Lots of 401(k) cash, but how best to make it last?

Even if you’ve socked plenty of money away in your 401(k) plan and invested it carefully, some of your toughest decisions lie ahead. And don’t expect much help or clarity from the government or your employer.
Strategies for drawing down lump-sum accounts in retirement – more important than ever in the 401(k) era – have received little attention from policymakers. For retirees, choices about how to spend a life’s worth of savings are fraught with tricky calculations about financial risk, taxes and death.
Outliving investments are a major concern for a baby boomer generation that includes the first retirees leaning heavily on 401(k)-style defined-contribution plans. They’re learning on the fly to do what pension managers did for their parents.
That’s challenging because the standard formula for squirreling retirement savings into bonds or certificates of deposit doesn’t necessarily work in an era of increased longevity and depressed interest rates. American men who reach age 65 will live another 17.9 years on average, while women will live 20.5 years, according to 2012 data released this month by the Centers for Disease Control and Prevention.
The government, which helps workers accumulate money in tax-deferred accounts, offers little guidance for when it should be spent. The main requirement – annual distributions from tax-advantaged accounts – is designed to deplete the money, not to make it last.
President Barack Obama has proposed eliminating the required distributions for people with account balances of less than $100,000, a plan that would simplify the system and save taxpayers $484 million over the next decade. That proposal has stalled in the broader debate over revamping the U.S. tax code.
Another issue is that the minimum distribution tables, which can be altered without congressional action, haven’t been updated since 2002. Since then, average life expectancy at age 65 has increased by 10 percent for men and 7 percent for women.
“People are undercalculating the level of risks and longevity they need to save for,” said Sri Reddy, head of full-service investments at Prudential Financial Inc. “The age-old question that people are often asked and they seldom have the answer to is: When are you going to die?” •

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