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Building Your Own Pension

Worried about lifetime income? New annuity options offer checks that last as long as you do

Remember pensions? Back in 1975, 85 percent of private-sector workers covered in a workplace retirement plan had one. Now it's closer to 30 percent. Unless you're in the public sector, your workplace retirement options are probably limited to a company 401(k)-type plan, which lays the responsibility for retirement squarely on you.

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That's a trend that has retirement experts worried. "The 401(k) alone was never really meant to be a complete pension plan for clients," says Dan Keady, director of financial planning for the financial-services organization TIAA-CREF. "Most people also had a defined benefit plan."

The solution, experts say, is to build a "personal pension" with a portion of your assets. To encourage people to do just that, the federal government recently proposed a host of regulatory changes to help Americans convert 401(k) assets into monthly checks.

These rules should make it easier to use part of your 401(k) stash to buy a longevity policy, a relatively new kind of annuity that kicks in at an advanced age. You could buy the annuity at retirement but agree to defer payouts until — and only if — you reach 80 or 85.

Why would you kiss your cash good-bye for 20 years — and maybe forever? Retirement experts tout longevity policies because they're an effective defense against the risk of outliving your money.

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For buyers, they can be a potent planning tool. You know your living expenses will be covered if you hit 85, which translates into peace of mind — and greater freedom to spend now.

But perhaps the biggest attraction of longevity policies is cost: They are far cheaper than their better-known cousin, the single premium income annuity (SPIA). Both are sold by insurance companies, but an SPIA is an immediate annuity — you turn over a wad of cash and start getting payments right away.

Longevity policies are a deferred annuity; they're less expensive because you're giving up control of your money for years, and you won't get a penny back if you pass away prematurely. MetLife says a 65-year-old man who wants $1,500 in monthly income could buy an SPIA for $272,000; a deferred longevity policy that pays the same amount starting at age 85 would cost just $52,000.

Longevity policies have been available for years for individual buyers, but they haven't been popular. One obstacle: Current tax laws make it difficult to set aside a portion of a 401(k) for an annuity.

Under the rules, people must begin withdrawing a specified amount from their accounts (called a required minimum distribution, or RMD) after they turn 70 1/2. The proposed changes exempt the annuity purchase from RMDs, which should make an annuity more attractive for people who want to minimize their withdrawals.

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Cristina Martin Firvida discusses the effects of pension reform with Lark McCarthy on Inside E Street.

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