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Guaranteed income via your 401(k)

Growing and sheltering money in a 401(k) account is one of life's goals for millions of employees. But, traditionally, there have been no guaranteed benefits associated with the plans. You, the employee, grow the account and, except for the government's minimum distribution requirement

Minimum distribution requirement

Generally, a traditional IRA owner must begin taking money out of the account by April 1 of the year after he or she turns 70 1/2. The amount is a minimum distribution determined by the account holder's age and life expectancy. The IRS has established simplified tables that a traditional IRA owner can use to figure the required distribution. If required payments are not made on time, the IRS will collect an excise tax. Roth IRAs aren't subject to minimum distribution requirements until after the Roth owner dies.
, you manage the withdrawals. Spend too much early on, or get hit by a disastrous downturn in the stock market, and your account could dry up.

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A few providers are tackling that deficiency and are offering plans to employers that allow employees to make regular contributions through payroll deductions that will guarantee the employee a specific amount of annual income starting at age 65 for the rest of his or her life.

"There's a growing body of research that says annuitizing your nest egg has a whole lot of value," says Jim McGhee, senior retirement solution architect at Hewitt Associates.

"If you give people a choice between a check for $1 million or $70,000 for the rest of their life, most people will take the $1 million. But that's the wrong answer from an economic standpoint unless you're 80 years old. If you're 60 and you're going to live on $1 million for the rest of your life, you need to protect against living too long and against market risk."

Annuitize your pension
Most financial planners would have you protect against those risks, in part, by withdrawing no more than 4 percent or 5 percent annually from that $1 million, so, no more than $40,000 to $50,000. This is where annuities come into play. Give up control of the money, give it to an insurance company to invest and, starting at a certain age, they'll give you a guaranteed income, perhaps $60,000 annually, for the rest of your life.

Wealth holdings of a typical household* prior to retirement
Source of wealth Amount in dollars Percent of total
Primary house
Business assets
Financial assets
Defined contribution
Defined benefit
Social Security
Other non-financial assets
* The "typical household prior to retirement" refers to the mean of the middle 10 percent of the sample of households headed by an individual aged 55 to 64.

Source: U.S. Board of Governors of the Federal Reserve System 2004 Survey of Consumer Finances.

These 401(k) plans allow employees to make regular contributions instead of forking over a large sum of money, and still receive a guarantee.

"If you buy a variable annuity off the street you're going to probably pay 300
basis points

Basis points

One one-hundredth of a percentage point. The difference between 8.04 percent and 8.05 percent is one basis point.
; which is really expensive," McGhee says. "These products are being offered in the context of a 401(k) plan for maybe 120 to 150 basis points; half the price because they don't have the commissions and they take advantage of the institutional pricing of the underlying investments. So, what's really expensive insurance at 300 basis points becomes reasonable insurance at 120 to 150 basis points."

MetLife has a plan called Personal Pension Builder, which it distributes to employers through Merrill Lynch. Employees decide how much they want to contribute and can select a retirement age anywhere from age 50 to 85.

A current example given by MetLife is that an employee who begins contributing $50 per month at age 50, increasing the contribution by 3 percent annually, will receive a lifetime annual income of $1,119, or about $93 per month if his or her payments began at age 65. A 40-year-old, with the same contribution plan, would receive $2,778 annually, or about $231 monthly. Currently, fees range from approximately 70 to 100 basis points, depending on age of the participant.

Next: "Some financial advisers are opposed to locking money ..."
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