Avoiding Potential Financial Problems Facing Retirees

According to a U.S. government study, there is a high risk that retirees will outlive their retirement assets. Data from July 2010 shows that almost half of individuals nearing retirement will not have enough money to pay for basic expenses and uninsured healthcare costs. The Government Accountability Office said that the decline in home equity and financial markets, along with the increase in health care costs and life expectancies have increased concerns about how individuals should manage their retirement savings.

The report recommends that retirees hold off on taking Social Security until the full retirement age (sixty-six for individuals born from 1943 to 1954). Additionally, the report suggests that middle-income households (households with a net worth of around $350,000) should think about purchasing an inflation-adjusted annuity using a portion of their savings.

Americans have opted against purchasing annuities because of concerns about fees, asset control, and litigation. The Labor and Treasury departments anticipate issuing guidance and rules later this year as a way to encourage the use of lifetime-income options in 401(k)-type plans.

Insurers and asset managers have already begun incorporating annuities into their retirement savings systems. This fall, State Street Global Advisors will announce a 401(k) that includes a built-in annuity. BlackRock Inc. offers employers a MetLife Inc. target-date fund with a fixed deferred annuity for 401(k)s. As of June 27, however, not a single company had adopted BlackRock Inc.’s target-date fund.

Liz Weston, author of “The 10 Commandments of Money,” urges that soon-to-be retirees should meet with a fee-only planner prior to committing to any retirement strategy because of the high potential for serious error when spending down savings.

Retirees Should Delay Social Security, Add Annuities, GAO Says, Bloomberg News, Jul. 1, 2011.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.