How Best to Annuitize Defined Contribution Assets?
The brief’s key findings are:
- In a 401(k) world, retirees face the tough job of having to figure out how to draw down their nest egg once they retire.
- They have shunned the standard options: an immediate annuity, which pays a fixed amount for life, or an advanced life deferred annuity, which begins payments at a later age.
- Alternatively, retirees could use their 401(k) assets for temporary income to delay claiming Social Security benefits, effectively buying more annuity income.
- The analysis shows that the “Social Security bridge” provides the highest level of utility for households with median wealth and remains competitive for those at the 75th percentile.
- Introducing such an option as the default in 401(k) plans would require no legislative or institutional changes and would greatly enhance the welfare of participants.