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Making Your Nest Egg Last a Lifetime

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  • Anthony Webb
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    Abstract

    Media attention on retirement security generally focuses on the need to save enough to enjoy a comfortable retirement. However, accumulating a nest egg is no longer the only significant challenge – the other is managing one’s nest egg in retirement. In contrast to previous birth cohorts who often received a lifetime income from a defined benefit pension plan, in today’s 401(k) world retirees must choose how to convert their accumulated savings into a monthly paycheck. One straightforward solution to the drawdown challenge is an immediate annuity, which turns a lump sum of income into a lifelong payment stream. However, for various reasons, such annuities have not proven broadly popular. Therefore, this brief examines several alternatives. All such strategies involve a trade-off between maximizing consumption and minimizing the risk of running out of money. Calculating the optimal strategy is really hard – maybe impossible. But, despite the complexity of the problem, some strategies are clearly superior to others...

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    File URL: http://crr.bc.edu/briefs/making-your-nest-egg-last-a-lifetime/
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    Bibliographic Info

    Paper provided by Center for Retirement Research in its series Issues in Brief with number ib2009-9-20.

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    Length: 7 pages
    Date of creation: Sep 2009
    Date of revision: Sep 2009
    Handle: RePEc:crr:issbrf:ib2009-9-20

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    1. Jeffrey R. Brown, 2007. "Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning," NBER Working Papers 13537, National Bureau of Economic Research, Inc.
    2. Horneff, Wolfram J. & Maurer, Raimond H. & Mitchell, Olivia S. & Stamos, Michael Z., 2007. "Money in motion: Dynamic portfolio choice in retirement," CFS Working Paper Series 2007/21, Center for Financial Studies (CFS).
    3. Robert J. Shiller, 2005. "The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1504, Cowles Foundation for Research in Economics, Yale University.
    4. Thaler, Richard H, 1990. "Saving, Fungibility, and Mental Accounts," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 4(1), pages 193-205, Winter.
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