How to Die Before You Money Runs Out

This new Issue Brief from the Center for Retirement Research at Boston College, Making Your Nest Egg Last a Lifetime by Anthony Web, examines strategies for making your retirement savings last your lifetime.

Media attention on retirement security generally focuses on the need to save enough to enjoy a comfortable retirement.  However, accumulating a nest egg is no longer the only significant challenge – the other is managing one’s nest egg in retirement.  In contrast to previous birth cohorts who often received a lifetime income from a defined benefit pension plan, in today’s 401(k) world retirees must choose how to convert their accumulated savings into a monthly paycheck.

One straightforward solution to the drawdown challenge is an immediate annuity, which turns a lump sum of income into a lifelong payment stream.  However, for various reasons, such annuities have not proven broadly popular.  Therefore, this brief examines several alternatives.  All such strategies involve a trade-off between maximizing consumption and minimizing the risk of running out of money.  Calculating the optimal strategy is really hard – maybe impossible.  But, despite the complexity of the problem, some strategies are clearly superior to others..

This paper examines three strategies: 1) spend the income, conserve the capital; 2) spend down over their estimated life expectancy; and 3) spend a fixed percent of their initial nest egg in each year. After examining all three strategies, the author concludes that households approaching retirement should annuitize a sufficient amount of their wealth to satisfy minimum living standards.

 

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