Millions of Americans approaching retirement face significant challenges in translating their 401(k) savings into sustainable income streams, according to a recent survey conducted by Nuveen and the TIAA Institute. The study, which included responses from over 2,100 employees, revealed widespread uncertainty about how to withdraw retirement funds effectively, with nearly half of participants unable to correctly answer any questions related to retirement withdrawals.

While many workers demonstrate a strong understanding of saving strategies—such as making regular contributions and securing company matches—few have developed concrete plans for spending down their retirement savings. Only 19% of near-retirees reported having given substantial thought to how they will convert their 401(k) balances into stable income during retirement years.

Experts emphasize the importance of well-informed withdrawal decisions, noting that retirees who lack a clear strategy may either exhaust their funds prematurely or adopt overly cautious spending habits, potentially limiting their quality of life. Brendan McCarthy, head of Nuveen Retirement Investing, highlighted the scale of the issue, noting that 401(k) plans hold over $8 trillion in assets across 725,000 plans serving 80 million active employees, making them the primary retirement savings vehicle in the private sector. Yet, despite these vast assets, many Americans enter retirement without a reliable income plan.

Several widely discussed guidelines exist to help retirees determine how much to withdraw annually, including the traditional 4% rule, which advises withdrawing 4% of the retirement portfolio in the first year and then adjusting for inflation. This rule is based on historical returns from a balanced stock and bond portfolio and is designed to make savings last roughly 30 years. However, critics argue the 4% rule may be too conservative in today’s diversified markets, citing an updated 4.7% rule that accounts for current market conditions.

Other approaches incorporate individual health and longevity estimates into withdrawal planning. Companies like Abacus Life use medical records, with client permission, to generate probabilistic lifespan estimates that aim to align spending strategies with expected healthspan and lifespan. For those hesitant to share personal health data, online tools offered by organizations such as the American Academy of Actuaries provide alternative methods for estimating longevity.

Despite these frameworks, confusion remains pervasive. Surya Kolluri, head of the TIAA Institute, noted that nearly half of surveyed workers underestimate their post-65 longevity, which undermines sustainable income planning. Kolluri emphasized that retirees need financial products that provide certainty, particularly options that guarantee lifetime income for themselves and their spouses.

One emerging solution gaining traction is the ability to convert part of 401(k) savings into annuities, which deliver predictable lifetime payments. This option was notably included in the 2023 contract settlements with the United Auto Workers and the Detroit Three automakers, where workers were offered the choice to allocate funds into low-cost annuities after pensions were not reinstated. Kolluri described lifetime income products as a form of “lifetime insurance” that removes the need for retirees to calculate safe withdrawal rates.

Although the shift toward annuities is gaining momentum, experts expect the future of retirement income to involve a hybrid approach combining market investments with guaranteed income streams to balance growth and security.