Jittery investors who are fearful about outliving their savings may have another investment option to consider in their workplace retirement plans. The Treasury Department has issued new guidelines designed to expand the use of annuities inside 401(k) plans. Annuities are attractive to some investors because they offer the ability to build tax-deferred savings, can help to protect the money that you've already saved, and generate a steady stream of income in retirement.
"Life expectancies are getting longer. With that comes an increased risk of outliving one's retirement savings," says Denise Appleby, founder of Atlanta-based Appleby Retirement Consulting. "Annuities can help to prevent that from happening by providing lifetime income for retirees."
An annuity is basically an insurance contract in which you pay a financial institution a specific amount of money—either in a lump sum or a series of payments—and the company then invests your money and promises to pay you a regular income right away or in the future.
With an "immediate" annuity, you can generally start receiving payments in about 30 days. A "deferred" annuity enables you to receive payments at some point down the road. You put in a lump sum or build up funds over time (by contributing a monthly amount) then you convert that amount, or "annuitize" it, into a income stream.