According to a 2011 Retirement Survey from Wells Fargo & Company, 25% of middle class Americans say they will need to work until at least age 80 to live comfortably in retirement.1
With fewer companies offering pensions in this day and age, there is more reliance on money saved through 401(k) plans to provide income during retirement. However, since defined contribution plans didn’t become mainstream until the 1980s, we are only now witnessing the first wave of retirees expected to draw significantly from this type of plan – and it remains to be seen whether they will provide adequately for today’s longer life spans.
Given the ongoing state of our slow economy, we’re approaching somewhat of a crisis with millions of baby boomers standing at the precipice of retirement. As such, policymakers are thinking the employer plans could use a little tweaking to become a more viable – and reliable – source of income.
The U.S. Departments of the Treasury and Labor recently proposed new rules to boost the potential for employer-sponsored plans to last throughout retirement. There are three specific guidelines:
1. Make it simpler for defined benefit pension plans to offer a combination of lifetime income and a lump sum distribution – or “partial annuitization.” This would allow retirees to maintain a portion of their savings invested should they need an emergency sum, while at the same time convert the balance to an annuity stream of income that may continue paying out as long as they live.
2. Make it easier for retirees to convert part of their 401(k) plan to purchase an annuity stream of income starting at age 80 or 85. This is called a “Longevity Annuity.” The reason this matters is because, when assured that you’ll have enough money to last throughout your most senior years, you can use your other assets to budget for a shorter period of retirement – with perhaps a more robust lifestyle.
3. The guidance defines plan and annuity terms designed to automatically protect spousal rights without requiring spousal consent before the annuity begins. To date, how spousal protection rules apply has been unclear when an employee selects a deferred annuity within a 401(k) plan – and this has discouraged plan sponsors from offering annuity options before now.
[CLICK HERE to read the Treasury Fact Sheet, “Helping American Families Achieve Retirement Security by Expanding Lifetime Income Choices” from the US Department of Treasury; February 2, 2012.]
There are a wide variety of annuity contracts on the market – and none of them are simple. This is one product where the advice, “do not try this at home” may be prudent. To determine if an annuity is a good fit for your situation, and to figure out which one to choose – whether as part of an employer plan or one you own independently – it’s important to consult with an experienced advisor. Choices include immediate annuities (start paying out right away), fixed annuities (guarantee a fixed interest rate), variable annuities (rely on investment growth over time before paying out), and indexed annuities (earn a percentage of indexed returns with a guaranteed minimum2).
[CLICK HERE to read “Designing a Monthly Paycheck for Retirement;” from the Society of Actuaries; 2012.]
[CLICK HERE to read “Don’t outlive your savings: How annuities can help” at CNNMoney.com; February 2, 2012.]
If you’re interesting in learning more about how to convert your retirement savings into a reliable stream of lifetime income, please contact us.
1 Wells Fargo; Wells Fargo Retirement Survey, November 16, 2011.
2 Guarantees are based on the claims-paying ability of the issuing insurance company.
Source: Woods Blog Old