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401k Annuities May Be the Future of Retirement Plans

Bankrate’s Jennie L. Phipps asked if annuities are the future of retirement plans in her article “Annuities the Next Big Retirement Option?“.  We’re well aware, especially those of us who are working, that our savings will have to carry us through retirement.  The majority of companies no longer offer pensions at retirement that will pay monthly income for the rest of our lives.  This is why the Department of Labor asked for input regarding annuities in retirement plans a couple of years ago.  The response from employers and insurance companies was positive.  They see the benefits to adding annuity options into 401k plans so that employees will have guaranteed income in retirement.  Unfortunately, the responses that the DOL received from employees did not contain the same enthusiasm.  Many people who responded were downright angry about the thought of transferring their 401k or IRA savings into an annuity.  But that’s mostly because they have an antiquated view of annuity products.

Prudential Financial’s Income Flex annuity plan is now an option in more than 7,000 different 401k plans.  One of their vice presidents insists that annuities within 401k plans are important, but cautions that it needs to be the right annuity.  The annuity has to offer a guaranteed minimum payout, but also offer increases in case the markets do well while the employee is still growing their retirement savings.  While some people appreciate annuities with fixed income payments that cannot be changed, others are looking for the variable annuity type in their retirement plan.  Prudential’s Income Flex offers minimum guarantees with upside potential.  The majority of people within the Income Flex plan move their 401k savings into the annuity accumulation phase around the age of 50.  That is the youngest age that they can guarantee their minimum payout.  They know that this guaranteed minimum payout will not decrease, no matter what happens in the markets.  If they significantly grow their savings or the markets jump in value, they can revise their guaranteed minimum upwards when it is time for retirement.

There are more ways to turn your 401k savings into lifetime guaranteed income with annuities.  Some companies offer an annuity purchase platform where employees list their age and savings and insurance companies bid to offer them annuity products.  Employees can also shop for an annuity outside of their plan and only transfer the amount of money they wish to use for an annuity.  You can choose an annuity for any of the goals you have in retirement, whether you are worried about outliving your savings or dying early.  You can receive expert help shopping for annuities if you wish to make a 401k annuity transfer outside of your actual retirement plan.

One hold-up that many people have with annuities is that they are not guaranteed by the federal government.  Boston College’s Center for Retirement Research director Alicia Munnell says that most people would lose their concern about annuities if they were backed up by something like FDIC insurance.  States do offer annuity guarantees, but they cap out between $100,000 and $300,000.  One good option is to purchase annuities with different companies, each with a value below your state guaranty level.  But Ms. Munnell is pulling for the government to offer insurance on annuities of any amount.  The Bankrate article offers people a list of questions to ask when you are considering purchasing an annuity through your 401k plan or with your 401k savings.  Make sure that you know the details of any annuity and how it will affect you at age 50, 65, 80 and beyond.

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