Making Your Nest Egg Last a Lifetime
IB#9-20
Introduction
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...
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Anthony Webb is a Research Economist at the Center for Retirement Research at Boston College. The Center gratefully acknowledges financial support from the AARP for this research. This brief provides general guidance that may be useful in many circumstances. However, for any specific household, an investment or financial planning strategy should be based on the particular household’s personal and financial circumstances. The author strongly recommends that households take appropriate financial advice prior to making any financial decisions.