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Allocating Annuities In Retirement Plans

The Treasury Department made waves earlier this year with their ruling regarding the use of annuities in 401k and other retirement plans.  Investment News’ Darla Mercado researched how best to implement this annuity strategy in her article “Now that annuities are OK in retirement plans, what strategy is best?”  This past July, the Treasury Department made it easier for Americans to use deferred income annuities within retirement plans.  These qualified longevity annuity contracts guarantee income payments later in life after a lump sum purchase in the present day.  Last month, the Treasury Department started allowing deferred income annuities to be used instead of target date funds.

While these federal rulings are very important for the annuity industry and the general public, there is still the issue of how to allocate your funds to annuities within your retirement plan.  Financial advisors, employers and retirement plan sponsors have some work to do to figure out the details regarding the use of annuities in 401k plans.  First, they need to determine what percent of retirement savings should be used for annuities and then they have to determine how the remaining money should be invested.

Morningstar Investment Managements’ David Blanchett recently wrote a paper about how to allocate a deferred income annuity in a defined contribution plan.  He said that advisors have to talk to plan sponsors about adding annuities to their defined contribution plan choices if they are not already there.  They also have to discuss the best types of annuities to use and how to use them.  In their research, Morningstar analyzed close to 80,000 different financial scenarios.  They determined that most consumers are best suited allocating 30% of their retirement funds to deferred income annuities.  Morningstar researched purchase ages of 50, 55, 60 & 65.  They expected all of these people to retire within 15 years of purchasing their annuity.

There were 10 different factors used when determining the results of this study.  Some of the factors included the current age, the retirement age, how much has been saved for retirement, life expectancy, glide paths and whether or not the individual wants to pass on money to their heirs.  Using annuities in retirement plans changes how your other money is allocated as well.  The equity allocations for target date funds can be raised because of the guaranteed income that annuities provide.  This income may also change the way that workers claim their Social Security benefits, including the age at which they choose to do so.  Consider your specific retirement goals and work closely with a knowledgeable advisor to best utilize annuities within your retirement plan.

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