Americans Might Want Annuities to Fund Retirement, Study Finds

Retirees might need to delay Social Safety benefits and buy an annuity to come up with the money for for retirement, according to a US government study.

“The risk that retirees will outlive their money is a rising problem,’’ a a report from the Government Accountability Office released yesterday shows. Increased life expectancies and health care costs coupled with declines in financial markets and home equity over the previous few years have intensified employees’ issues about methods to handle their savings in retirement, the report said.

Annuities are insurance contracts that can provide a steady stream of revenue for life. High-earning households typically don’t want them, based on specialists the GAO consulted. Middle-income households - defined within the research as having a net value of about $350,000, including their properties - that don’t have traditional pensions should consider using a portion of their financial savings to buy an inflation-adjusted annuity, the research said. Low-income households need to accumulate some cash savings first.

The research recommended that retirees make withdrawals from their investment portfolios at a rate of three to six percent annually. Many additionally should wait to take Social Security until at least full retirement age, or 66 for these born from 1943 to 1954. The Social Security program lets recipients take diminished funds as early as age 62. It offers full advantages at age 66 and will increase payouts for many who wait up to age 70. Almost three-quarters of people took payouts before age 65, the GAO said.

“The advantages are large particularly when you’re married and the higher wage earner waits till 70,’’ mentioned Christine Fahlund, senior financial planner at T. Rowe Price Group. As long as retirees live to age 77, delaying payments until age 70 is usually worth it, she said.

Social Securities’s trustees have mentioned it won't be capable of paying recipients in full beginning in 2036. The bipartisan US deficit commission has recommended increasing the retirement age to cut costs.

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The GAO research was requested by Senator Herb Kohl, chairman of the Senate Special Committee on Aging. The shift by employers to 401(k) accounts have put the onus on Americans for managing their financial savings, Kohl said.

Individuals have resisted annuities for reasons concerning fees and the control of assets, mentioned David Laibson, a economics professor at Harvard. Employers have held off adding them to 401(k) plans because they're apprehensive about litigation and lack clarity on tips on how to proceed, Laibson said.

Individuals ought to consult a price-only planner before committing to any retirement strategy, said Weston. That’s because many issues can go wrong when spending down savings, such as withdrawing funds too quickly, she said.