Steady Income for Your Golden Years

Kiplinger's Personal Finance Magazine
October 1, 2004

RETIREMENT | A proposed tax break would give retirees an attractive alternative for their savings.

One simple way to make sure that you don't outlive your savings is to purchase a life annuity. That is, you hand over a lump sum to an insurance company and, in return, you get a guaranteed stream of income for as long as you live. Although life annuities are routinely purchased by employers with defined-benefit plans for their retirees, they've been slow to catch on with individual investors. A bill that was recently introduced in Congress could change that by giving annuity buyers a tax break on the earnings component of the regular payments, which is currently taxed as ordinary income. "This legislation will give Americans greater incentive to secure for themselves and their family a 'paycheck for life,' " says Rep. Nancy Johnson (R.-Conn.), who is co-sponsoring the bill. Under the proposal, annuity holders could exclude from federal income tax one-half of the earnings, up to an annual limit of $20,000. One catch is that you can't use payouts from a 401(k), IRA or other so-called qualified plans to purchase the annuity. But savings that you've accumulated outside of retirement plans, for instance, or proceeds from the sale of a house or farm would be eligible. It's too soon to speculate on whether or not the bill will pass. But even if it fails, says Martha Priddy Patterson of Deloitte Consulting, it highlights the pressing need for retirees and those nearing retirement--and the financial-services providers that cater to them--to start thinking about how to make their money last.