Workers entering retirement today typically face greater responsibilities  for managing their retirement savings than those who retired in the past. For example, retirees will no longer need to  save for retirement and their payroll and income tax liability will likely fall. Experts Recommend Retirees Balance Draw Down of Savings and Use of Lifetime Retirement Income Options

Experts we interviewed tended to recommend that retirees draw down  their savings strategically and systematically and that they convert a  portion of their savings into an income annuity to cover necessary  expenses or opt for the annuity provided by an employer-sponsored DB  pension, rather than take a lump sum. The experts also frequently  recommended that retirees delay receipt of Social Security benefits until  they reach at least full retirement age. However, according to the experts,  the combination of these strategies depends on an individual’s household  circumstances, such as the standard of living the household seeks, its  financial resources, and its tolerance for risks such as investment,  inflation, and longevity risk. The systematic drawdown of financial assets can be based on a “smooth”  and sustainable level of income throughout retirement or on a retiree’s  remaining life expectancy. 3.) Most Retirees Have Chosen Reduced Social Security Benefits, though Increasing Numbers of Retirement Age Individuals Work

The experts we talked with frequently recommend that retirees delay  taking Social Security to increase their lifetime retirement income, but  most of today’s retirees took Social Security before their full retirement  age, which has committed many to substantially lower monthly benefits  than if they had waited. By taking the benefits on or before their 63rd  birthday, 49.5 percent of beneficiaries born in 1943 passed up increases of  at least 25 to 33 percent in monthly inflation-adjusted benefits that would  have been available, had they waited until their full retirement age. 4.) 6.) In some cases some of the retirees may have  purchased annuities at a later time. Even with the widespread availability of Social  Security, Medicare, and Medicaid benefits, in 2009 an estimated 3.4 million  people aged 65 or older lived in poverty. The poverty rate for this age  group (8.9 percent), however, was lower than for all U.S. residents (14.3  percent). Various Proposed Policies Would Seek to Promote Access to Annuities through Defined Contribution Plans and Improve Financial Literacy about Retirement Income

		Proposed Options for Promoting Access to Annuities through Employer DC Plans Take Many Forms

Multiple experts told us about increasing lifetime retirement income by  purchasing an annuity, but DC plans typically do not offer access to  annuities and their participants infrequently use annuities when leaving  employment and retiring. Proposed Approaches Vary to Improve Individuals’ Understanding about Retirement Income

Improving individuals’ financial literacy can be one important component  in helping them manage retirement income appropriately. According to  Labor and Treasury officials, plan sponsors are not required to provide a  notice to participants on managing pension assets in retirement, such as  the general financial risks and choices they face. Require Sponsors to Provide an Estimate of Lifetime Annuity Income on Benefit Statements

Given the rise of DC plans which provide pension benefits as an account  balance, many industry, consumer, and academic groups noted that an  estimate on the participant benefit statement could present, or “frame,”  the pension benefit as a stream of income in retirement rather than just an  account balance, which could help to change how participants in DC plans  perceive or ultimately withdraw their benefit at retirement. As part of these  interviews, to ensure we identified strategies that apply to households  across the net wealth spectrum and with both defined benefit (DB) and  defined contribution (DC) pension plans, we randomly selected five  households from the Health and Retirement Study (HRS) conducted by  the University of Michigan in the lowest, middle, and highest net wealth  quintiles with different combinations of pension plans in the middle and  highest quintiles. For  example, for the lowest quintile, median net wealth was $2,000 so we  selected households with net wealth in the $1,800 to $2,200 range. To review the choices retirees have made for managing their pension and  financial assets for generating income, we analyzed data from the HRS,  reviewed others’ analyses of the HRS, and analyzed data from the Social  Security Administration, compiled by the Office of the Chief Actuary. To identify policy options that are available to ensure income throughout  retirement as well as their advantages and disadvantages, we collected and  reviewed information representing a variety of academic, consumer,  industry, and government sources. Retirement Income: Challenges for Ensuring Income throughout  Retirement.
Why GAO Did This Study

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. GAO was asked to review (1) strategies that experts recommend retirees employ to ensure income throughout retirement, (2) choices retirees have made for managing their pension and financial assets for generating income, and (3) policy options available to ensure income throughout retirement and their advantages and disadvantages. GAO interviewed experts about strategies retirees should take, including strategies for five households from different quintiles of net wealth (assets less debt); analyzed nationally representative data and studies about retirees' decisions; and interviewed experts and reviewed documents about related policy options.

What GAO Found

Financial experts GAO interviewed typically recommended that retirees systematically draw down their savings and convert a portion of their savings into an income annuity to cover necessary expenses, or opt for the annuity provided by an employer-sponsored DB pension instead of a lump sum withdrawal. Experts also recommended that individuals delay receipt of Social Security benefits until reaching at least full retirement age and, in some cases, continue to work and save, if possible. For example, for the two middle net-wealth households GAO profiled with about $350,000 to $375,000 in net wealth, experts recommended purchase of annuities with a portion of savings, drawdown of savings at an annual rate, such as 4 percent of the initial balance, use of lifetime income from the DB plan, if applicable, and delay of Social Security. To navigate the difficult choices on income throughout retirement, they noted strategies depend on an individual's circumstances, such as anticipated expenses, income level, health, and each household's tolerance for risks, such as investment and longevity risk. Regarding the choices retirees have made, GAO found that most retirees rely primarily on Social Security and pass up opportunities for additional lifetime retirement income. Taking Social Security benefits when they turned 62, many retirees born in 1943, for example, passed up increases of at least 33 percent in their monthly inflation-adjusted Social Security benefit levels available at full retirement age of 66. Most retirees who left jobs with a DB pension received or deferred lifetime benefits, but only 6 percent of those with a DC plan chose or purchased an annuity at retirement. Those in the middle income group who had savings typically drew down those savings gradually. Nonetheless, an estimated 3.4 million people (9 percent) aged 65 or older in 2009 had incomes (excluding any noncash assistance) below the poverty level. Among people of all ages the poverty rate was 14.3 percent. To help people make these often difficult choices, policy options proposed by various groups concerning income throughout retirement include encouraging the availability of annuities in DC plans and promoting financial literacy. Certain proposed policies seek to increase access to annuities in DC plans, which may be able to provide them at lower cost for some individuals. However, some pension plan sponsors are reluctant to offer annuities for fear that their choice of annuity provider could make them vulnerable to litigation should problems occur. Other proposed options aim to improve individuals' financial literacy, especially to better understand risks and available choices for managing income throughout retirement in addition to the current emphasis on saving for retirement. Proposed options include additional federal publications and interactive tools, sponsor notices to plan participants on financial risks and choices they face during retirement, and estimates on lifetime annuity income on participants' benefit statements.