Guaranteed income via your 401(k) |
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Plan for withdrawals
Jody Strakosch, national director for MetLife institutional income annuities, says a sea change has to take place to get both employers and employees to think in terms of income instead of just assets.
"We're at the beginning of a change in the way the industry is thinking about defined contribution plans. Clearly, creating a retirement income stream is an important component of what you do with this accumulated balance. We've been very good at teaching participants to save but we need to help them figure out how to take the next step."
Genworth Financial developed a product called ClearCourse Group Variable Annuity, which also encourages participants to begin contributions early.
"The earlier you put money in, the higher the guarantee for each dollar," says Fred Conley, president of Genworth's institutional retirement group.
"If you contribute $100 at age 40 we'll guarantee at age 65 that you'll get $19.52 per year at retirement. If you put the same $100 at age 20 we're going to guarantee you $50. But the highest participation we've seen is people in their 40s. It seems that a lot of people in their 40s start thinking more seriously, start making contributions."
Both MetLife and Genworth also allow employees to make lump-sum contributions. Genworth's plan currently guarantees a 6 percent income stream for an immediate annuity.
Missing out on gains
Some financial advisers are opposed to locking money into an annuity during the accumulation phase.
"An annuity is a good idea when you're at the point
of collecting -- an immediate annuity can be a good idea and makes
sense in certain circumstances," says Benjamin Tobias, president
of Tobias Financial Advisors. "But if you're willing to take any
kind of risk (during the accumulation phase), you're going to do
better.
"The average historical return for the S&P 500 is really closer to 10 percent than 8 percent. So, if you're not going to use a diversified portfolio and you just invest in the stock market over a 25-year period, you'd be hard-pressed to find a 25-year period where the S&P did less than 8 percent annually. More often than not it was in double digits since 1930."
An issue for younger employees who may be changing employers several times throughout their careers is portability. If you want to take your money with you and not leave it in the plan, you'll lose the guarantee. Even though the fees in these 401(k) plans are lower than what you'd pay for a similar guarantee outside the plan, they're still higher than what's charged for, say, an S&P 500 index fund. That means you'll have paid extra for a guarantee you'll never use.
Nevertheless, a guaranteed income stream in retirement is a tangible benefit that will appeal to many people because it offers protection against outliving assets and a stock market slide. Just be sure you understand the guarantee, the company behind the guarantee, fees and any restrictions before signing up.
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