[784caroline]

Retirement Income: Ensuring Income throughout Retirement Requires Difficult Choices
GAO-11-400 June 7, 2011

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Summary

As life expectancy increases, the risk that retirees will outlive their assets is a growing challenge. The shift from defined benefit (DB) pension plans to defined contribution (DC) plans also increases the responsibility for workers and retirees to make difficult decisions and manage their pension and other financial assets so that they have income throughout retirement. GAO was asked to review (1) strategies that experts recommend retirees employ to ensure income throughout retirement, (2) choices retirees have made for managing their pension and financial assets for generating income, and (3) policy options available to ensure income throughout retirement and their advantages and disadvantages. GAO interviewed experts about strategies retirees should take, including strategies for five households from different quintiles of net wealth (assets less debt); analyzed nationally representative data and studies about retirees' decisions; and interviewed experts and reviewed documents about related policy options.

Financial experts GAO interviewed typically recommended that retirees systematically draw down their savings and convert a portion of their savings into an income annuity to cover necessary expenses, or opt for the annuity provided by an employer-sponsored DB pension instead of a lump sum withdrawal. Experts also recommended that individuals delay receipt of Social Security benefits until reaching at least full retirement age and, in some cases, continue to work and save, if possible. For example, for the two middle net-wealth households GAO profiled with about $350,000 to $375,000 in net wealth, experts recommended purchase of annuities with a portion of savings, drawdown of savings at an annual rate, such as 4 percent of the initial balance, use of lifetime income from the DB plan, if applicable, and delay of Social Security. To navigate the difficult choices on income throughout retirement, they noted strategies depend on an individual's circumstances, such as anticipated expenses, income level, health, and each household's tolerance for risks, such as investment and longevity risk. Regarding the choices retirees have made, GAO found that most retirees rely primarily on Social Security and pass up opportunities for additional lifetime retirement income. Taking Social Security benefits when they turned 62, many retirees born in 1943, for example, passed up increases of at least 33 percent in their monthly inflation-adjusted Social Security benefit levels available at full retirement age of 66. Most retirees who left jobs with a DB pension received or deferred lifetime benefits, but only 6 percent of those with a DC plan chose or purchased an annuity at retirement. Those in the middle income group who had savings typically drew down those savings gradually. Nonetheless, an estimated 3.4 million people (9 percent) aged 65 or older in 2009 had incomes (excluding any noncash assistance) below the poverty level. Among people of all ages the poverty rate was 14.3 percent. To help people make these often difficult choices, policy options proposed by various groups concerning income throughout retirement include encouraging the availability of annuities in DC plans and promoting financial literacy. Certain proposed policies seek to increase access to annuities in DC plans, which may be able to provide them at lower cost for some individuals. However, some pension plan sponsors are reluctant to offer annuities for fear that their choice of annuity provider could make them vulnerable to litigation should problems occur. Other proposed options aim to improve individuals' financial literacy, especially to better understand risks and available choices for managing income throughout retirement in addition to the current emphasis on saving for retirement. Proposed options include additional federal publications and interactive tools, sponsor notices to plan participants on financial risks and choices they face during retirement, and estimates on lifetime annuity income on participants' benefit statements.

[rubicon]

this information. Retirement decisions are a bear and many comapnies made it more difficult by dumping their define benefits programs.

While there are constants in this equation age, health etc they still are moving targets. You can make a solid case that you are beter off retiring at 62 and taking your social security then waiting until full retirement benefits kick in. The same applies to an annuity.

In our situation my wife and i want to leave as much money to our kids as we can....they will need it given what we see happening now. My biggest concern is Uncle Sam and so I pray that the estate tax will be eliminated. We have estblished a revocable living trust and periodically review it but the government is always one step ahead of you so that they are in a position to put their hands in your pockets. that's a longer way of saying taxes are a huge issue in retirement planning.....good luck

[eremite06]

Thanks for this. I've been trying to convince some family members in law enforcement to take the DB pension. This will give me more ammo.....so to speak.

