Putting some of your 401(k) or the entire amount into a fixed or variable annuity can make the account perform in much the same way as pensions do. An annuity can be helpful as a retirement financial planning tool, because you can structure payments to ensure you don’t outlive your retirement savings. It’s important to know from the start, however, that putting a 401(k) into an annuity isn’t the right choice for everyone. Research and careful planning will determine whether putting your 401(k) into an annuity is right for you.
Although there are two options for putting your 401(k) into an annuity, a lack of employer participation may leave you with only one option. A report issued by WorldatWork and the American Benefits Institute in March 2013 says that while 21 percent of employers are thinking about adding an annuity option, only 12 percent of companies currently include an annuity option in their 401(k) plans. If your employer doesn’t have or doesn’t plan to include an annuity option in your 401(k) plan, you can purchase an annuity using 401(k) disbursement funds after you retire.
Fixed vs. Variable
An annuity can be fixed or variable. A fixed annuity may be a better option for an investor with a low tolerance for risk or who prefers to know in advance how much to expect each month. Fixed annuities grow according to the interest rate in effect at the time you purchase the annuity, and monthly payment amounts are determined by the date you start you start receiving income and how long you want annuity income to continue. Variable annuities grow according to market conditions, and while they carry the potential to earn substantially more, there is no guarantee they will.
Timing is crucial regardless of whether you purchase an annuity through an option in your 401(k) plan or use disbursement funds after you retire. Annuities come with significant annual costs, so the earlier you purchase an annuity the more expensive it will be. Although purchasing an annuity through an option in your 401(k) is less costly than purchasing an annuity on your own, David Blanchett, head of retirement research at Morningstar, told Fox Business in a June 2013 article that you should wait until about 10 years before you expect to retire.
Putting your entire 401(k) into an annuity removes all its liquidity potential and leaves you living on a fixed income. On the other hand, putting only some of your 401(k) plan in an annuity provides guaranteed income while still leaving options for managing large or unexpected expenses .The Actuarial Foundation presents two purchase strategies, both of which involve putting only a portion of your 401(k) in an annuity. The first involves purchasing an immediate-payment fixed or variable annuity just before or at the time you retire. This option allows you to go into retirement knowing you have guaranteed income for life. The second option is to wait to purchase an annuity until you turn 70. This more-flexible option allows you to manage your money on your own during the early years of your retirement but still provides the income insurance that guarantees you won’t outlive your retirement funds.
Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.