GAO's Advice for Retirees

The General Accounting Office (GAO) released (June 2011) a study "Retirement Income: Ensuring Income throughout Retirement Requires Difficult Choices." I read the key findings and scanned the study. Here's what the GAO has to say to those approaching retirement.

Consider delaying the receipt of Social Security benefits until reaching at least full retirement age. The Social Security Administration permits recipients to start payments as early as age 62. Many Americans begin receiving benefits at this age. However, their payments would be higher by waiting to full retirement. Nearly three quarters of current beneficiaries took payouts before age 65. Those who wait to age 70 increase their benefits 32% compared to taking them at age 66.

Waiting to start Social Security has other benefits. The applicant continues to work and, hopefully, save. The period of retirement is reduced and, as a result, so is the amount of money required to fund living expenses during retirement.

The study suggests retirees may take withdrawals from their retirement savings at a rate of 3%-6%. This is a pretty widely accepted rule of them in the financial planning community.

For many this draw down rate will not produce sufficient income. The GAO suggests retirees consider the purchase of an immediate annuity which guarantees income for the life of the annuitant.

I find fee only advisors reluctant to suggest clients consider using annuities to fund retirement. Fee only advisors (and their clients) find annuities overly complex and expensive. They are often reluctant to have their clients transfer assets they may be managing to an insurance company. Further, the rates credited by insurance companies to annuities are quite low in the current investment environment rendering the effective return on annuities uninspiring.

I believe there is a place for an immediate annuity in many retirement plans. When I include immediate annuities in client retirement models, I see the model's performance improve.

The GAO study warns that many Americans are in jeopardy of living in poverty in retirement. The office calls for greater financial literacy and making annuities available in defined contribution retirement plans (e.g. 401(k) or 403(b)).