Generating Retirement Income Isn T Easy Even for Vanguard

Colleen Jaconetti

As a mom, I'm keenly aware my two daughters are part of a coveted demographic targeted by marketers trying to sell them something.

Some of it's valid—helpful even. But some of it's questionable. Hopefully, I've taught my daughters to distinguish between the two, because it doesn't get much better when you get older. It just gets more complicated, especially when it comes to retirement income.

Consider what some financial service providers are positioning as a solution designed to provide guaranteed income in retirement: target-date funds (TDFs) with an annuity¹ component.

TDFs are great as qualified default investment alternatives (QDIAs) because of their ability to get participants to retirement. But we believe attempts to position TDFs as a retirement income silver bullet by slapping on an annuity is a stab at solving a problem—spending in retirement—that will only offer a solution for the few, not the many.

Why?

As I wrote in an earlier blog post, while annuities can make sense for some participants, there are real behavioral challenges to purchasing one. Given participants' understandable wariness, an annuity shouldn't be the primary—and certainly never the only—option provided.

It's why we're introducing a new Target Retirement Income and Growth Trust for participants seeking higher spending levels than can be supported by our Target Retirement Income Fund and who are comfortable with the associated higher level of risk. When combined with our spending services and participant guidance tools, the two Target Retirement strategies provide a straightforward and flexible alternative to annuities.

For many good reasons, our industry has become more comfortable creating asset allocations based on a single input—the expected retirement date. But is that really all that's needed to inform an irrevocable decision to annuitize a potentially substantial portion of a participant's retirement savings?

We have done a lot of research and found that a participant's retirement income strategy is based on many variables.

It also depends on:

• What resources do they have beyond their retirement plan?
• What's the tax status of each resource?
• How's their current health and what's their life expectancy?
• How much risk are they willing to live with?

For these reasons, Vanguard does not generally recommend income annuities as part of a typical retiree's income strategy. Instead, we believe that a prudent spending rate from a diversified investment portfolio will provide retirees the most flexibility in meeting their short- and long-term spending needs.

To the extent that a retiree seeks additional guaranteed income to support basic living expenses beyond their other guaranteed sources such as Social Security or a pension, then a low-cost annuity may be a viable complement to the investment portfolio.

Such variability is why we take a more personalized approach. We believe this approach can fit every participant's unique circumstances.

Of course, it's much easier to sell a single product that solves for both saving for retirement and spending in retirement. Reasonable people can disagree, but we believe that's why some have chosen to offer TDFs with an annuity component.

Because much like the products once featured on late-night informercials that were lampooned for appearing to promise the world (It slices! It dices! It walks your dog and does your taxes!), we believe claims that any single product is the solution to both saving and spending for everyone in retirement are dubious at best.

The silver lining: My daughters and others in their generation will have had many years of training before they retire. Hopefully, that will help them cut through the marketing noise.

¹ Annuity income guarantees are subject to the claims-paying ability of the issuing insurance company.

Colleen Jaconetti

Colleen Jaconetti is a senior investment strategist in Vanguard Investment Solutions. She is responsible for the development and positioning of Vanguard's holistic retirement income offer for defined contribution plans, including thought leadership, services, advice, and products. Before her current role, Colleen led the global Retirement Income Research team in Vanguard Investment Strategy Group, which was responsible for conducting research and providing thought leadership on retirement accumulation and decumulation topics. In addition, Colleen worked as a financial planner in Vanguard Personal Financial Planning and Advice Services departments, where she created comprehensive financial plans and supported the development of Vanguard's advisory products and services. Colleen's areas of expertise include portfolio construction and financial planning, with specialization in retirement income solutions and wealth management strategies.

Colleen has more than 25 years of experience in the financial services industry. She earned a B.A. in mathematics and an M.B.A. from Lehigh University. She also holds the Certified Public Accountant and Certified Financial Planner™ designations.

Notes:

• All investing is subject to risk, including the possible loss of the money you invest.
• Diversification does not ensure a profit or protect against a loss.
• Annuity income guarantees are subject to the claims-paying ability of the issuing insurance company.
• Investments in Target Retirement Trusts are subject to the risks of their underlying funds. The year in the trust name refers to the approximate year (the target date) when an investor in the trust would retire and leave the workforce. The trust will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. The Income Trust and Income and Growth Trust have fixed investment allocations and are designed for investors who are already retired. An investment in a Target Retirement Trust is not guaranteed at any time, including on or after the target date.
• The Vanguard collective trusts are not mutual funds. They are collective trusts available only to tax-qualified plans and their eligible participants. The collective trust mandates are managed by Vanguard Fiduciary Trust Company, a wholly owned subsidiary of The Vanguard Group, Inc. Investment objectives, risks, charges, expenses, and other important information should be considered carefully before investing.

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Source: https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/blog/BlogRetirementIncomeSolution

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