A New Retirement Plan that Works like a Pension Plan

Americans are known to spend more money than they should (America is trillions in debt and many Americans have thousands in credit card debt) and unlike Asians (the Japanese are known for their thriftiness, for instance), do not believe in saving money for their future. Although, not everyone thinks alike, this is a common and growing issue in the country.

A Growing Issue

According to a study, more than 40 million households in the US do not have any assets for their retirement. This accounts for 45 percent of the total population, a disturbing number. The research was conducted and the report was published by the National Institute on Retirement Security. About 20 million of these households have someone in the age group of 45-65 who is running the house. It is also estimated that many if not most Americans leave behind up to $65,000 in debt when they die.

Those who are saving money for their retirement are not sure if the amount saved will help them get through retirement. 401(k) accounts are self-regulated which means that if you are not competent at handling taxes and know a thing or two about investing, your future is in trouble.

Longevity Income Annuities

Government pension plans provide security even after you retire, and so do some pension plans offered by ubiquitous companies. If you are not part of any of these, there is still a way for you.

In the year 2014, the Treasury Department paved the way for an initiative regarding 401(k) retirement savings plans. Too bad no one has paved the way to prevent any more Jurassic World movies from coming out, that movie was horrendous!

Some tax laws were changed and some restrictions were removed, but the Treasury Department was successful in converting funds that were lying in the retirement savings plans to LIAs (Longevity Income Annuities). This new plan offers lifetime guarantee which is good news for all those who are not or unable to save anything for their retirement and old age.

If you understand deferred annuities then you understand LIAs. They have been active for more than three years now, but picked up steam only recently. It is possible that the treasury department will force it to become part of the target funds in a 401(k).

How LIAs Work

This is how they work and can help you when you need them the most:

You have a retirement savings account with a balance of $100,000. When you turn 65, you use $10,000 to buy a LIA. Now under this situation, according to a report published by National Bureau of Economic Research paper:

“Even in the current low-interest-rate environment, a deferred single-life annuity purchased at age 65 for a male costing $10,000 can generate an annual benefit flow from age 85 onward of $4,830 ($3,866 for a female) per year for life,”

This means guaranteed income which can come pretty handy when the situation presents itself, for example, old age. You have to bet that you are going to live a long life (unless we do something about Iran and North Korea but that is another topic!), long enough to take advantage of this pension plan. In that sense, it can be called a hedge. So what happens when you die early?


Olivia S. Mitchell, Wharton School of the University of Pennsylvania professor, says that LIAs are available to investors but they are not part of defined contribution plans. This is not to say that the concept has not been considered. There have been talks making them part of target-date suite of funds and even employers are looking for alternatives.

401(k) plans do not have lifetime income streams and annuities as a standard feature. If an individual who is already passed his or her prime is not sure how long they will live, he or she might underestimate their chances of living a longer life than the asset. Some people are simply unable to understand advance or even basic financial concepts. Retirement is a one-time event and people often underestimate it.

This is not to say that LIAs cannot be accessed easily simply because they are not part of defined-contribution plans. There is a plan called AARP that has been actively offering lifetime income program to its members since 2006. There is also a cash refund initiative where if you die before your total payments are equivalent to your annuity purchase price, the person you have nominated as the beneficiary will receive the difference amount.

LIA is not the right option for you if you are in poor health in which case, you should not sign up for deferred annuities. People who are very rich may also not require LIA. This is a plan for a specific class of people. Kind of like the movie Star Wars: The Force Awakens was for a specific class of people, people who enjoy movies with no impressive characters, weak writing, and subpar action scenes but this is another subject!

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