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New savings plans for those concerned about social security

Trying to choose a retirement savings plan these days is getting to be a matter of deciding how much credibility you give to forecasts of the demise of the social security system.

All the stories about whether social security can be ''saved'' have prompted many people ''to realize that the government can no longer be all things to all people,'' says Daniel Perkins, vice-president at Merrill Lynch Life Agency Inc., a division of Merrill Lynch, Pierce, Fenner & Smith Inc. He projects that if changes in the system are not made, the annual shortfall in the social security system could amount to $110 billion within 30 years. That will be a time when many post-World War II ''baby boomers'' are retiring.

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For those concerned over reports like this, and who think an individual retirement account (IRA) still won't be enough, a number of companies are trotting out new, updated versions of the tax-deferred annuity. Annuities are a form of savings account where an individual purchases a insurance policy that earns tax-deferred returns on the money deposited with an insurance company.

As they have always done, these annuities offer tax-free accumulation of interest until the money is withdrawn, plus a guaranteed payment of a lump sum or monthly income for a specified number of years. Unlike with IRAs, some companies offering annuities will also make uninterrupted payments should the customer become disabled. These payments can continue for the rest of the person's life, or until he reaches retirement age, if necessary.

After about five years, withdrawals can be made at any time without penalty, except for taxes on the money taken out.

a wide choice of ''products'' in which the money can be invested, sometimes in a money-market fund.

Before, annuities generally earned less than 7 percent interest. The customer had no say where the money was invested or how much of the earnings the insurance company got to keep.

Unlike IRAs, which are intended almost solely for retirement, annuities can also be used for a number of other purposes. They can serve as a college education fund, savings for a down payment on a house, or any major savings project. Unlike IRAs, which have a $2,000 annual limit on deposits, annuities have no such restriction.

Annuities can also be used by people who wish to follow the life insurance plan known as ''buy term and invest the rest.'' If you buy a low-cost term policy instead of whole life and invest the difference in an annuity, after 15 years or so you could have enough money in the annuity to pay for the term premiums for the rest of your life.

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Many of the changes in the modern annuity came when stockbrokers, financial planners, and mutual funds started working with a few of the more adventurous insurance companies to improve the product. One of those efforts lasted only a year or two. Known as the ''wraparound annuity,'' it was offered jointly by mutual funds or brokerages and insurance companies, but was shot down last year by the Internal Revenue Service because it violated the IRS's definition of policy ''ownership.''

Since then, there have been several insurance company-brokerage-mutual fund mergers, and the ''new'' companies have come back with annuities that seem to satisfy IRS objections. At Merrill Lynch, a customer can put his money in any one or all of six investments, including a money market fund that only invests in US government securities. These are considered the safest money funds.

Massachusetts Financial Services Company, a mutual fund that is now a subsidiary of Sun Life Assurance Company of Canada, has introduced a fixed annuity with a choice of one-year or five-year guaranteed interest rates. The one-year rate is 14 percent; for five years, it is 13.75 percent.

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