As all of us know, the idea of working for one company for 20 or 30 years is a dream most of won't ever realize in our lifetimes. Historically, if you worked for one company for your whole career, you could retire with a pension. A pension is really another similar term for the word annuity which means that you would receive a consistent stream of income for the rest of your life that you could not outlive. In many cases, you can also get a spousal option to have the annuity continue upon your death to your spouse even if for a reduced amount of income.
As pension plans have largely been replaced over the past 25 years with the 401(k) savings plan, the combination of employee/employer savings rates and overall rates of return have led many people to having a 201(k) at this point in their lives. With 'retirement' lurking in the not too far distant future, many people in their mid 40's to mid 50's are wondering just how they will recreate their paycheck during their golden years.
Annuities have been criticized by many people in the media because of supposed steep fees for income guarantees, fixed payments that could lose purchasing power due to future inflation, and complicated mechanics around locked in phantom income values versus actual cash values. But annuities can have an ace card over most other retirement investments: You can't outlive their guaranteed lifetime payments for you and possibly your spouse.
The Treasury Department on Thursday rolled out a proposal making it possible to buy "longevity" annuities with a portion of savings in employer-sponsored retirement plans, including 401(k) s. A separate proposal pushes partial annuity options for traditional pension plans. And a ruling issued on Thursday clarifies how protections for workers and their spouses apply to annuities in retirement plans (source: www.wsj.com)
The Government is currently looking at ideas like partial annuities and longevity annuities as well as spousal benefits to help people consider a more consistent way to drive income during retirement. My feeling is we don't need another Government proposal or bill to help people understand how these work. There are numerous companies today that offer quality products that can give you income guarantees in retirement. There are additional costs to take advantage for these programs, but once you hit your mid 40's, I think it can make sense to carve out a portion of your retirement assets with these types of programs due to the uncertainty of interest rates, the markets, and the economy.
Nobody likes to pay additional fees and costs, but every type of protection costs money. If you think about the $1000 to $2,500 a year most of you spend on car insurance to protect $50,000 to $75,000 in assets, would it make sense to do the same with a piece of your hard earned retirement assets? Before the Government starts to get involved in another retirement program, maybe they should fix Social Security first. Remember, we have only seen 10.4% of incomes going into this program over the past 14 months versus the normal 12.4%. With more people taking money out than they have money coming in, you may want to think about how you are going to recreate your paycheck. An annuity could be just the type of vehicle to make that possible.
Written by:
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc
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