The differences between 'retirement income,' 'guaranteed income,' and 'lifetime income'

The defined contribution (DC) system, a cornerstone of American retirement savings and income, is often shrouded in complex terminology that can confuse plan sponsors and participants. Terms such as “retirement income,” “guaranteed income,” and “lifetime income” are frequently used interchangeably, though they hold distinct meanings. This lack of clarity can hinder the effective adoption and utilization of retirement income offerings within DC plans. Plan sponsors and participants must understand these differences in order to make informed decisions that secure financial stability in retirement.

Defining the terms

Retirement income: The broadest definition of the three terms encompasses all sources of income that an individual receives after retiring. This includes Social Security, pensions, withdrawals from retirement accounts (such as DC plans), and any other retirement investments or savings earmarked for retirement. Unlike guaranteed income, retirement income may not be fixed or predictable. Notably, “retirement income” should be the broadest definition of retirement income options in DC plans. This is the term that most effectively communicates DC plans’ utilization of a suite of possible retirement income in-plan options: hybrid target date funds, annuity distribution options, annuities supermarket, installment distributions, and managed accounts with retirement income paycheck features. 

Guaranteed income: This refers to a source of income not subject to market fluctuations or other uncertainties and is paid for a retiree’s lifetime. Annuities typically provide this, promising a fixed payment amount for a specified period or life, regardless of market conditions.

Lifetime income: This subset of retirement income is structured to be paid for life for the retiree’s lifetime, but is not guaranteed. Lifetime income solutions ensure that retirees do not outlive their savings, providing financial security throughout their retirement years.

The importance of clarity

Accurate usage of these terms is not merely a matter of semantics; it directly impacts retirement planning and outcomes. According to a 2023 study by the Employee Benefit Research Institute (EBRI)1, confusion around retirement income terminology leads to suboptimal decision-making by plan participants. When terms are used correctly, participants are more likely to understand their options, improving their retirement readiness.

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For instance, a 2022 Plan Sponsor Council of America (PSCA) survey2 found that 62% of 401(k) participants were unsure if their plan offered any form of guaranteed income. This confusion often results in participants underutilizing available options that could enhance their retirement security. Additionally, the same survey highlighted that when participants were educated on the specifics of lifetime income options, there was a 45% increase in utilizing a retirement income option.

The case for in-plan retirement income options

Shifting demographics and economic realities underscore the need for in-plan retirement income options within DC plans. With increasing life expectancies and the decline of traditional defined-benefit pensions, retirees face a greater risk of outliving their savings. A 2020 report by the National Institute on Retirement Security (NIRS)3 revealed that nearly 50% of Americans are at risk of not having enough retirement income to maintain their pre-retirement standard of living. There is also the reverse, that retirees are too conservative in spending, which impacts their enjoyment of retirement.

Integrating retirement income options into DC plans can mitigate this risk. For example, adding annuities to DC plans can provide a stable income stream that participants cannot outlive. Industry studies show that retirees with annuities are more confident about their financial future than those relying solely on withdrawals from retirement accounts.

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Moreover, offering in-plan income options can enhance the overall attractiveness of 401(k) plans. A 2021 survey by Willis Towers Watson4 found that 77% of employees view retirement income options as a critical feature of a comprehensive retirement plan. This feature can help employers attract and retain talent while promoting better retirement outcomes.

Conclusion

The interchangeable use of “retirement income,” “guaranteed income,” and “lifetime income” can obscure critical differences that affect retirement planning. Plan sponsors and participants must understand these distinctions to navigate their retirement options effectively. “Retirement income” should be the broadest definition, encompassing the diverse and evolving suite of in-plan guaranteed income and lifetime income options available today, including hybrid target date funds, annuity distribution options, annuities supermarket, installment distributions, and managed accounts with retirement income paycheck features. By educating participants and correctly using these terms, we can improve the adoption and utilization of retirement income offerings in DC plans. This clarity will ultimately lead to more secure and confident retirements, addressing the financial challenges that many Americans face as they transition out of the workforce.

Kevin Crain is the executive director at the Institutional Retirement Income Council (IRIC).