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How best to annuitize defined contribution assets?

Alicia H. Munnell, Gal Wettstein and Wenliang Hou

Journal of Risk & Insurance, 2022, vol. 89, issue 1, 211-235

Abstract: 401(k) plans provide little guidance on turning accumulated assets into income. Insurance against the risk of outliving one's assets is available through immediate annuities, deferred annuities, and additional Social Security through delayed claiming. Under this Social Security bridge option, participants would tap their 401(k) for payments equal to their Social Security to delay claiming. This paper compares these three options in simulations against a baseline in which no assets are annuitized. In each option, assets not allocated to purchasing lifetime income are consumed following the required minimum distribution; robustness of results to optimal drawdown conditional on annuitization strategy is also assessed. The analysis finds that, when market and health shocks are included alongside longevity uncertainty, the Social Security bridge option is generally the best for households with median wealth. Wealthier households can benefit from combining the bridge option with a deferred annuity.

Date: 2022
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https://doi.org/10.1111/jori.12333

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