Retirement Income: Ensuring Income throughout Retirement Requires Difficult Choices
GAO-11-400 June 7, 2011
Officials from the Department of the Treasury, IRS, Department
of Labor, SEC, and the National Association of Insurance Commissioners provided
technical comments that we incorporated in the report,
Summary of the 80 page report
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.
When the choice of taking a lump sum in exchange for lifetime retirement income from a DB plan is available, the experts we spoke with generally recommended that retirees take lifetime retirement income because it would reduce their exposure to investment and longevity risks.
The experts we spoke with also recommended that retirees enhance their guaranteed income by purchasing an annuity with some limited portion of their savings. The income needed from an annuity depends, in part, on the amount of living expenses not covered by other sources of guaranteed income.