The decline of the traditional defined benefit (DB) pension and the rise of the 401(k) plan has shifted the burden of deciding how the retirement nest egg should be distributed onto millions of retirees, substantially increasing their risk of running out of money in old age. Annuitizing some or all of the assets in a 401(k) can help reduce longevity risk and investment risk.
This report presents data from an AARP survey that canvassed 1,750 older workers and 670 retirees with either a pension plan or an individual retirement account about their distribution decision. The survey found that annuities are more popular than many observers have thought. In addition to participants receiving an annuity automatically from their DB plan, 30 percent of workers and 41 percent of retirees planned to choose or had actively chosen a life or other type of annuity. Older workers who could not or would not choose an annuity expressed moderate interest in a more flexible arrangement, such as partial annuitization, gradual annuitization, or a trial arrangement. Retirees were less interested.
The survey’s finding of greater than expected interest in annuities is encouraging. However, annuitization remains uncommon among 401(k) plan members, so that many retired Americans, especially women, are at risk of exhausting their nest egg. Reducing underannuitization should be a top policy priority.
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