Once upon a time, in a galaxy far, far away, concerned elected officials cared about the retirement needs of their many millions of citizens.
But those days are over.
Today, retirement security continues to be an elusive goal for millions who will likely never be able to retire and enjoy the quality-of-life comfort level they had in their working lives.
This is intentional. Republicans and the potent financial services lobby have derailed every effort to make retirement more accessible and financially secure.
Take the issue of longevity income annuities, which were introduced by the U.S. Treasury and the IRS on Feb. 12, 2012, by then-Treasury Secretary Tim Geithner. The move by the Treasury Department and Geithner was unexpected, but the basic idea remains very valid.
The Treasury believes that a deferred income annuity allows you to invest today and grow your account without paying taxes on the gains. The goal is to generate a larger income stream past retirement (often age 65.)
These annuities give private-sector defined-contribution plans a “pension-like option” and address Americans’ living longer. The annuities decrease a person’s chances of outliving their retirement savings. According to Fidelity, this is a genuine concern given medical advances and the low average 4011(k) retirement savings most Americans have: $100,000 as of December 2016. Regarding how Americans gauge their financial security, a 2016 study by EBRI found that only 21% of Americans were “very confident” about having enough money for a comfortable retirement.
These are not great numbers, so the Treasury’s plan to make it easier to get lifetime income plans in retirement is important. The problem is that these annuities are expensive and are being used less, mainly due to tax considerations. Treasury wanted to change the tax rules regarding the start date of deferred annuities, among other things.
Today, retirement security continues to be an elusive goal for millions who most likely will never be able to retire and enjoy their quality-of-life comfort level that they had in their working lives.
As it stood, deferred income annuities were unavailable for IRA transfers if the deferral period the owner chose went past the start of their required minimum distribution (RMD) age (70-1/2). To resolve this, Treasury proposed that as long as the deferred income longevity annuity met specific requirements, it would be considered a “Qualified Longevity Annuity Contract” and would satisfy the RMD rules even though annuity payments (distributions paid out) wouldn’t begin for another 15 or 20 years, or so.
Treasury noted that pension plans were declining in popularity (and still are today) and that lump-sum payments were becoming more popular. (These are the coveted “roll-overs” that financial advisors and fund companies love to get.) To provide these income streams, the Treasury advanced the idea of allowing employers and individuals to buy privately issued longevity annuities in their 401(k)s. This idea has worked well in the UK for decades.
“Specifically, the new tax rules now allow not only 401(k) plans but also individual retirement accounts (IRAs) and 403(b) tax-sheltered annuities for employees of nonprofit employers, to convert their retirement nest eggs into longevity income annuities (LIAs), according to Olivia Mitchell, professor of business economy and public policy, Wharton School.
“Longevity income annuities are income streams that begin paying out the buyer at some future age (e.g., age 85) and continue for life. They can be attractive to retirees wanting what would feel like a retirement paycheck. For instance, even in the current low interest-rate environment, a deferred single life annuity purchased at age 65 by a man (woman) costing $50,000 can generate an annual benefit flow from age 85 onward of $24,200 ($19,400 for a woman) per year for life.”
As noted in my book, (How 401(k) Fees Destroy Wealth), the proposed longevity annuities would help healthy people who want to take the chance they will live years past their retirement age (65) and if they have $100,000 or more to invest in the policy. (The odds of living to age 85 are 50-50 if you live to age 65).
Where Are Longevity Annuities Today?
The Treasury’s 2012 decision was designed to give individuals some degree of financial security so they would not outlive their retirement savings. But did the Treasury’s decision to ease tax considerations make deferred annuities more popular?
In a March 2015 story, New York Life Insurance says a 65-year-old couple could spend $100,000 on an immediate annuity and get $437 a month for the rest of their lives, but if they deferred taking the payments for 20 years until turning 85, they could get $2,682 a month for the rest of their lives.
That is quite a difference. But the big bet is whether you will live to age 85 and, if you do, what shape you will be in to enjoy the money. That is the largest, most important, and unanswerable question facing retirees. Do we choose the sure thing today or the possible deferred more excellent benefit years?
I would take the money today. The future is unknowable, and that is the major selling problem with deferred annuities. But it is important to remember that these annuities would not be needed if we still had pensions instead of 401(k)s.
