Retirement Income: Making the Right Choices

By Glenn Ruffenach

Trying to figure out how you’re going to generate a steady paycheck in later life? Uncle Sam has some ideas.

A report published last month by the Government Accountability Office – titled “Retirement Income: Ensuring Income Throughout Retirement Requires Difficult Choices” – is an interesting and valuable introduction to what promises to be an exceedingly difficult task for most Americans. Given that only about one in three current workers will leave the office with a traditional pension, most of us will turn to 401(k)s, personal savings and Social Security to produce a monthly payout.

The GAO started by interviewing financial planners, as well as financial experts from “academic and industry organizations.” In specific, the agency asked these individuals to recommend strategies that five hypothetical retiree households might follow in producing income in later life.

(GAO randomly drew the five households from the University of Michigan’s celebrated Health and Retirement Study. As such, the study ends up with a good range of possible financial situations.)

For instance, Household No. 2 in the study (a married couple) is identified as: “Middle Quintile Net Worth with a 401(k) plan.” The household’s total net worth (including home equity) is $349,000, and the “gross financial wealth” (the present value of savings and financial assets excluding home equity) is $191,000. The experts’ recommendations: “Purchase an annuity and systematically draw down balance of financial assets. Delay Social Security. Continue working and accumulating assets, if possible.”

Of course, that advice might sound familiar: Delaying, for as long as possible, the date when you first claim Social Security – and, thus, increasing the size of your monthly check from the government – is a recurring recommendation for easing the strain on household budgets in retirement. That said, the GAO reports that most families, seemingly, have little use for that advice.

Almost three-quarters of Americans (72.8%) claim benefits before age 65 – and about four in 10 (43.1%) claim benefits within one month of turning age 62 (the youngest age at which benefits are available). Similarly, while the GAO’s experts advise many retirees to use a portion of their retirement savings to buy an annuity (and, thus, guarantee income in later life), only 6.1% of retiring workers with a defined-contribution plan take such a step.

The GAO study offers a good look at the basics in retirement income – but also indicates that one of the most important moves you can make is to press your employer and 401(k) provider for more and better information about your financial options. The report concludes: “Without objective information from employers and the federal government, even those retirees who have adequate savings may be at risk of not having sufficient retirement income.”

Check out the SmartMoney Retirement Planner to further figure out your retirement income needs.