The feds have a plan for giving retiring employees a wider range of options in choosing how to structure their savings.
As things stand now, when a 401(k) plan participant retires, he or she has just two choices in where to put funds — take it all out in a lump sum or stash it all in an annuity.
The Treasury Department has announced a proposal to make things a little more flexible.
Many retirees find it difficult to determine how to formulate a plan for drawing down retirement assets over an uncertain, and potentially lengthy, time — in other words, to arrange their finances so they don’t outlive their money.
An annuity is a lump sum deposit to an insurance company, which then sends the individual a monthly check beginning on an agreed-upon date. In addition, the Treasury proposal would allow retirees to stash some of their funds in an annuity while keeping the rest of their cash liquid.
According to a report from the President’s Council of Economic Advisers, annuities can help to mitigate some of the risk faced by retirees. In particular, annuities protect retirees against the risk of outliving assets.
In 2007, the average 65 year-old male could expect to live an additional 17.2 years, but many will live much longer, the report says. Nearly a fifth of 65-year-old men could expect to live to at least age 90.
The proposal would also make it easier for retirees to use a limited portion of their savings to purchase an annuity that would begin paying out at an advanced age. Annuities of this type would provide an efficient way for 65- or 70-year-olds (or even younger savers) to address the risk of outliving their assets by purchasing a predictable income stream starting at age 80 or 85, for example.
To see a fact sheet on the new proposal, go here.
