Posting by Fabricia Edwards, CPA
P: 301.272.6054 | E: edwardsf@bbcpa.com

During the past few years, the US government has issued incentives for Americans to save more for retirement, including opportunities for automatic enrollment in 401(k) and other retirement savings plans.  Unfortunately, many Americans are still not saving enough money for retirement.

As life expectancy increases and retirement periods lengthen, Americans are at risk of outliving their retirement assets.  This is known as longevity risk.  Research has shown women are especially susceptible to longevity risk because their life expectancy exceeds that of men (for example, a 65 year old woman is projected to have an even chance of living past age 86 while her male counterpart is projected to have an even chance of only living past age 84).  It is hard to predict life expectancy, but it is critical to improve retirement security, and most importantly, learn how to budget savings.

On February 2, 2012, the Internal Revenue Service issued proposed regulations that will help Americans manage retirement savings by encouraging life annuity options that provide a guaranteed stream of lifetime income.  One of the regulations makes it easier for defined benefit pension plans to offer combinations of lifetime income and single-sum cash payments (REG-110980-10). Another regulation includes a modification to the current required minimum distribution rules in order to help participants in tax-qualified defined contribution plans to purchase a deferred annuity that is scheduled to begin at 80 or 85 years old using a portion of the participant’s account (REG- 115809-11).

These proposals will enable employees who receive lump-sum cash payouts from their employer’s 401(k) plan to transfer some or all of those amounts to the employer’s defined benefit pension plan in order to receive an annuity.  The longevity contracts will help retirees hedge the risk of drawing down their benefits too quickly and thereby outliving their savings.

Managing longevity risk is a challenge and building sufficient retirement savings raises legitimate concerns.  These proposed changes will help Americans establish strategies for managing retirement savings and increase financial security.  The IRS has scheduled a hearing on June 1, 2012 to review comments and other topics related to the new regulations.  Keep checking www.benefitplanaccounting.com for more updates on these and other retirement plan regulations.