The Missing Link That Could Make Your 401(k) Last a Lifetime
Written by
Travis Woods
Edited by
Zuri Anderson
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The 401(k) plan is a fundamental aspect of nearly every retirement plan, as it is an excellent way for workers to accumulate wealth and savings in preparation for their golden years.
However, it can fall short by one critical measure: Taking those savings and transforming them into a reliable (and lifelong) income stream.
Experts claim, though, that the missing link between 401(k) plans and a pension-like income may already exist.
Annuities: The Missing Link to the 401(k)
As reported by Insurance News, retirement experts are pointing to annuity income as a way to modernize the 401(k).
How? By combining the reliability of a pension-styled paycheck (which annuities can create) with the flexibility of the 401(k) account’s defined contribution plan.
Integrating annuities into a 401(k) plan could allow for a retirement savings plan to be less focused upon just building a “nest egg,” and more dedicated to continuously paying out and making a retirement last.
What Annuities Can Do
When buying an annuity (usually with a portion of your 401(k) savings), you are entered into a contract with an insurance company in which, from that lump sum, the insurer will pay you a regular income. Some annuities will even compound with interest and grow, thereby increasing the amount paid out to you.
Why Annuities Are a Beneficial Addition to the 401(k)
“Adding lifetime income annuities inside the plan can help recreate what retirees have lost as traditional pensions have disappeared,” Dan Peterson, president and managing partner at E4 Insurance Services, recently told GOBankingRates.
“Well-designed plan annuity options allow a portion of a participant’s 401(k) to be converted into a guaranteed monthly paycheck, regardless of market conditions or how long they live. In effect, it can turn part of a 401(k) into a personal pension, while preserving flexibility and investment choice with the remaining assets.”
Instead of relying solely upon investment returns, a retiree who has invested a portion of their 401(k) into an annuity or annuities would be able to secure a predictable income stream throughout retirement, effectively creating the key feature of the pensions that 401(k) plans have largely replaced.
As Peterson put it, “For the ‘post-pension’ generation, allocating an appropriate slice of a 401(k) to lifetime income, ideally in a modular, transparent and portable structure, can create a stable income floor while still allowing for growth, liquidity and legacy planning with the remaining assets.”
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