If you’re not scared of dying broke, you probably should be.
It’s a concern that’s fairly unique to today’s savers as many of those before us had pensions, guaranteeing them at least some income for life beyond Social Security.
By contrast, two-thirds of working millennials — defined here as those born from 1981 to 1991 — say they have nothing saved for retirement, according to research this year from the National Institute on Retirement Security. The fault isn’t all their own: Close to half have no retirement plan at work and only 10% have access to a defined-benefit plan like a pension, according to The Pew Charitable Trusts.
Matt Carey hopes to change that. Carey is one of three co-founders of Blueprint Income, a New York City startup that launched nationwide this year. The company is offering the “personal pension” — a monthly paycheck in retirement, accessed by purchasing income annuities in small pieces over the decades before.
The product has pros and cons — which we’ll get into here — but it has brought a new audience to annuities: About 30% of Blueprint Income’s customers are in their late 20s or early 30s. That’s a break from the traditional annuity market, where most purchasers are 50 or older.
How a personal pension works
In case you’re unfamiliar, annuities are essentially insurance products that turn a lump sum from the purchaser into an income stream for life. They have a reputation for being complex, and rife with fine print and fees. It isn’t misplaced. Annuities came in lots of different shapes and sizes, making them confusing and potentially costly.
However, financial advisers occasionally recommend simpler versions, like fixed-income annuities, to clients at risk of running out of money in retirement.
Blueprint Income’s personal pension uses deferred fixed-income annuities and replaces the lump sum for a model that mimics how a typical investor saves for retirement: Through small, regular contributions. Blueprint requires an initial investment of $5,000, but subsequent amounts can be as little as $100 a month. At retirement, those investments turn into a monthly paycheck back to you.
The amount of that monthly check — which is guaranteed by the insurers Blueprint works with, all of which have financial strength ratings of A or higher — largely depends on how much you contribute, your longevity and when you start distributions.
For example, a 35-year-old woman who wants to retire at 67 can get $4,000 a month retirement income by making the initial $5,000 required contribution, then subsequent contributions of $100 a month. To obtain that $4,000 monthly benefit, those contributions will also need to increase annually 13%, meaning she’ll need to invest $113 a month the second year.
Contributions are held at the insurer; Blueprint Income is simply the middleman. Contributions can be made with funds in an IRA or a savings, checking or brokerage account — Blueprint Income will help facilitate the process of transferring funds and initiating future automated contributions.
Focusing on income rather than assets
Carey, who is 32, came up with the idea for Blueprint Income while working on retirement security at the U.S. Treasury Department, and later dropped out of The Wharton School at the University of Pennsylvania to see it through.
“You look at the data and you realize that something has to give, and a big part of that to me is to give people a simpler mental model for how to save for retirement,” Carey says. “If I make $50,000, my goal when I retire is to replace that $50,000 a year. The idea of basing retirement around income rather than assets is something that the industry doesn’t talk about.”
The ideal, he says, is to have enough guaranteed income in retirement to cover fixed expenses, which ensures you won’t outlast your money and allows you to weather the effect of market fluctuations on the money you’ve invested.
Combining a personal pension or other annuity with Social Security and a retirement account like a 401(k) or IRA is one way to do that.
The fine print
As with any financial product, you need to dig into the details here.
First, the cost. Consumers don’t pay a direct fee for the pension, but Blueprint Income earns a commission of 1% to 5% from insurers. That cost is factored into and indirectly reduces the amount of income you receive in retirement.
Surrender fees, common with annuities, aren’t a factor here because there isn’t an option to get contributions back, Carey says. If you stop contributions, your monthly benefit will lock to reflect what you’ve contributed so far.
Along with losing liquidity, you’re also giving up potential investment returns, says Ashley Foster, a certified financial planner and founder of Nxt:Gen Financial Planning and an alumni of the insurance industry. There’s a reason annuity purchasers tend to be older: They’re typically already dialing back their equity allocation in preparation for retirement.
But Carey — who says Blueprint Income acts as a fiduciary — isn’t suggesting anyone forgo investing in stocks for his pension product. Rather, he sees it as partial substitute for bonds, and a way for investors to buy into annuities over time. That makes the product best-suited to those who are risk averse. Younger investors, on the other hand, should have most if not all of their money in stocks.
“You’re getting a similar return to bonds,” Carey says. “You’re giving up liquidity to do it — that’s one downside — but in return, you don’t have to worry about how long you’re going to live.”
And if you die early? Any money you contributed that wasn’t paid out will be distributed to your beneficiaries.