Using Deferred Income Annuities in 401k Plans

The Huffington Post is talking about deferred income annuities.  In “401(k)s Welcome Annuities,” Jeff Rose says that deferred income annuity products are a good way to create a lifetime stream of retirement income.  Last year the U.S. Treasury Department and the IRS made it easier to use deferred income annuities in 401k plans because Americans are worried about running out of money during retirement.  The average American has to worry about financing around two decades of life with their retirement savings.  There are no guarantees that you won’t run out of money at some point if your savings are in the stock market or you spend too much without realizing it.  Most of us don’t have a company pension that we can rely on for lifetime income payments, so we have to find our own way to create an income stream.

Deferred income annuities have only been around for about four years, but they are a valuable product for creating a stream of lifetime income.  They are the closest product to the traditional company pensions that were common in the past century.  You protect your principal investment and receive regular income payments until your death.  Deferred income annuities are similar to immediate annuities other than the point in time in which you start to receive income payments.  You make a lump sum payment to an insurance company in exchange for income payments that will start later in your life.  Most of these products offer an optional death benefit that will pay your initial premium amount to your beneficiaries upon your death.

Up until last October, deferred income annuities were not included as Qualified Default Investment Alternatives.  Those are the options that employers give to employees when they invest in company retirement plans.  But the new regulations allow for certain deferred income annuity products to be included in 401k plans and IRAs.  This eliminates fees and allows your money to transfer from your 401k plan into your annuity at retirement.  If you are ready for your income stream at retirement, you can start receiving income payments.  Some people opt to defer their annuity payments later than when they retire.  In this case, the money stays in your annuity and acts more like a fixed indexed annuity product.  The amount of your annuity payments increases based on how long you defer the receipt of your first payment.  Deferred income annuities might be the right product to convert your 401k retirement savings into a stream of income that will last as long as you live.

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