You’ve saved it, but how do you spend it?
Millions of Americans are well versed in how to save in their 401(k) plans – everything from contributing regularly to securing company matches – but they have no real plan for turning those savings into income that will last, a survey of more than 2,100 employees by Nuveen and the TIAA Institute showed. Workers correctly answered only about one-quarter of survey questions on retirement withdrawals, on average, and nearly half couldn’t answer a single question correctly on that topic. Only 19% of near-retirees have even thought much about how to withdraw retirement income from their 401(k) savings.
Withdrawal decisions are crucial during retirement. Without a plan, retirees could run out of money or end up budgeting so tightly that they leave too much on the table and don’t enjoy retirement to the fullest, experts said.
“With more than $8 trillion in assets spread across 725,000 plans serving 80 million active employees, 401(k) plans are the primary employer-provided retirement savings vehicle in the private sector,” said Brendan McCarthy, head of Nuveen Retirement Investing. “Yet despite that scale, too many Americans arrive at retirement without a clear strategy for turning their savings into income that will last. And that gap has real consequences.”
How Can Americans Calculate What to Spend?
There are many general rules and tools people can use to help ensure their retirement savings last. Some are:
4% rule: Withdraw 4% of your total retirement portfolio in the first year and adjust that amount each subsequent year to account for inflation. Historically, under this rule, a portfolio of stocks and bonds with steady returns lasts about 30 years assuming stable expenses.
4.7% rule: The updated version of the 4% rule, which some think has become outdated and too conservative. Critics of the 4% rule said it didn’t account for more diversified portfolios that include more than stocks and bonds and for the recently booming stock market.
Healthspan and lifespan: A person’s lifespan and healthspan, or the number of healthy years, can be used to determine what you can spend. With a signed HIPAA (Health Insurance Portability and Accountability Act) release from clients, Abacus Life can tap your medical records, find odds on people who match your health condition and medical history and provide you with the most probable lifespan and plan around that. People wary of signing over access to medical records can choose free online health tests like those at the American Academy of Actuaries or Abacus to get an idea of how long they might live.
These guidelines are helpful, but they still leave retirees uncertain their money will last as long as they need, said Surya Kolluri, head of the TIAA Institute, a think tank within financial services company TIAA.
“Nearly half of 401(k) employees underestimate how long they’re likely to live after age 65, and that misperception directly undermines their ability to plan for sustainable income,” he said.
“People need a guarantee. They can’t be uncertain. They need to be assured that I and my spouse are taken care of.”
What’s an Easier Way to Determine Retirement Income?
Given the difficulty 401(k) participants have understanding retirement and estimating longevity, Kolluri said, employers and retirement plan designers should provide more education and options to convert retirement money into income for employees.
An option Kolluri and his fellow researchers found that resonates with near-retirees is the ability to convert 401(k) money into a type of annuity that automatically provides lifetime income.
During UAW contract negotiations in 2023 at the Detroit Three automakers, striking workers wanted the return of pensions. They didn’t get them, as most experts predicted. Instead, they received the option to set aside a chunk of their 401(k) savings into a lower-cost annuity for a more predictable stream of income in retirement.
“If you buy lifetime insurance, you don’t need to calculate a withdrawal rate,” Kolluri said. “You always get money.”
But he also acknowledged that the future likely won’t turn singularly back to annuities: “The future will probably be hybrid, with some money in the market plus lifetime income.”
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. Subscribe to USA TODAY’s free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
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