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Making your money last

By Barbara Whelehan · Bankrate.com
Tuesday, May 11, 2010
Posted: 4 pm ET

It's tough enough funding retirement and having to make decisions about how to invest during the so-called "accumulation" phase. But that ain't nothin' compared to converting your retirement savings into a lifelong stream of income during the so-called "distribution" phase.

Recently, the Government Accountability Office outlined the challenges Americans face in this endeavor in an 18-page letter directed to Sen. Herb Kohl, D-Wis., chairman of the Special Committee on Aging.

Among the highlights, taken directly from the report (parenthetical statements are mine):

  • In 2007, before the recent recession, half of the households with someone aged 55 to 64 had financial assets of $72,400 or less (egads!), not much more than the median working income of $54,600 in the same year.
  • From 1990 to 2007, the number of active participants in private sector defined benefit plans (meaning old-style pension plans) fell by 26 percent.
  • From 1990 to 2007, the number of active participants in defined contribution plans (such as 401(k) plans) increased from about 35 million to 67 million. (Thus, the burden of risk transferred to the shoulders of individuals.)
  • According to the Internal Revenue Service, the average taxable pension and annuity income was $19,500 in 2007 (not much, but better than nothing).
  • Many workers retiring with a defined benefit plan choose a lump sum over an annuity (which means they think they can manage money better than financial professionals).
  • Few households -- about 6 percent -- owned individual annuities in 2007. However, only 3 percent (a minuscule $8 billion worth) of the total amount of annuities sold in 2008 were fixed immediate annuities, designed solely to provide lifetime income.

The upshot: Americans generally are not choosing fixed, reliable forms of income other than Social Security. The letter goes into a lot more detail than I can possibly cover here, explaining the pros and cons of annuities, the benefits and drawbacks of delaying Social Security, and the availability of other investment products designed to provide retirement income, albeit with more risk.

But risk is in the eye of the beholder

Even "safe" annuities that provide guaranteed income for life come at great expense. As the GAO letter points out, a $100,000 annuity purchase would provide an annual income of $6,480 for the life of the purchaser and a spouse. That amounts to $540 a month -- not enough to pay for groceries in my household. And in 20 years, it may not cover the electric bill.

That GAO letter came out at the tail end of a two-month period during which the public was invited to comment to the Department of Labor and Treasury Department's request for information on lifetime income options within retirement plans. The government received more than 900 comments, many expressing support for the development of these annuity options. Not surprisingly, these supporters included insurance interests such as the American Council of Life Insurers and TIAA-CREF. Those entrenched in the retirement industry who like things just the way they are voiced opposition to a mandate for annuities -- the SPARK Institute and the ERISA Industry Committee, for example.

It's clear that Americans could certainly use some assistance with converting assets to retirement income, not to mention building up their assets. But requiring employers to provide an annuity option may only discourage them from offering any kind of retirement plan at all.

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