Why It’s So Hard to Spend Down Your 401(k) in Retirement

Will I underspend my assets? Will I run out of money? These are questions that retirees face every day as they decide how much to withdraw from their retirement plans. In a recent MarketWatch article, Alicia Munnell expresses concern about the millions of Americans who will be entirely reliant on their 401(k) assets at retirement:

At a recent conference, retirement experts concluded that the lack of an easy drawdown mechanism in 401(k) plans was the major challenge facing the 401(k) system.


In 2014, the Treasury Department and the IRS issued guidance that made longevity annuities accessible to 401(k) plans and that enabled target date funds to include annuity contracts either as a default or as a regular investment option. But individual plan sponsors feel under siege by lawsuits and see little payoff to being innovative. At the same time, Congress is unlikely to mandate that annuities be a part of 401(k) arrangements.


So we are at a standstill. Millions of Americans — having been told that their retirement plans are automatic — will be handed a pile of money and told they are on their own. Neither academics nor policymakers really have any idea how they will behave. Recent studies show that people draw down their balances in retirement much more slowly than expected. But most of today’s retirees with a retirement plan have an old-fashioned defined benefit plan, so these studies have little to say about the likely behavior of those retiring entirely dependent on 401(k) plans.

Munnell is onto something here. Working with retirees every day, our firm has concluded that a major risk to retirees is their lack of of a retirement drawdown strategy. In other words, they need a coherent strategy that will help them turn their life’s savings into a regular pay check that will last as long as they do. Given that there are at least ten strategies for accomplishing this task, selecting and implementing a retirement drawdown strategy is easier said than done. Munnell cites a Boston College study that leads her to favor the RMD method, but this is only one strategy out of many and, depending on one’s unique set of circumstances, it may not be the most effective.

Nevertheless, Munnell is spot on when she points out the many hurdles one must overcome when deciding how best to spend down retirement savings:

First, people seem to have a psychological attachment to their pile; they have spent a lifetime building it up and may be reluctant to draw it down. Second, people are fearful about end-of-life health care needs and want to be sure they have enough money to cover their expenses. Finally, people seem to have a desire to leave a bequest — perhaps ensuring their immortality. So, without some guidance, chances are high that retirees will deprive themselves of necessities.

In light of these retirement complexities, the best course of action one can take is to educate one’s self on the many drawdown options that are available. It’s also a good idea to develop a retirement income strategy in the context of one’s larger financial circumstances. This is important because a strategy that’s right for one person may not be right for someone else. Working with a comprehensive financial planner who is a fee-only fiduciary can also be a good way to obtain a more comprehensive strategy that can help one avoid potential blind spots.

At Dunston Financial Group, we regularly assist both retirees and pre-retirees with their retirement income strategies, and we’re always happy to be a resource for retirees who are attempting to navigate this important and complex topic. If you would like assistance, you can reach us here.

First Seen over here: Why It’s So Hard to Spend Down Your 401(k) in Retirement


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