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Combining Multiple Retirement Income Options Can Help 401(k) Plan Participants Obtain Lifetime Income

GAO-16-433, August 2016

American workers are primarily saving for retirement through their 401(k) plans, and most will likely need assistance making complicated decisions about how to use their savings throughout retirement. A number of options may be available within a 401(k) plan.

This interactive model illustrates a few strategies that combine:

In this model, the systematic withdrawals and annuity are funded from the hypothetical retiree’s 401(k) account balance. The model demonstrates how different combinations of retirement income options might change the amount and security of protected income. For example, the model illustrates how someone retiring at age 66 can use systematic withdrawals to delay claiming Social Security retirement benefits until age 70, illustrating the late retirement trade-off between a higher level of secured income and more savings left for other needs.

Adjust the profile below to view different strategies for combining options that can help participants obtain lifetime income in retirement. Once the profile is complete, the chart will automatically populate. Place your cursor over the plotted areas on the graph to show more detailed information below the graph.

Complete the profile at retirement:
Gender: Gender affects retirement income planning because women tend to live longer than men; therefore, they are likely to draw a greater number of payments over their lifetimes. One effect is that, where insurers are allowed to take this difference into account, women generally receive lower periodic payments from the annuity than men receive for a given dollar amount spent on the annuity purchased. Annuities offered inside a 401(k) plan would not differentiate pricing by gender; however, this model calibrated annuity pricing offered outside of plans, where gender-distinct pricing is allowed.

Age at retirement: Illustrations are based on key Social Security claiming ages. Age 62 is the earliest retirees are allowed to claim benefits; age 66 is the full retirement age for people aged 61 to 73 in 2016; and age 70 is the latest age at which Social Security benefits are increased for delayed retirement. By delaying retirement income withdrawals, retirees can expect to receive higher payments. Retirees can also increase the likelihood that their savings will last throughout retirement if they begin withdrawals later.

Social Security claiming age: Claiming Social Security at a later age results in higher monthly benefit payments. Age 62 is the earliest that participants are allowed to claim retirement benefits, age 66 is the full retirement age for people aged 61 to 73 in 2016, and age 70 is the latest age at which benefits are increased for delayed retirement. Retirement benefits are reduced if they begin before the full retirement age and increased if they begin after the full retirement age (but not after age 70).

Inflation-adjusted monthly retirement income*

*The projected income illustrated in this model has been discounted to its value at the beginning of 2016 using an assumed annual inflation of 2.25 percent. Due to rounding, the amount of total monthly income shown may differ from the sum of the combined retirement income options by $1.

Disclaimers: This retirement model should only be used for illustration purposes as it does not represent specific annuity quotes or rates from an insurer or other financial institutions, nor does it include many of the individual circumstances that may be considered. Moreover, conclusions drawn from the use of this model should not be taken as an endorsement or financial advice about retirement income options available in 401(k) plans or Social Security claiming strategies.

The 401(k) account balance options modeled here are for illustrative purposes only and are not intended to represent actual account balances held by 401(k) plan participants as of publication. As such, the amount of income illustrated by this model also should not be considered to represent what 401(k) participants could generate with their savings as of publication.

This retirement model illustrates how multiple retirement income options can be combined to help 401(k) plan participants obtain lifetime income. Systematic withdrawals are structured to provide a constant level of total expected income, including all modeled sources of retirement income and adjustments for inflation. The illustrated withdrawals assume that account balances earn a 3 percent real rate of return each year and that savings are exhausted at age 100. The model does not reflect potential investment risk associated with the return assumption. In addition to potential underperformance, risk factors like the sequence of investment returns—the order in which above- and below-average investment returns occur—can affect how long savings will last while withdrawals are taken.

This retirement model assumes retirees live to age 100. Alternative longevity assumptions will change comparisons of the illustrated strategies. For example, fixed immediate annuity purchases generally appear more advantageous with longer assumed lifespans.

Notes: This retirement model simplifies the many factors and options that 401(k) participants can consider to obtain lifetime income in retirement. For example, the retirement model does not take into account a 401(k) plan participant’s access to other sources of retirement income, such as defined benefit plans, spousal benefits, or other retirement income options that may be available. Nor does it take into account the effects of economic and demographic risks on the security of the illustrated amounts of income. For example, a risky investment portfolio may produce less than a 3 percent real return, or retirees may live longer than the assumed retirement age. In either case, the illustrated retiree would have an income shortfall relative to the illustration. Further, the model does not consider Required Minimum Distribution (RMD) requirements that begin at 70 ½ or the tax implications of various retirement income choices and Social Security claiming strategies.

Social Security benefit amounts were obtained by using Social Security Administration's Social Security Quick Calculator to calculate benefits: The calculated Social Security benefits assumed historic wage growth equal to the growth of national average wages (using the Average Wage Index) through 2015, which is assumed to be the final year of earnings for the illustrated retirees.

401(k) plans generally offer participants only one distribution option, a lump sum payment. Although some 401(k) plan may offer other options to participants, most plans in our review did not offer annuities or withdrawal options. According to our non-generalizable questionnaire responses from 401(k) plan record keepers, about a third of plans offered a withdrawal option, and about a quarter offered an annuity option (for details, see GAO-16-433).

About this report: This retirement model is a part of 401(K) PLANS: DOL Could Take Steps to Improve Retirement Income Options for Plan Participants. The full report is available at:

About this methodology: In the development of this model, GAO consulted with our actuaries and two external reviewers who have expertise in retirement income and annuity pricing. See Appendix I of GAO-16-433 for a detailed description of our scope and methodology.

About these data: We obtained annuity prices from an annuity shopping platform provider who provided quotes averaged from multiple annuity providers as of January 2016. Annuities offered inside a 401(k) plan or in retail markets may be rated differently than those available through annuity shopping platforms. For example, annuities offered inside a 401(k) plan would not differentiate pricing by gender, and retail market pricing may reflect differences in the cost of distribution or the potential pool of annuitants. The annuity payments represented here are for illustrative purposes only and should not be considered as quotes or endorsements of a particular insurance product.