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Retirement Income

Retirement Income: Risks and Strategies

Mark J. Warshawsky
Copyright Date: 2012
Published by: MIT Press
Pages: 280
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  • Book Info
    Retirement Income
    Book Description:

    As members of the baby boom generation head into retirement, they face an economic environment that has changed noticeably since their parents retired. Most of these new retirees will not be equipped, as many in the earlier generation were, with private pension plans, early retirement options, and fully paid retiree health benefits in addition to Social Security and Medicare. Today it is increasingly left to retirees themselves to plan how to maximize retirement income and minimize risk. In Retirement Income, Mark Warshawsky and his colleagues describe strategies, products, and public policies that will help a new generation achieve financial security and income growth in retirement.Warshawsky, a noted expert in the field who has worked in both government and private industry, analyzes two insurance vehicles, life annuities and long-term care insurance, and their capacity to protect against the extra costs arising from longevity and disability. He proposes two innovations. The first is a strategy that includes a set percentage withdrawal from a balanced portfolio, which is gradually used to purchase a ladder of life annuities. The second proposal, which includes a description of the potential choices in product design and available tax characteristics, is a product that integrates the immediate life annuity and long-term care insurance.With Retirement Income, Warshawsky offers practical ideas based on the results of empirical investigations and analyses, which can be applied to household decision making by retirees and their financial planners and to the design of insurance products and public policy.

    eISBN: 978-0-262-30159-6
    Subjects: Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Acknowledgments
    (pp. vii-viii)
  4. 1 Introduction and Overview
    (pp. 1-36)

    Past cohorts of workers in the United States retiring in the 1980s and 1990s had many comprehensive benefits and insurance protections in place. In particular, nearly all had a Social Security retirement benefit that is fairly generous, especially to lower-income workers and single-earner couples, and that can begin as early as age 62. Many older workers had accrued some defined benefit (DB) pensions, especially if they worked in the government sector or for a large corporation; indeed, in the government sector or in some union plans, many workers could retire at ages ranging from 50 to 60 with full benefits....

  5. 2 Recent Developments in Life Annuity Markets and Products
    (pp. 37-56)

    The change in the nature of predominant retirement plans in the United States, in particular, the movement from traditional defined benefit (DB) pension plans to individual account plans like 401(k) and hybrid plans, is well known. The former generally pay out benefits as a life annuity, while the latter pay out benefits as a lump sum. But plan sponsors, financial advisors, and public policymakers are just beginning to consider how to assist plan participants in the distribution phase as more and more workers retire with individual accounts as their sole formal source of retirement support outside of Social Security.


  6. 3 Longevity-Insured Retirement Distributions: Basic Theories and Institutions
    (pp. 57-84)
    Jeffrey R. Brown

    The method of funding retirement in the United States is in the midst of a major transition, one that is placing greater responsibility on individuals for managing their own retirement assets. The past two decades have witnessed a large shift away from defined benefit to defined contribution pension plans, a trend that appears likely to continue for the foreseeable future. According to some estimates, the average retiree’s balance in 401(k) plans alone will rise tenfold over the next thirty years and will rival Social Security as the major source of retirement wealth.¹

    While defined benefit and defined contribution plans differ...

  7. 4 Who Prefers Annuities?
    (pp. 85-102)
    Tomeka Hill

    As baby boomers retire, they must decide how to receive payouts from their defined benefit (DB) plans, defined contribution (DC) plans, and personal savings. Many pension experts believe that life annuities are the best way for retirees to ensure that they do not run out of money. But most people do not choose annuities, and experts are wondering why. To find out, Watson Wyatt Worldwide asked a national panel of older workers and recent retirees about their payout and risk preferences, retirement decisions, and related issues. Our observations are based on special surveys sponsored by Watson Wyatt, the2007 U.S....

