Reforming Retirement Income: Annuitization, Combination Strategies, and Required Minimum Distributions

American retirees face significant challenges when planning for lifetime retirement income. Specifically, they must devise financial plans that best balance the risk of outliving their assets with the need for flexibility and liquidity. Transferring a portion of retirement assets into life annuities, which pay a predetermined amount regularly for the life of the insured, has been shown to help retirees better achieve these goals. The Department of the Treasury has taken steps to incentivize particular types of partial annuitization, but broader changes to tax rules are needed to allow and encourage retirees to pursue the most efficient partial annuitization strategies.

The best strategy to produce lifetime retirement income while maintaining flexibility and liquidity from a retirement account is to use a combination of purchases of immediate life annuities and withdrawals from a dynamically changing investment portfolio. Federal tax law should encourage this broad strategy, providing individuals with financial security for the whole of their retirement.

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