS PlAnnInG

pre- and post-retirement. Annuities can more worried about having predictable gate the impact of any portfolio short-
lead to a smoother income path because income over maximizing returns.” falls over time. Unlike income annuities,
they provide more certainty of income. When making decisions about annui- which are basically commodity-like prod-
Deferred annuities with living ben- ties, investors mustn’t forget to factor in ucts, fixed indexed annuities are really
efits are complicated financial products, Social Security. deferred annuities that can offer a num-
Pfau said, adding that there is a concern Delaying Social Security claiming past ber of features to consider for retirees.
that in the midst of that complexity it full retirement age adds 8% per year to the Pfau added that income annuities,
can be difficult for an investor to tell if benefit, Look noted, which may help retir- single premium immediate annuities
the insurance company is taking too big ees fight inflation better than any annuity. or deferred income annuities should all
of a cut from the annuity. Pfau added that he views Social Security offer higher lifetime payouts than a fixed
There are secondary factors as well, as longevity insurance and inflation pro- indexed annuity with a living benefit. In
Pfau added. “One of these other factors tection for a surviving spouse, with the some cases, those with a fixed indexed
you see with that total return approach benefits of the higher-earning spouse last- annuity don’t take full advantage of all of
is an accumulation mindset post-retire- ing for the joint lifetime of the couple. the protections offered by the contract.
ment. Some people still focus on maxi- The panelists also made several impor-
mizing returns over having a predictable tant points about fixed indexed annuities. Roger Wohlner is a freelance financial writer
income, whereas other people change to Look mentioned a study he was doing and fee-only financial advisor. Reach him via
a distribution mindset, [when] they’re that found these products can help miti- [email protected].

Married Couples Leave 401(k) Money on the Table
A significant share of couples are not effectively coordinating the retirement planning process, showing that both financial
their contributions to workplace retirement plans, robbing the and behavioral factors must be considered by advisor profes-
average household of more than 10% of their total potential sionals while helping clients prepare for life after work.
annual contributions, new research finds. this is according to In running the numbers, which cover filings provided by
a new analysis published by the national Bureau of Economic more than 6,000 DC retirement plans in the u.S. covering
Research, which shows that a variety of factors drive what more than 44 million eligible employees, the researchers
they refer to as contribution inefficiency. found that fully 24% of couples in the sample failed to exploit
the new paper, “Efficiency in Household Decision making: a “within-period intra-household arbitrage condition.” Stated
Evidence from the Retirement Savings of u.S. Couples,” was more simply, these couples are missing out on an opportunity
developed by taha Choukhmane, of the mIt Sloan School of to adjust their contributions in a way that would increase their
management; Lucas Goodman, of the treasury Department’s retirement wealth without changing their current consumption.
Office of tax Analysis; and Cormac O’Dea, with Yale Generally, these inefficient couples could either generate
university’s Department of Economics. more long-term wealth or increase their current consumption
the study’s authors say that roughly a quarter of mar- at no cost to retirement wealth by simply reallocating exist-
ried couples in which both spouses have retirement plans ing contributions from the account of the spouse with a lower
appear to allocate their individual contributions in a way marginal match to the account of the spouse with a higher
that fails to optimally exploit the employer match incentives marginal match. In some cases, the costs of the inefficiency
available at the household level. In other words, by maxing are small, but the mean and median levels of the foregone
out whichever spouse’s employer match is more generous, match for couples who fail to exploit the intra-household
these couples could generate additional long-term savings arbitrage opportunity are substantial, at $682 and $350 per
without having to make additional consumption sacrifices in year, respectively.
the short term. the authors found the mean and median forgone match
notably, the researchers suggest this lack of coordination are, respectively, 13% and 9% of the total employee
cannot be explained by inertia, automatic enrollment trends or retirement contributions made by the households ana-
simple heuristics. Instead, they identify a number of compelling lyzed. In addition, inefficiency is persistent, such that more
indicators that suggest weaker marital commitment correlates than half of couples with an inefficient allocation at one
strongly with the incidence of inefficient allocations. ultimately, point in time still allocate their savings inefficiently four
the researchers say their work underscores the complexity of years later. — John Manganaro

14 Investment AdvIsor June 2023 | ThinkAdvisor.com