A new federal report on retirement security requested by U.S. Senator Herb Kohl finds that most American workers will face difficult financial choices and challenges in retirement.
"As workers near retirement they not only have to focus on saving money but on closely managing their investment throughout their retirement years," Kohl said. "This report shows that many Americans will need to save much more or work longer in order to avoid the very real risk of outliving their savings."
The report on how best to ensure income throughout retirement was undertaken by the independent and non-partisan Government Accountability Office (GAO) at the request of Kohl, the chairman of the Special Senate Committee on Aging. To complete the 79-page study, GAO interviewed financial experts and used input from the Department of Labor, Internal Revenue Service, Securities and Exchange Commission, Social Security Administration and the National Association of Insurance Commissioners.
Kohl said the report was requested to see what experts advise people to do to ensure they have income throughout their retirement and to see if most retirees are following that advice.
In the study, GAO found that while most retirees rely primarily on Social Security, most Americans fail to maximize their benefits. An estimated 72.8 percent took benefits before age 65, and only 14.1 percent took benefits the month they reached full retirement age. By taking the benefits on or before their 63rd birthday, nearly half -- 49.5 percent -- passed up at least 25 to 33 percent in additional monthly inflation-adjusted benefits that would have been available had they waited until full retirement age.
Overall, GAO found that experts recommended that retirees systematically draw down their savings and covert a portion of their savings into an income annuity to cover necessary expense or opt for the annuity provided by an employer-sponsored defined benefit pension instead of a lump sum withdrawal. GAO also found that given the difficult economy and life expectancy increase, experts recommend that most workers continue to work and save well beyond age 62, if possible.
And, while an immediate annuity can protect retirees from the risk of outliving one's savings, only about 6 percent of those with a 401(k)-type plan purchased one at retirement, the GAO said.
According to experts consulted by GAO, the report includes the following recommendations:
*Many retirees should delay taking Social Security to increase payments for life.
* Depending on net worth, households also should consider buying a life annuity, particularly if they don't have a traditional pension that guarantees sufficient income.
*High-net wealth households generally don't need life annuities.
*Middle-income households, such as those with $191,000 in financial assets and without a traditional pension, should consider using a portion their savings to purchase an inflation-adjusted annuity.
*Delaying Social Security is more cost effective than purchasing an annuity to enhance retirement income because the money that a retiree would forego by waiting until age 66 is less than the amount needed to purchase the contract.
*Retirees should make withdrawals from their investment portfolio at a rate of no more than 3 percent to 6 percent annually at retirement, with adjustments for inflation, to help ensure they won't run out of money.
The report also offers several policy options for improving consumer understanding of retirement income and for increasing access to lifetime retirement income products, such as annuities. Among the policy options to increase access to annuities, some experts suggest requiring defined contribution plans, such as 401(k)s, to offer annuities as a choice to plan participants, or by making tax law modifications that would make deeply deferred annuities, or longevity insurance, more financially attractive.
The full GAO report can be found at: http://www.gao.gov/products/GAO-11-400