The fear strikes when retirement becomes a realistic option: Will I run out of money?
The question is pressing since corporate America abandoned pensions for 401(k)s. The 401(k) puts the risk on employees, including how much to invest and how much to withdraw during retirement. Figuring out how to invest in a retirement savings plan was hard enough, but the uncertainty pales to calculating how much you can withdraw from savings each year.
The basic conundrum: Withdraw too much from retirement in the early years and you run the risk of exhausting your savings prematurely. Being too cautious means you won't live as comfortably as you could.
Since pensions aren't coming back, economists like the option of reducing income uncertainty with annuities. For example, with an immediate annuity you invest money with an insurance company and receive a fixed payment for life. Another possibility is advanced life deferred annuities. You invest a lump sum, say, at age 65, but payments don't start until you are 85. The upfront investment is much lower than with immediate annuities.
Private-sector annuities aren't popular. They are expensive. People are reluctant to give up control of their savings. Retirees already participate in an annuity — Social Security. Since benefits are at least 76% greater at age 70 than at age 62, retirees could use their savings to delay filing for Social Security.
A recent study by the Center for Retirement Research at Boston College tackled the question of the best way to annuitize 401(k) savings: An immediate annuity? A deferred annuity? Or an option they propose: Set up a regular 401(k) payment schedule that allows participants to delay their Social Security filing.
For the typical household, they found the 401(k) "bridge" to Social Security came out on top. The study reinforces the insight that one of the best ways people can bolster their finances in retirement is to plan on earning enough income so that it's practical to delay filing for Social Security. Working longer — often with part-time work — shores up the household balance sheet for the long haul.
Of course, many older workers find it hard to land another job if they are laid off. Nevertheless, two critical pillars when it comes to retirement planning are working longer and filing for Social Security later. Both strategies will pay off better for many people than buying an immediate annuity or a deferred annuity.
Chris Farrell is senior economics contributor for "Marketplace" and Minnesota Public Radio.