A New Option for the Retirement Crowd

By Janet Whitman, Special to CNBC.com

NEW YORK ( CNBC) --As a growing number of Americans worry about outliving their retirement savings, the government is encouraging employers to offer an old-school, pension-style option for 401(k) holders.

The proposed revamp of retirement fund rules would make it easier for workers to convert part of their 401(k) savings into an annuity that would pay guaranteed income checks for life -- no matter the ups and downs in the markets.

And in keeping with the new assumptions about retirement, there is an unconventional component; a "longevity option" would let 401(k) savers take a lump sum portion at retirement age and defer it for 20 years, so retirees would start getting steady checks in the mail at age 85 and beyond.

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Investment advisers say that's a big improvement on the "all-or-nothing" choice of many current plans, which allow retirees to take their entire 401(k) as a lump sum in cash or convert the whole thing into an annuity, instead of a combination of options.

"The new regulations give people more flexibility," says Warren Ward, a financial planner in Columbus, Ind. "You could put a third into an annuity and invest the remaining lump sum or keep some cash handy for medical needs and emergencies. It can give people piece of mind, which is important. After you work for your whole life, you don't want to worry about money when you get to retirement."

The U.S. Treasury proposal to encourage partial annuity options for 401(k) investors comes as Americans contemplate longer life spans while being spooked by the drop in value of retirement portfolios in the wake of the 2008 financial market meltdown.

A recent survey from global financial services association Limra found that 40 percent of Americans don't feel well informed about generating retirement income, investing their nest eggs, or managing their risks and expenses.

The survey, cited in a recent edition of Financial Advisor Magazine, also found that less than 50 percent of Americans plan for more than 20 years of retirement.

Only a handful have factored in how they might cover the cost of health care, long-term care, rising taxes and inflation, and what they might do in the event they outlive their savings.