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.