I happened to read a couple of articles this week whose basic premise was good, but that once again, I had other ideas about.

Consumer Reports – Daily Journal

While I agree with the strategy that Consumer Reports suggests for investors to “buy a simple annuity,” I do not agree that the smaller the nest egg, the smaller the annuity.

We know the reverse is not true, that high net worth investors should buy larger annuities.

The allocation of a portion of a retirement portfolio to income annuities requires the same discipline, maybe even more, as asset allocation during the accumulation of savings. Most importantly, that allocation to income annuities is not a one-time purchase decision.

Bottom line, it’s a very individualized decision, and not amenable to simple rules of thumb.

Focus on retirement income, not investment return

While I agree with headline, I don’t agree with the notion expressed in the article: that savings should only be used as part of the 401(k) participant’s “holistic draw-down schedule during retirement.”

Some portion of savings should be used to purchase Income Annuities to provide lifetime income.

Holistic or not, we need to shut down “draw-down” strategies. They just don’t make sense for most investors.

The End of the 401(k)?

Interesting article and headline, but it misses the fundamental problem of 401(k) plans: it’s about generating savings that can be converted to income at retirement.

While low fees and simple asset allocation models are important during savings years, the real solution includes the following:

  1. Expressing 401(k) status in terms of future income.
  2. Creating a default option at retirement for a gradual conversion to lifetime income.
  3. Making it mandatory for plans to include an option for in-service roll-out starting at age 59 ½.
  4. Strengthening fiduciary standards for rollovers to IRA, particularly as it relates to securing income.

If 401(k) plans are intended to pension plans, then they need to do a better job of replacing income.