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Making Your Nest Egg Last a Lifetime

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  • Anthony Webb

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...

Suggested Citation

  • Anthony Webb, 2009. "Making Your Nest Egg Last a Lifetime," Issues in Brief ib2009-9-20, Center for Retirement Research, revised Sep 2009.
    • Handle: RePEc:crr:issbrf:ib2009-9-20
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    File URL: http://crr.bc.edu/briefs/making-your-nest-egg-last-a-lifetime/
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    References listed on IDEAS

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    1. Robert J. Shiller, 2005. "The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation," Cowles Foundation Discussion Papers 1504, Cowles Foundation for Research in Economics, Yale University.
    2. 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.
    3. Wolfram Horneff & Raimond Maurer & Olivia Mitchell & Michael Stamos, 2007. "Money in Motion: Dynamic Portfolio Choice in Retirement," Working Papers wp152, University of Michigan, Michigan Retirement Research Center.
    4. Robert J. Shiller, 2005. "The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation," Cowles Foundation Discussion Papers 1504, Cowles Foundation for Research in Economics, Yale University.
    5. Thaler, Richard H, 1990. "Saving, Fungibility, and Mental Accounts," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 193-205, Winter.
    6. Robert J. Shiller, 2005. "The Life-Cycle Personal Accounts Proposal for Social Security: A Review," NBER Working Papers 11300, National Bureau of Economic Research, Inc.
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