Are annuities making a comeback?

More and more defined contribution (DC) pension plans in the U.S. are seeing an old retirement staple – the annuity – as a way to meet “the rising demand for lifetime income products” within those plans.

According to an article by Leo Almazora in Investment News, research from TIAA, who surveyed “insights gleaned from 500 C-suite decision makers” sponsoring DC plans, 76 per cent feel interest in annuities will grow over the next five years.

For background, a DC plan (like the Saskatchewan Pension Plan) is the type of retirement savings program where what goes into the plan, in terms of contributions, is what’s defined.

At retirement, the job is to turn a lump sum of money into an income stream.

An annuity is a way to turn a lump sum into a guaranteed income stream. You can’t run out of retirement savings with an annuity; you’ll get a payment – typically on the first of the month – for each month of your retired life.

Almazora notes that “among sponsors who do not currently offer an annuity, more than 40 per cent say they plan to introduce one within two years.”

There is one problem, however, the article notes – understanding what an annuity is and how it works and then explaining it all to plan members.

“Even though the interest in lifetime income solutions is real, the report points to a lack of `annuity fluency’ as a potential challenge, with only 37 per cent of respondents feeling confident in explaining the value and importance of these products,” the article explains.

Kourtney Gibson of TIAA tells Investment News that DC plans are on the rise in the U.S. due to the decline of traditional defined benefit (DB) pension plans. With a DB plan, the amount a member will receive in retirement each month, for life, is what’s defined.

“Now, with growing uncertainty around Social Security and people living longer lives, we need to help people manage their savings to last through retirement,” Gibson states in the article.

A whopping 85 per cent of the DC plan sponsors surveyed felt that “employees require guaranteed income beyond Social Security,” but 43 per cent feel that understanding how an annuity works and explaining it will require help – perhaps via consultants – to boost adoption.

Members of the Saskatchewan Pension Plan already have the option our U.S. DC friends are thinking about. Members can convert some or all their account balance to an annuity when they retire. With an annuity, you will get a lifetime, guaranteed monthly payment for as long as you live. And SPP’s stable of annuity products includes options that can provide benefits for your surviving spouse.

Check out SPP today!

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When star quarterback Tom Brady announced his retirement in the offseason – and then “unretired” soon afterwards, resuming his career – he was probably not aware of the fact that he’s a trendsetter.

More and more of us are “unretiring,” reports Edward Jones . “’Unretirement’ represents a growing trend among Canadians living in and approaching retirement,” an article on the firm’s website reports.  Citing recent Age Wave research, the article notes “33 per cent of recent retirees struggle to find a sense of purpose in retirement with new-found free time. Most Baby Boomers want to be more active, engaged, exploratory and purposeful in retirement than their parents and grandparents.”

So, for some of these folks, this leads to a desire to return to work, the article notes.

“When retirees stop working, it can create a void, often more social than financial. When asked what they miss most about their work life, 39 per cent of retirees say it’s the people and social stimulation, with only 22 per cent saying it’s the pay. The loss of social connection can lead to harmful isolation,” the article notes.

Okay, missing the work colleagues and all the social interactions can be part of it. Another part of it can be not having enough money in retirement, reports The Express.

“Given that living costs are rising and pay growth is pretty strong too, we might expect to see more people coming back to work through the winter and into the new year, particularly with vacancies so high and with so many employers keen to recruit,” Tony Wilson of the Institute for Employment Studies tells The Express.

The latest U.K. data finds that one in eight pension-aged Brits, a total of 1.46 million pensioners, are “in work,” with those over 65 being able “to claim a state pension while still working.” A further six per cent of current retirees are said to be thinking of making a return to work “to top up their pension income,” the article notes.

Investment News, looking at the U.S. market, says it may also simply be the great number of unfilled jobs out there that is leading to older workers being “actively recruited” for a return to work.

“We need older workers to stave off inflation and get the economy back on track,” states demographer Bradley Schurman in the article. “They are a key ingredient to solving the massive imbalance in the demand and supply of labour, which has created the ideal environment for the Great Resignation to thrive and is a contributing factor to increasing prices.”

The article makes the point that the waves of resignations by younger workers in the latter stages of the pandemic crisis led to job openings not seen since the Second World War.

“Today’s employment pictures looks a lot less like the pre-pandemic years and a lot more like those during the post-World War II, when America relied on older workers to fuel growth,” states Schurman in the article.

So, putting this all together, there are three factors that may be driving the “unretirement” trend. First, some older folks miss being at work and interacting with colleagues. Second, many retirees find (particularly with high inflation on the upswing) that retirement isn’t as affordable as they thought – so they go back to work due to income needs. The third idea expressed here is that the Great Resignation has created vacancies, and recruiters are looking to retired, experienced workers to plug employment gaps.

It’s an interesting phenomenon, and certainly is not something we saw when our parents retired. Typically, they left at age 65 and “fully retired,” with most never working for wages ever again.

Whether or not you become an “unretiree” one day, you’ll still want to have some retirement savings in your piggy bank. If you don’t have a pension plan through your workplace or if your workplace wants to introduce a pension plan, the Saskatchewan Pension Plan may be worth a look. This open defined contribution plan is available to anyone with registered retirement savings plan room. SPP will carefully invest any contributions you make and can help you turn them into retirement income when you finally put down the hammer for the last time. Check them out today!

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