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Making Your Money Last

Help for Retirement Savings from Uncle Sam

The feds are doing what they can to keep the savings rate up and to get folks to preserve their nest egg after retirement.

Worried about your retirement? The government is, too. Treasury officials are planning steps to help make your savings grow and to guide you into investments that will provide income as you live.

For starters, the Internal Revenue Service is keeping limits on 401(k) contributions from dropping in 2010. The caps on tax free payroll deductions are indexed for inflation, which usually means that they increase each year. But because the inflation rate declined for part of 2009, the formula used to calculate plan limits called for those limits to drop. Rather than curtail the ability of people to save just as they are trying to rebuild battered retirement savings accounts, the IRS decided to leave the caps where they are.

For most workers, this means that for 2010 you can contribute up to $16,500 to a 401(k), 403(b) or similar defined contribution plan -- the same as in 2009. Those who turn 55 in 2010 will be permitted to put in a total of $22,000, because the so-called catch-up contribution limit of $5,500 allowed for 2009 also won’t change.

The government is also laying plans to push annuities. The feds want to encourage people to invest at least part of their 401(k) savings in annuities when they retire, so they can be assured of a steady stream of income for the rest of their lives. The Treasury Department wants employers to add “automatic annuitization” to 401(k) plans. The feature would require a portion of a worker’s lump sum 401(k) distribution made at retirement to be converted into an annuity unless he or she opts out.

Problem is, offering the annuity option is a hassle for employers because of current pension regulations, so Treasury is considering easing those rules. Eventually, for example, the department will clarify that the employer isn’t liable for lost retirement savings if an annuity provider goes belly up. If easing various rules doesn’t encourage enough companies to adopt the feature, Treasury will consider requiring that it be added to plans.


Getting folks to buy into the idea of annuities will probably still be an uphill battle, however, even if employers get on board. Studies show that workers usually prefer taking lump sum payouts of retirement savings and managing the funds themselves, even though they know there is no guarantee that they will be able to make the money last long enough. Experts say that one way around such reluctance would be to allow trial annuities: Putting some portion of the 401(k) distribution into an annuity that could be canceled after a set period of time, say one or two years. The thinking is that once account holders get used to that steady stream of income, they won’t bother unwinding the investment when they finally get the chance.

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