Drawing down assets on a regular schedule after retirement is a standard premise of retirement planning but in practice, “many retired households do not draw down their savings systematically but rather hoard their financial assets,” says a white paper from the Brookings Institute.
It noted that one standard rule is to draw out 4 percent of assets per year, reflecting the “life-cycle” model commonly used in financial planning: that savings are built over a lifetime and then drawn out in retirement regularly in an amount that supports a comfortable lifestyle. That same notion underlies requirements for required minimum distributions from investment vehicles such as IRAs, it added.
“Among the households that have accumulated significant retirement assets, why do more of them not draw down those assets and enjoy a more comfortable or affluent retirement? A big reason is that retirees are fearful of running out of money, scared of an expensive illness, and worried about the need for end-of-life care. Managing these uncertainties is an important part of managing asset decumulation,” it says.
It adds that there are several potential ways to protect against those risks but retirees may shy away from each of them for differing reasons.
* Using assets to purchase annuities provides protection against running out of money but “means surrendering a large share of a household’s financial assets, leaving limited liquidity to address unexpected shocks and lesser wealth for bequests. Returns on annuities are mostly backed by bond holdings, and with the stock market apparently on an endless upward trend, retirees would often rather hold onto their assets invested in stocks.”
* Purchasing long-term care insurance can protect against costs of home care or institutional care but one in six people even as young as their fifties do not qualify because of an existing condition and “even those who do qualify generally do not buy the policies.” One reason, it said, is that Medicaid provides a base level of protection against long-term care costs, even though that applies only to those whose assets and income are below certain thresholds.
Background on TSP Withdrawals at ask.FEDweek.com
* Reverse mortgages allow homeowners to turn their home equity into cash, either in the form of a lump-sum payment or as an annuity, but suffer from a reputational problem. “Decades ago, these products earned a reputation for being fraudulent and carrying high fees. There have also been stories of heartbreak because elderly couples failed to understand the obligations they faced under the terms of their reverse mortgage and ended up losing their home and being evicted,” it said.