  8. 5 Comparing Strategies for Retirement Wealth Management: Mutual Funds and Annuities
    (pp. 103-126)
    Gaobo Pang

    This chapter compares wealth management strategies for individuals in retirement, focusing on trade-offs regarding wealth creation and income security. Specifically, it compares the following six strategies: (1) systematic withdrawal from mutual funds, (2) fixed payout immediate life annuity, (3) immediate variable annuity for life, (4) variable annuity plus guaranteed minimum withdrawal benefit (VA+ GMWB), (5) mix of withdrawals from mutual funds and fixed payout immediate life annuity, one-time wealth split at retirement, and (6) mix of mutual fund withdrawals and fixed payout life annuity, gradual annuitization at certain ages.

    Systematic withdrawals from mutual funds usually give opportunities for greater wealth...

  9. 6 Optimizing the Equity-Bond-Annuity Portfolio in Retirement: The Impact of Uncertain Health Expenses
    (pp. 127-162)
    Gaobo Pang

    With the recent decline of traditional defined benefit (DB) pension plans, there has been a corresponding shift to defined contribution (DC) plans by many U.S. corporate plan sponsors. The Social Security (SS) system may also have reductions in its scheduled benefit payouts in order to move it to sustainable solvency. Because DC plans are typically self-managed by their participants and lack the withdrawal discipline featured in the life annuity distributions of SS and most DB plans, a legitimate concern arises that many retirees may run out of their DC funds or underconsume given that the length of life is uncertain....

  10. 7 Good Strategies for Wealth Management and Income Production in Retirement
    (pp. 163-178)
    Gaobo Pang

    Defined contribution (DC) plan participants need to select good strategies for wealth distribution in retirement. Broad options include self-management strategies, such as systematic withdrawals from mutual funds, and market products, such as fixed payout life annuities. Pang and Warshawsky (2009) recently examined the trade-offs of wealth preservation and income security for a variety of strategies and products. Here we focus on one particularly promising strategic approach: the combination of withdrawals from mutual funds with a series of immediate life annuity purchases. We examine the optimal split of wealth between them and the exact process of fund-annuity conversion. This analysis searches...

  11. 8 In Sickness and in Health: An Annuity Approach to Financing Long-Term Care and Retirement Income
    (pp. 179-214)
    Christopher M. Murtaugh and Brenda C. Spillman

    As the baby boom generation nears retirement, concerns are increasing as to how the larger and longer-lived cohorts that will be turning 65 over the next 20 to 30 years will finance their long-term care needs. Retirement health and income security policies typically are considered separately. Disability requiring long-term care is an issue that links the two because it can result in catastrophic costs but generally is not insured. Median family income for those age 65 or older in 1998 was $23,000 to $33,000 for married couples and $16,000 for unmarried persons (Social Security Administration, 2000). Although two-thirds of retirees...

  12. 9 Tax Issues and Life Care Annuities
    (pp. 215-240)
    David Brazell and Jason Brown

    A life care annuity (LCA) is an integrated insurance product consisting of life annuity and long-term care insurance (LTCI) segments. It addresses inefficiencies in the separate private markets for its component parts—adverse selection, which increases the price of life annuities, and strict underwriting, which restricts the availability of LTCI. In this chapter, we argue that, by lowering prices and increasing availability, an LCA may be more attractive to retirees making critical choices in financing their lifetime retirement spending and insuring against the bankrupting contingency of severe disability. This attractiveness, in turn, may decrease pressures on government social insurance and...

  13. 10 Recent and Proposed Legal and Regulatory Developments Affecting Retirement Plan Distributions, Especially Annuities
    (pp. 241-256)
    Jeffrey R. Brown

    This chapter is composed of two main sets of sections. In the first set, recent legislative and regulatory requirement changes affecting plan distribution are reviewed. In particular, the section explains changing rules for lump-sum calculations for distributions from pension plans, joint-and-survivor annuities, fiduciary obligations on sponsors of plans with annuities, and minimum distribution requirements affecting life annuities. In the second set, various public policy ideas in this area are discussed, and their pros and cons are evaluated.

    Employer-sponsored defined benefit plans that offer retiring workers a lump sum or an annuity option should offer a different pattern of loading than...

  14. Index
    (pp. 257-268)