ROBERT SIEGEL, HOST:
For Americans who are hoping to retire, here's one new idea of how to do it. The Treasury Department is proposing to make it easier to transfer money from your 401(k) into an annuity. The idea is stability. When you retire, you would have a guaranteed source of income that is not subject to the turbulence of the markets. Andrea Coombes joins us now from San Francisco to talk about this. She's personal finance editor for MarketWatch. Welcome to the program.
ANDREA COOMBES: Thank you.
SIEGEL: And let's start with a basic definition. What is an annuity, and how does it work?
COOMBES: They're very complicated, and there are many different types of annuities. But let's start at the basic level. If you buy an annuity and immediately annuitize that money, basically what you're doing is handing over a lump sum to an insurer, and that company, in return, promises you a monthly guaranteed income stream for life.
SIEGEL: And there are variations on this. You can decide I'll wait until I'm 80 years old and then start collecting an annuity.
COOMBES: That's right. You can buy it at 65, but wait to start payments until you're 85. Some people call that longevity insurance or a deferred income annuity. Other products are really more like investment vehicles. You're investing money in this sub-account. You know, likely, it would be some, you know, mutual funds, stocks and bonds and the like. You're investing that money, but you also get a guaranteed minimum payout, but it may actually rise if the market rises.
SIEGEL: And what is the federal government changing about all this, and why?
COOMBES: So I'll start with the why, actually. There's a lot of public policy aimed at getting people to save for retirement. And now, we're getting to the point of, OK, ideally you've saved a lump sum. You have this money sitting in an account, and you're about to retire, now, what are you going to do with it? And, of course, this all really came into relief during the financial crisis. A lot of people with a lot of money, you know, sitting in retirement accounts that just vanished.
So more attention is being paid now to how can people take this lump sum, turn it into an income stream in retirement, and that money's got to last a long time.
SIEGEL: Andrea, the changes that the Treasury is adopting or proposing, I know some of it is quite technical, but what's an example of something they would do that would make it easier to get money into annuities?
COOMBES: One is that for a company that still has a traditional pension plan and a 401(k), maybe that pension plan is closed, but if you're in the 401(k), and you're getting ready to retire, you would be allowed to roll the money over to the pension plan and get a really low-cost annuity through that pension plan.
SIEGEL: Now, in retirement or at a certain age, you have to start taking some money out of your retirement accounts. The money that you put into an annuity, that's counted toward the base of what percent you have to withdraw, or it's exempted from it?
COOMBES: It's counted. And this new proposed rule from the Treasury would make sure that that annuity money is not counted. So that's a big benefit and would encourage more employers to offer annuities to their workers.
SIEGEL: If someone who's 65 is purchasing an annuity and thinking about it paying out for, perhaps, 20 years, and they'd really hope maybe 30 years - who knows how long one can live - are these accounts insured, and is it clear that the companies that pay them have 20 or 30 years' life in them?
COOMBES: That's a very good question. People are very worried. I think that's why not that many people annuitize their money. They're worried about, A, giving up control of it, and, B, will the company be there to pay - make those payments for the next 30 years? There are ways to mitigate that risk. First things first: find an insurer who has, you know, AAA ratings from the ratings agencies, such as, you know, Moody's and S&P, A.M. Best. Also, every state has a state guarantee association that insurers pay into. That money, that pool of money is there to protect policyholders if the insurer goes out of business.
SIEGEL: Well, Andrea Coombes, thank you very much for talking with us.
COOMBES: Thank you for having me on.
SIEGEL: Andrea Coombes is the personal finance editor for MarketWatch. She spoke to us from San Francisco.
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