For retirees who fear outliving their money, longevity annuities may offer some relief.
A type of deferred-income annuity, which allows investors to pay an upfront premium in exchange for a stream of payments starting at a much later date, as much as 10 to 25 years into the future. The initial cost of these annuities is much lower than an annuity that starts paying immediately. These deferred-income annuities allow investors to make sure they have income in old age, something that's a particular concern to the growing number of Americans whose retirement accounts consist primarily or entirely of defined contribution plans like 401(k)s or IRAs rather than pensions, which provide a fixed income.
A recent paper published by the Brookings Institution notes that several studies have shown that longevity annuities could "markedly improve retirement well-being" for retirees.
That may help explain why the Obama administration has taken several steps recently to increase annuity options for retirement savers.
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Last July, the Internal Revenue Service completed rules that allow people to put the lesser of 25 percent of their IRA assets or $125,000 into a so-called qualified longevity annuity contract, or QLAC. Then in October, the Treasury Department and the IRS approved guidance making it clear that employers can offer deferred-income annuities in target-date funds that are used as default investments in employer-sponsored retirement plans.
Now President Barack Obama's proposed 2016 budget would give employees more flexibility if they do choose to include annuities in their retirement plans. Under a provision, if an employer-sponsored retirement plan decided to offer an annuity investment within the plan, but then later changed its mind, participants would be eligible to roll over the annuity within their plan to an IRA or other retirement account via a direct rollover. The distribution would not be subject the additional 10 percent penalty on early withdrawals.
The proposal would be effective for plan years beginning after Dec. 31, 2015.
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Chances of adoption: Good. There's no requirement that employers offer annuities, nor additional expenses associated with this provision.
What advisors are saying: Given the steps the administration has taken to increase annuity options within retirement accounts, "this provision seems like the next logical step," said Jeffrey Levine, a CPA and an IRA technical consultant with Ed Slott & Co.
For more information on other provisions that could affect you, click here.