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There is a slowing growing movement to offer annuities within 401k plans, mostly through target date funds. They purchase the annuity gradual starting around age 50 or so or in a lump sum. 401k Plan provisions determine other options. I think it’s a good and much needed option for the great majority of workers.
But my question is, how important to you is a regular income stream, at least to cover all basic living expenses. I know many HD folks like the flexibility of DIY withdrawals, but for many, income security may be most important.
For me, knowing my income is just like a paycheck is essential. I’m not a DIY guy.
One of the smartest things I did upon retirement was to get an annuity. I worked for the state so I got a low cost annuity that covered 15 years. No inflation hedge. If I died my wife got it, if she died, my grown kids got it. This allowed me to invest my other assets much more aggressively (no question of whether I should withdraw 4% or 5% or how to balance my holdings) which has proved over the last 7 years a very good thing. I retired at 71 and figured that if I could not invest well enough to support myself after age 86 I had not learned anything. 86 was about my life expectancy anyway.
The ability to select an annuity as a 401(k) option is in principle very positive. The devil is in the details. One issue with annuities in general is the prevalence of excessive (and prepaid) fees. Another issue is the discount rate/earnings expectations formula for calculating the payout. In the retail annuity world, both of these can abused to the point that they become predatory in nature. Where that occurs, they usually conspire to penalize the annuitant greatly. Only if these two negatives can be eliminated or made truly fair will the 401(k) annuity work.
I would expect, to protect themselves at least, prudent plan sponsors would be very careful when selecting the annuity option to include in their plan and to communicate the full picture to plan participants. In addition, offering in the group market allows insurers to be more flexible than in the individual market.
Having a defined-benefit pension in retirement would have a major impact on whether annuities would be desirable for someone whose “pension” was a defined-contribution plan, like a 403 (b) or 401 (k).
I actually had two pensions from two previous employers,
both of whom offered me a cash-out offer shortly after I turned 55. One from
Ford Motor Company. It was $296.00 per month with a 50% survivor’s benefit. Thesecond was from Mitsubishi Motors of America. It was almost double at $597.00per month. It also had a 50% survivor’s benefit. Together, they totaled@$114,600. I took the cashouts and deposited the funds into a rollover IRA.
As I was approaching retirement (self-selected) at age 70, 2020 happened, and I put off retirement FOMY! As you know, the market in 2020 recovered, in record time, but it reminded me of a lesson I had been discussing with students academically, which I now understand in reality. The concept of the sequence-of-returns risk. It is not just an academic theory.
My employment contract was renewed for an additional 5 years in 2021, so I figured, “Why not stay for another 12-18 months and stuff money into my 403b Roth account?’ Then came 2022? Recovery wasn’t quite
as fast, and the lesson from 2020 about the sequence-of-returns risk was
brought home again.
The good news is that in 2023, right before the late spring market drop, I bought a series of income rider annuities. Three of them were paid for with Roth money from my 403(b), establishing tax-free income for life, with joint-life survivor benefits and an LTC rider as well. The fourth one was paid for through a rollover from my rollover IRA.
As 2023 was drawing to a close, I had built up what JL Collin refers to as “FU Money.” That gave me pause, and cause to reconsider my current situation, and I decided I would retire, for real, this time. After giving 90 days’ notice, I established my final work day as 1 January 2024. Why not 31 December 2023? Because that date took me into a new year, entitling me to one final Roth 403 (b) contribution to be matched by my employer. In addition, it gave me a final paycheck, an additional payment for 300 hours of unused vacation (maximum allowable), and a payment for a contract job completed just before YE 2023.
Today, my wife and I are enjoying retirement, secure in the knowledge that our guaranteed income far exceeds our retirement expenses, for the next few years anyway, with minimal income tax due. In the words of Beldar Conehead, “Life on Earth is good.”