Your Retirement Plan Needs Guaranteed Income

In “Lifetime income is possible (and necessary)” on Producers Web, Peter J. D’Arruda tells us why it is so important to have a lifetime income stream.  He says that a retirement plan that doesn’t guarantee your income will last as long as you live isn’t even a plan; it is just a wish.  There are two reasons that pensions started disappearing in the 1990s.  Believe it or not, it was actually employees who decided that they would be better off with 401k plans than they were with company pensions.  This is because the returns in the stock market were above 10% a year and they thought they would continue getting these returns for life by managing their own money.  Employers were happy to switch from traditional pensions to 401k plans because their costs were significantly lower and the employer matches were tax deductible.

But with a decade of stock market uncertainty, some people have been longing for those pensions of old.  It’s unlikely that they will return, but there is a way to make your 401k plan more like a pension that will guarantee you income for life.  The downsides of 401k plans are that many people just don’t put enough money in, employees borrow from their plans and don’t pay back the loans, and people take the money out too early and are hit with penalties and high taxes.  Also, employees make the mistake of trying to time the markets right and lose, some companies have stopped matching employee contributions when they are financially strapped, and 401k plans do not guarantee income over your lifetime.

Many Americans have most of their retirement savings in a 401k plan.  In order for any retirement plan to be worthwhile, the author says that it should do two things.  It should protect you from longevity risk by guaranteeing you lifetime income and it should should cover the basic living expenses that you must pay.  Income annuities are the best way to use a portion of your 401k to meet those two basic needs.  Annuities can guarantee you income to cover your basic living expenses that will last as long as you live.  They can even be set up to last over your spouse’s lifetime as well.  The 4% rule used to be the way to guarantee that your income would last over your retirement.  This no longer a valid strategy because having retirement savings of $1 million, required for the plan to work, is unlikely.  In addition to that, increasing life expectancy means that 30 years might not be long enough to finance your retirement.  The stock market has to steadily increase for the 4% plan to work well also and we all know that isn’t the case.  Transferring some of your 401k balance to an income annuity really sounds like a good idea for making your retirement savings last for you.

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