In the past, traditional pensions offered Americans guaranteed income throughout their retirement. Unfortunately, in more recent years, that guarantee has waned drastically. Instead, the average retirement plan must focus on investment accounts that you must manage on your own.
But is there good news on the horizon? Might we soon see a shift back to the old ways?
If regulations recently proposed by the federal government are any indication, the answer might very well be yes. These regulations, if accepted, would simplify the way in which annuities and other types of steady income can be added to existing 401k plans and IRAs. When you look at the current state of retirement and what these changes could mean to many retirees, it isn't difficult to see why the government is taking these steps.
Current Retirement Plans are Insufficient
One of the biggest issues facing retirees is trying to save enough money to live on throughout their retirement. With the average lifespan at an all-time high, citizens need to plan for more years of life than their ancestors ever did. Even an extra ten years of retirement planning can put quite a strain on a person's financial portfolio.
Many women are in an even worse spot. The average lifespan of a woman is higher than a man's, which means they will need to save for more years than their male counterparts. If that wasn't bad enough, women often have considerably lower retirement savings because they often spend less time earning full-time wages than men. This is often due to family and home obligations, which means women have often sacrificed their own well-being for the betterment of their loved ones.
New Proposals Tackle Longevity Risk
Many retirees are unsure how to plan for their future, because it's impossible to know how long they may live. The average lifespan of a man is 84, whereas it's 86 for a woman. Reaching these ages is becoming increasingly common. It isn't unusual for at least one spouse to live into his or her 90's. Even though you may have a nice chunk of money squirreled away in your retirement accounts, it's difficult for a person to know how much he or she should spend each year in order to make the savings last. This is especially true if they are in good health and may very well surpass the average lifespan. Many retirees in this situation believe they should only withdraw four percent of their savings each year, but some are unsure if that will be enough when added to Social Security.
Predictable Income
The best way to combat the above issues is to help retirees gain a stable income that they can count on. One way to do this is to utilize an annuity that is offered in conjunction with a 401k or IRA plan. This will allow retirement accounts to be pooled together, which means that the normal four percent withdrawal rate mentioned above will switch to something more along the lines of six or seven percent, determined by the type of annuity and the interest rate. The suggested regulations would make attaining this increased, steady income much easier.
Longevity Insurance
This is another option that the federal government is trying to improve. Depending on the insurance offered, the income doesn't begin until you're much older, like into your 80's. It is designed to assist people with a steady income past the point of the average lifespan. 401k plans and IRAs cannot offer this type of longevity due to their required minimum distribution rules.
Source: http://firstsecurityfinancialshow.com/blog/bid/151325/Bringing-Annuities-into-401k-s
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