New Treasury Rules May Provide Long-term Retirement Planning Benefits


As more and more Baby Boomers are entering their golden years and living longer, long-term retirement planning is becoming more of a common occurrence. As such, the United States Treasury Department and the IRS have recommended the expansion of deferred income annuities in 401(k) and IRA retirement plans.

To understand the benefits of this, it is important to understand what “longevity annuities” are and how they can be an assets when it comes to long-term retirement planning.

Longevity Annuities Equate Income for Life 

An annuity is still a voluntary option when it comes to retirement planning. It is a tool that can be used to insure a person does not outlive his or her retirement savings. A longevity annuity contract can be purchased in addition to regular retirement contributions. It is actually a supplemental investment that protects a person later in life. However, it doesn’t necessarily cost any more money than what has already been contributed to retirement.

Longevity annuities have been around for a very long time, but in the past they were harder to take seriously as an option for a practical and steady source of income. It used to be that a person had to make a minimum taxable contribution every year from a retirement plan beginning at age 70.5. With the new Treasury rules, it can be paid with a one-time lump sum transfer from a retirement fund–up to 25% of the fund’s account balance. The revised rules also lower the rates at which annuities are purchased, making them a more affordable option for long-term income planning.

Once an annuity begins paying out, it is a taxable source of income until the beneficiary passes away. Longevity annuities begin paying out later in life and are sometimes referred to as deferred annuities as opposed to an immediate annuity that begins paying out as soon as you purchase or contribute to it.

Annuities Help Prevent Overcompensation  

The typical employer sponsored retirement plan involves a target retirement date. Unless a person specifically elects a different package, the target date fund has been most people’s automatic investment path. A target date fund sets a date for retirement and then will automatically shift from building equity to providing a fixed income. This process can be somewhat gradual in the years leading up to the target retirement date.

For many people this is the end of retirement planning. They contribute monthly to a retirement fund, and their employer matches them to a certain percentage. In this scenario, many retirees end up overcompensating the small amount they receive from their retirement fund by living well below their income level. They do this to prevent their money from running out.

Because an annuity is set to continue all the way through to death once payments begin, there is no need for a person to worry about outliving his or her money.

While there is never anything unwise about living within a person’s means, longevity annuities are a way for funds to continue to grow and be dispersed at a later date. Because an annuity is set to continue all the way through to death once payments begin, there is no need for a person to worry about outliving his or her money. It can be thought of as a retirement insurance plan of sorts; it ensures that the annuity owner has a steady source of income should he or she live beyond the money in a retirement fund or in the event a major medical expense arises, depleting the funds early.

With the Treasury Department’s guidance, longevity annuities are encouraged to become a default option within retirement packages, but they can still be individually chosen based on personal planning preferences. By incorporating these annuities into typical retirement packages, individuals are able to keep a portion of their retirement savings intact while still pursuing long-term protection.

A Breakdown of What a Typical Longevity Annuity May Look Like

To gain an even better understanding of what an annuity would look like, it is helpful to use the example of a typical default employer-sponsored retirement package that will begin paying out once retirement begins. If a person has accumulated $200,000 in such a retirement fund, they can take up to 25% of that ($50,000) and open a deferred annuity contract. That deferred annuity would then be invested and grow to term. If a person opened a $50,000 annuity contract at age 60, from age 80 on, the person would receive roughly $17,500 a year for the rest of life.

Under the old Treasury rules, a person who wanted to open an annuity would typically wait until their retirement began and then would make monthly payments to the annuity fund. This way was not attractive to many people who limit their expenses when living in retirement. A longevity annuity is a good option for someone who looks at their retirement fund and knows they can comfortably live for 10, 15, or even 20 years from what is in it. Rather than having a large sum of money with no way of knowing how long it needs to last, a longevity annuity option allows retirees to plan ahead more effectively as they are armed with concrete numbers rather than guesses.



Pozen, Robert. (October 17, 2014).New Treasury Rules Help Long-Retirement Planning. Harvard Business School. Working Knowledge. Available at Last Visited March 23, 2016.

U.S. Department of the Treasury. (10/24/2014). Treasury Issues Guidance to Encourage Annuities in 401(k) Plans. Press Center. Available at Last Visited March 23, 2016.