In a new report from the Government Accountability Office (GAO), experts recommended that middle-income retirees convert a portion of their savings into an inflation-adjusted annuity or opt for an annuity instead of a lump sum from an employer sponsored defined benefit (DB) plan. They also recommended that Americans delay taking Social Security benefits until at least full retirement age.

But that’s not what most Americans are doing.

Only 6% of Americans retiring with a 401(k) or other kind of defined contribution (DC) plan chose or bought an annuity at retirement from 2000 to 2006.

Nearly 73% of Americans who become eligible for Social Security took benefits before age 65 from 1997 to 2005. Only 14% took benefits the month they reached full retirement age, which varied from age 65 to age 66. This means that nearly half passed up from 25% to 33% in extra monthly income they could have had by waiting.

U.S. Senator Herb Kohl, who requested the study, said, “This report shows that many Americans will need to save much more or work longer in order to avoid the very real risk of outliving their savings.”

The report discussed proposals to encourage plan sponsors to offer annuities and provide estimates of lifetime annuity income on benefit statements.

However, the current annuity market doesn’t seem likely to solve the nation’s retirement problems. As the report notes, in 2008, if all IRA and other kinds of financial assets owned by those age 66 and up had been spent on fixed annuities, they would have covered only small portion of the group’s household income.  And buying fixed annuities would be a big change in how Americans use insurance today. In 2009, sales of fixed immediate annuities for retirement came to $7.5 billion, only some 3% of total sales. Few people who buy deferred annuities, which can be converted to a lifetime income stream at a later time, actually do so.

Meanwhile, the age when people quality for their full Social Security benefits is gradually increasing from age 65, beginning with retirees born in 1938, to 67 for those born in 1960 or later.

The report recommended that retirees withdraw no more than 3% to 6% of their savings in retirement, with adjustments for inflation.

In what may be good news, many people aged 65 or older work. In 2010, more than 29% of Americans aged 65 to 69 worked at least part-time and nearly 7% aged 75 or older were employed.

An estimated 3.4 million people aged 65 or older in 2009 had incomes below the poverty level. Nine percent of seniors lived below the poverty level, compared to 14.3% for Americans of all ages.


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