[DaleMN]

The very best retirement plan possible is that the check for your funeral bounces.

[Bill-n-Brillo]

JMHO: The 'Summary' seems to, in part, push the premise that retirees should purchase an annuity. I would urge anyone to do a good bit of research into the pros and cons of annuities as they're not necessarily the best financial instrument for everyone - other options can be better.

Again, JMHO!

Bill

[2BNTV]

Originally Posted by DaleMN

The very best retirement plan possible is that the check for your funeral bounces.

Originally Posted by Bill-n-Brillo

JMHO: The 'Summary' seems to, in part, push the premise that retirees should purchase an annuity. I would urge anyone to do a good bit of research into the pros and cons of annuities as they're not necessarily the best financial instrument for everyone - other options can be better.

Again, JMHO!

Bill

Annuitites - I've had this discussion with a financial advisor and they are not right for everyone. JMHO

[l2ridehd]

Annuities are good for those who do not have the discipline to manage there own investments. If you have the ability and savvy to set up your own investments and withdraw a fixed amount every month not to exceed 4% annually of the beginning base, that is far better then any annuity I have every reviewed. But you need the capability to manage your own portfolio and the discipline not to withdraw more in a crisis or for a fun filled weekend in Reno.

[railroadman]

I2ridehd:

You always have great ideas on investments and you do sound very savvy about investments.

Do you have any advice on MLP's?

[l2ridehd]

Hummmmmmmmmmm, MLP's? I assume you mean Master Limited Partnerships? Or the stocks and mutual funds that trade in them? Not Maui Land and Pineapple?

I have looked at them a few times and was going to do some testing on them, but the detailed information I like before investing is just not as easy to get as it is for stocks. I like investments I really understand, ones that are very liquid, and those that I can do easy research to understand the real value.

So no, I have not invested in MLP's or studied them enough to provide comments. There are so many really great stocks that are way under their target value price that I stay with those.

[railroadman]

Thanks, I2ridehd:

You always give great information on investments and all items, concerning TV.

Thanks, again Randy

p.s. Time for me, to go drive the Train!!

[brostholder]

Originally Posted by railroadman

I2ridehd:

You always have great ideas on investments and you do sound very savvy about investments.

Do you have any advice on MLP's?

I am fairly heavily invested in MLP's and have been for the last 4 years. They have performed very well for me and I average about 8.5% TAX FREE!!! The real nice part about them, is that even though my net worth can increase or decrease with market fluctuations, my income never changes. In fact, even during the "crash", none of the MLP's I owned cut their dividends. A few of them even increased dividends during that difficult time. What I have been doing recently is pulling some of my profits out of the MLP's and purchasing a very low cost annuity from Fidelity that pays me 5.8%. Ideally, I plan to purchase enough in annuities to cover all my fixed costs.

[angiefox10]

Originally Posted by DaleMN

The very best retirement plan possible is that the check for your funeral bounces.

[Schaumburger]

Just heard a news snippet on ABC tonight. According to Suze Orman (don't know if she's always right or not) most people will no longer be able to retire at 62. 67 or 70 is more likely. I don't know what age group she was referring to. I only know that I won't be able to collect my full Social Security until 67. And I hope I will be a seasoned TV veteran by the time I collect my first Social Security check.

[Hal :-)]

Originally Posted by DaleMN

The very best retirement plan possible is that the check for your funeral bounces.

I know it's humor. But it occurred to me it's quite the opposite of rubicon, who's concerned about his taxable estate. That's anything over 5 million single, 10 million joint today. If your funeral check bounces, I'm afraid your heirs will be on the hook. Unless you have a way to pass the check just before for you (pass).

[l2ridehd]

I always look for more then 8.5% to put my money at risk. I want a 15% annual return. And there are enough good companies whose stock is selling at a bargain to provide that. It takes some research and some work to identify them and to understand them, but the returns are worth the effort. I would rather own 4 or 5 really good stocks then some funds that spread them over 100's of stocks. Just my personal choice and not for everyone.