As life expectancy increases, the risk that retirees will outlive their assets is a growing challenge.
Patrick Smith | US Gov Connect
As life expectancy increases, retirees are facing a new problem. There is a growing concern that some seniors may outlive the assets they have acquired to sustain them through their golden years. A report commenced by the Government Accountability Office (GAO) recommends retirees convert a portion of their current savings into an annuity as a safety net to prepare for the possibility of post-employment assets running out.
According to GAO, another possibility is to opt for an annuity provided by a retiree's employer-sponsored Defined Contribution pension. This is an alternative to a lump sum withdrawal. Another way to extend assets, according to financial experts, is to delay the initial receipt of Social Security benefits until retirement age. Those who are able to continue to work should do so, even on a part-time basis, to add to their savings. Recommendations vary per individual.
In fact, GAO recommends strategies based on each individual's circumstances. Criteria to be considered includes current income level, health, expected expenses and the ability to tolerate risks (unexpected expenses and losses) and longevity risk. GAO reports that most retirees depend primarily on Social Security and do not pursue other opportunities to build their savings once they retire. Many retirees either are not aware of the potential to make returns on investments or are concerned that such financial investments are too risky.
According to one estimate, those who take an early retirement and begin receiving Social Security benefits at 62 lose increases of at least 33 percent that they would have received if they waited until full retirement age. Just six percent of retirees with a DC pension plan chose an annuity once they officially retire. Retirees in the middle income level typically draw from their savings, but those savings gradually decrease over time. It is estimated that 3.4 million people over the age of 65 had an income level below the poverty level in 2009.
Various groups, including GAO, are advocating financial literacy efforts to help retirees become aware of the options available to them. The goal of proposed policies is to increase overall access to annuities in DC plans. Some of these plans may be available at lower costs to some individuals. Some sponsors of such plans remain hesitant to offer such annuities due to concerns over possible litigation should problems arise. Additional plans focus more on making retirees aware of the need to start saving early. These plans include educating retirees or soon-to-be retirees through federal publications and interactive tools online.
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