A new report from the United States Government Accountability Office (GAO) recommended that retirees—particularly middle-income retirees—convert a portion of their savings into an income annuity to cover necessary expenses in retirement. This is yet another official government report that supports the use of annuities as a hedge against longevity and market volatility.
The report, entitled “Retirement Income: Ensuring Income throughout Retirement Requires Difficult Choices,” aims to identify (1) sound strategies that experts recommend retirees employ to ensure income throughout retirement, (2) choices retirees have made for generating income from their pension and financial assets, and (3) policy options available to ensure income throughout retirement.
The GAO randomly selected five actual households in the lowest, middle and highest net wealth quintiles from the Health and Retirement Study and asked financial experts to recommend strategies for each based on their situation.
Here are some highlights from the full 79-page report:
“As life expectancy increases, the risk that retirees will outlive their assets is a growing challenge. The shift from defined benefit (DB) pension plans to defined contribution (DC) plans also increases the responsibility for workers and retirees to make difficult decisions and manage their pension and other financial assets so that they have income throughout retirement.”
“Financial experts interviewed by the GAO typically recommended that retirees systematically draw down their savings and convert a portion of their savings to an income annuity to cover necessary expenses, or opt for the annuity provided by an employer-sponsored defined benefit pension instead of a lump sum withdrawal.”
“Today, a husband and wide both aged 65 have approximately a 47% chance that at least one of them will live to his or her 90th birthday and a 20% chance of living to his or her 95th birthday.”
“Social Security benefits provide annually inflation-adjusted income for life—and in 2008 were on average the source of 64.8% of total income for recipient households with someone aged 65 or older.”
“An alternative to self-managing periodic distributions from savings is to use one’s savings to purchase an immediate annuity from an insurance company that guarantees income for life. An immediate annuity can protect a retiree against the risk of underperforming investments, the risk of outliving one’s assets, (longevity risk) and, when an inflation-adjusted annuity is purchased, the risk of inflation diminishing one’s purchasing power.”
“Researchers have concluded that annuities have important benefits. For example, according to the American Academy of Actuaries, it is more efficient to pool the risk of outliving one’s assets than to self-insure by accumulating enough assets to provide enough income in case one lives to a very old age.”
“Deeply deferred annuities, or “longevity insurance,” which initiate payments at an advanced age, could provide protection against longevity risk and could do so at a substantially lower price than an immediate annuity. For example, according to one association, the cost of a deeply deferred annuity purchased at age 65 with payments beginning at age 85 is approximately 10 to 15 percent of the cost of an annuity providing the same income that begins payments immediately.”
Click here to download the full 79-page report.