How to create retirements that fit.

Time to read: 11 minutes

Key takeaways

• The American retirement system is straining at the seams. Fewer pensions, potentially reduced Social Security benefits and longer lives are stretching people’s personal savings to the limit. Too many people may not have enough.
• There are surprisingly good reasons to delay Social Security, and easy ways to bridge the gap between your first day of retirement and when you claim your benefit.
• Fixed annuities offer a safety net: reliable, protected and guaranteed income unaffected by market turbulence.
• Advice shouldn’t be considered a luxury—it’s a necessity when making these critical decisions.

Our lives don’t look the same. Why would our retirements?

For our second annual Retirement Income Roundtable, TIAA TMRW hears from an annuity expert, a policy wonk and a financial planner on why there’s no one-size-fits-all retirement and how more people can get a retirement income advantage.

More than 11,200 Americans will turn 65 every day for the next four years, the largest surge of retirement-aged people in U.S. history (also known as Peak 65^®).¹ And it’s highlighting many of the flaws in our retirement system.

For most workers, the classic three-pronged approach to retirement income—employer pensions, personal savings and Social Security—no longer applies. Only about one in 10 private-sector workers has a job that comes with a pension.² Nearly half of American workers in the private sector don’t have an employer-sponsored retirement plan.³ And, absent a major overhaul, Social Security benefits may face cuts over the long run.

How many of the more than 16 million people hitting 65 in the next few years feel prepared for retirement? Fewer than most of us would like.

The state of U.S. retirement

Jason Fichtner: We definitely have a retirement income challenge, especially as more people live longer. When employers offered defined benefit (DB) pensions, people kept getting a paycheck when they retired. Today we do a better job making sure people save in a defined contribution (DC) retirement plan, but they struggle to convert their savings into a protected and guaranteed income stream. Crisis or no crisis, it’s a major challenge we need to solve.

Dana Anspach: I see bifurcation across the system. Some people saved well for retirement, while other people never had the means to save in the first place. But even for the people who saved, it’s not clear they know how to spend in retirement. The others will need Social Security to replace a significant portion of their income.

Wade Pfau: I worry a bit telling people who live paycheck to paycheck that they are in crisis may be counterproductive, like they think there’s no point in doing it. There’s so much pressure and so many obligations—student debt, life insurance to protect their families—that for a whole lot of people there really isn’t anything left to save.

Fichtner: We have to find a way to show the benefit of starting earlier—that even small amounts that come out of your paycheck can grow—so more people can have a mentality that they can succeed. We have to figure this out for the Millennials who are roughly 30-plus years behind, because they are now the largest generation and are also the true 401(k) generation.

What about 401(k)s and 403(b)s?

Fichtner: People liked DB pension plans because they got a paycheck for life. But many companies that offered pensions couldn't fund them. So now we’ve transferred the risk from employers to the individual, who has to fund their own retirement.

Pfau: And DC saving is all voluntary. Other than Social Security payroll taxes, there are no mandated retirement savings.

Anspach: The rules of the DC system are hard to understand. We need protection, but many layers of rules were put in place that changed the nature of what we were trying to do in the first place. I learned at a conference recently that the financial industry is more highly regulated than the nuclear industry.

Fichtner: We need to get the best of the DC system—personal responsibility, individual growth and access to markets—and pull in what we liked about the DB system, which is a paycheck for life.

Fichtner: We need to get the best of the DC system—personal responsibility, individual growth and access to markets—and pull in what we liked about the DB system, which is a paycheck for life.

Fichtner: I’m a fan of automatic defaults in retirement plans.

Fichtner: Right. And after the SECURE 2.0 Act passed in 2022, more people could be opted into retirement plans in this way. Will it add up to several hundred thousand dollars for most people? No. Will it be enough to delay taking Social Security so they can maximize income? Maybe.

Where fixed annuities enter the picture

Pfau: Annuities can be workhorses for retirees because they provide protected, reliable income that can cover disproportionately more of your spending needs than other investments. And, the more you have, the less vulnerable your spending is to market downturns. Your portfolio may decline, but your lifestyle isn't going to be affected as negatively.

Fichtner: If people have enough protected income, they can use the rest of their assets for growth. For higher-income people, Social Security will only replace maybe a third of their income. They need something on top of that to maintain their lifestyles.

There’s research that says getting regular paychecks from an annuity can help you budget, because your recurring income is basically your license to spend until you get that bump in Social Security.

Pfau: We know bond funds can have double-digit annual losses, as they did in 2022. Annuities can change the structure of risk because there’s principal protection, so you have a better sense of what you’re going to get. That could be competitive with owning bonds as you’re building assets before retirement.⁴

Anspach: It’s important for potential cognitive decline. We don't know what decisions people might make. Having additional guaranteed income at that point adds a layer of security that’s different than anything else you can do with your money.

Pfau: I’ve done a lot of work to break retirement strategies into four categories that match different personality types. One of the primary factors we consider is the idea of commitment versus optionality.

Having a commitment orientation is when people prefer to find something that solves a lifetime need and stick with it, whereas optionality orientation is when people want to be free to change up investments when they see fit. If you are this type of person, an annuity isn’t going to feel right for you. But cognitive decline is one of the concerns people identify if they are commitment-oriented: “I may have trouble making these decisions in the future, so I want to take care of it now and protect my family.”

Anspach: I've encountered all kinds of situations where you say the word “annuity” and people act like you said a four-letter word. It clearly comes from something they've seen or read or an experience a family member had. You can try and explain how it’s a tool—but if they need a hammer and they’re using a screwdriver, of course it’s the screwdriver's fault it didn't work, right? Bottom line: nothing is perfect. An annuity is great at guaranteeing lifelong income, but it can't also double your assets.

Fichtner: A challenge of putting annuities inside of retirement plans is you can't annuitize someone’s savings as the default because it’s irreversible. But automatically putting money into an annuity that can be converted into income in retirement is a great option, if the individual chooses to do so. People can then see “this is how much protected income I could get if I pull the lever and turn that into income.”

Anspach: These products can be really useful if they are easy to understand.

Fichtner: This kind of product does a lot. It gives people an allocation that basically pays for the bridge annuity we talked about earlier. You want the default investment to be something that’s powerful and meaningful. Employers could include annuities in their retirement plans, fulfill their fiduciary responsibility and allow people to opt out if they never need or want to annuitize.