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Opinion: Here’s A Way To Get Retirees To Spend Their Savings Responsibly

Opinion: Here’s a way to get retirees to spend their savings responsibly

Employers, academics, and policymakers all recognize that drawdown is the major challenge facing the 401(k) system.

Participants face the risk of spending their money too quickly and exhausting their assets or hoarding their balances and depriving themselves of necessities.

My view is that reluctance to spend is the greater threat for three reasons. First, people form an unnatural attachment to their pile of assets, which they have spent a lifetime accumulating. Second, people are fearful of end-of-life health and long-term care expenses. Third, many people want to leave a bequest to ensure their immortality. Thus, given the modest size of 401(k) balances, without some orderly drawdown mechanism many retirees could live in self-imposed deprivation.

With these concerns in mind, in 2014, the Department of Treasury in collaboration with the Internal Revenue Service (IRS) and the Department of Labor (DOL) issued guidance on how plans might incorporate auto-annuitization features into target-date funds (TDFs).

Under this arrangement, a fund will allow participants, say, age 50 or older to invest a portion of their assets in deferred annuity accounts. When the fund reaches its target date, it will dissolve, participants will receive an annuity certificate providing for immediate or deferred annuity payments, and the remaining portion of the participant’s investment would…

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