Retirees Need Options and Assistance to Make Money Last

As individuals are increasingly responsible for their financial security following retirement, the cost of limited financial literacy can be extremely high. Yet, recent survey data suggest that seniors have some of the lowest financial literacy rates. These surveys—which included questions on interest rates, inflation, and risk diversification—found that less than 30 percent of individuals over the age of 65 got all three questions correct. As Financial Literacy Month comes to a close, we are highlighting a key GAO report that provides useful financial information for citizens approaching retirement. Spending Down Instead of Running Out American workers primarily save for retirement through their 401(k) plans, and will likely need assistance making complicated decisions about how to spend their money throughout retirement. Currently, defined contribution systems like 401(k) plans typically offer only lump sum payments, leaving some participants at risk of outliving their savings. We recently studied the experiences of six other countries with defined contribution systems, including Australia, Canada, Chile, Singapore, Switzerland, and the United Kingdom. Each of these countries has developed innovative spend-down policies that have the potential to yield useful lessons for the United States. More Choices for 401(k) Plans The U.S. departments of Labor and Treasury have begun to explore the possibility of expanding options for 401(k) participants, but have not yet helped plan sponsors—typically participants’ employers—address key challenges to offering a mix of options. Various retirement plan options available in the six countries we studied include:

• The lump sum payment. A single distribution of some or all of a participant’s retirement savings. Participants can then choose to invest this lump sum themselves.
• The programmed withdrawal. A series of fixed or variable payments from a participant’s account that may be administered either within a plan or in retail financial markets. This option attempts to produce relatively stable annual income for the lifetime of the participant.
• The annuity. Guaranteed payments that are normally secured through a contract with an insurance company for either a set period or for the participant’s lifetime.

More Choice Means More Responsibility Participants face trade-offs in choosing among spend-down options because no single option protects against all the risks participants may encounter in retirement, such as longevity and inflation. For example, interest rates at the date of purchase can affect the size of payments from an annuity. In all cases, even modest inflation can erode the purchasing power of retirement income over the course of an extended retirement. Participants approaching retirement must also take into account a number of factors, including their own retirement needs, and consider other sources of retirement income, such as government benefits and personal savings. For example, to see how retirement age can affect retirement income, check out this hypothetical example. For a hands-on experience that will allow you to see how different factors, including interest rates, investment returns, and inflation affect retirement income and spend-down options, try our interactive retirement model.

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• Questions on the content of this post? Contact Charlie Jeszeck at jeszeckc@gao.gov.
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