Here's some more retirement planning grist to consider if you're dubious about the value of buying an immediate annuity to give yourself dependable retirement income.
The National Retirement Risk Index, created by the Center for Retirement Research at Boston College, looked at preretirement incomes and calculated how much retirement income each household would need to maintain the same standard of living. Then it took those numbers and figured out the percentage of households at risk of not having within 10 percent of that much money.
The results will make you cringe. In 2009, 51 percent of all households will reach age 65 without having enough potential income to maintain their standards of living. Early boomers are in the best shape at 41 percent, with late boomers at 48 percent and Gen Xers at 56 percent.
The study assumed that households would have Social Security and some would have old fashioned pensions. It also assumed that many would have retirement savings that would be used to purchase inflation-adjusted annuities. In addition, the study examined two other income strategies. The first scenario was that households would draw down their savings at a rate of 4 percent per year, a strategy recommended by many financial planners. The second alternative scenario examined what would happen if households lived off the interest on their accumulated savings at the then-current average return of 1.9 percent (slightly higher than the current one-year CD rate).
The results showed, not surprisingly, that living off savings earning the low interest rate of 1.9 percent increased the percentage of people at risk of running short of money from 51 percent to 60 percent. Those people who drew down their assets at 4 percent were at 53 percent risk for not having enough money.
High-net worth households were most affected by not annuitizing their assets. The percent "at risk" increased from 42 percent to 47 percent for those who drew down their assets at 4 percent a year and increased from 42 percent to 57 percent for those who lived off the interest of their money invested at 1.9 percent annually.
The study notes that one of the reasons that this is true is that more high-net worth households live off their savings, while lower-income households are likely to be more dependent on Social Security.
There are lots of holes in the logic of this study. We could have a field day picking it apart. But even after we got done, these statistics would still argue for putting at least some retirement savings in an annuity as a hedge against an all-kibble diet.
Will your retirement plan afford you haute cuisine in exotic locales? Or pot luck dinners with your neighbors? Apply for a free Money Makeover, to be featured in Bankrate’s upcoming Retirement Reality series.