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Annuity and IRA article in NY Times- Image via CrunchBase

Annuities are private insurance contracts that take the place of the traditional defined benefit pension plan.  Pension plans, like Big Iron, are a thing of the past, yet the need remains.  Many large corporations that offered pensions have phased them out, or bankrupted them out.  This is a horrible scenario and the ultimate in concentration of risk.  Imagine working at GM for 40 years, accumulating GM stock, expecting a GM pension… then going thru 2008, with GM bankrupt, your stock wiped out, your pension in tatters.  It’s depressing to think about.

Diversification is KEY!

Anyway, the IRS and congress has never made things easy, especially in regards to 401k and retirement accounting.  But there is hope.  A recent article in the  NY Times indicates that new regulations may actually make life easier and cheaper to replace your 401k assets with pension-like income from an annuity-

On Thursday the government said it had some new tools to deal with the problem. The Treasury issued several new regulations intended to make it easier, and maybe cheaper, for middle-class people in retirement to transfer the money they accumulated in their 401(k)s into an annuity that would guarantee monthly payments until they die.

Specifically, the article discusses an interesting component of lifetime income planning, longevity insurance.  This is an annuity contract that has a long deferral period then kicks in to cover the ‘as long as you live’ portion.  For a 75 yr old retiree with assets and a managed portfolio account, sleep would be so much more sound knowing that that the ‘probability of failure’ you convinced yourself was acceptable at age 65 and was actually playing out like a worst case scenario was not a big deal.

If you put insurance- in its most basic sense- in place to insure you against failure, and have an income kicking in at say age 85, then continue to play markets in retirement, and loose… and your nestegg only lasts 20 years, you insurance annuity kicks in at 85 to carry the day.  This is a smart, hedged strategy.

Here’s another quote:

Longevity insurance consists of an annuity whose stream of payments does not start until the retiree is well into retirement — say, 80 or 85 years old. That is the point where policy makers think many will need the money, because they will have exhausted their savings or developed costly health problems. The insurance would kick in and supplement Social Security. Like Social Security, the longevity insurance payments would keep coming every month until the retiree’s death. But because the policy would pay nothing in the first 15 to 20 years of a person’s retirement, it would cost much less than a conventional annuity.

If you are interested, the entire article appears here.

It’s official- The government likes annuities!

 

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“For all time periods and for all portfolios, the addition of the annuity leads to a decline in the portfolio failure rates.”