Your 401(k) Won’t Be Enough — Here’s the Backup Plan Financial Advisors Recommend
Written by
Laura Bogart
Edited by
Kristen Mae
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All too often, people consider their 401(k) plans the end-all and be-all of their retirement savings. For decades, it’s been considered the bedrock of a stable retirement. But as times change and the markets fluctuate, you’d be wise to diversify your strategy. That means building a plan that includes multiple income sources.
Experts often recommend having at least 10 to 12 times your salary saved by the time you retire, yet even those who diligently max out their 401(k) contributions every year often fall short of that number. Market volatility, taxes and inflation can all take a significant bite out of your 401(k). That’s why financial advisors stress the importance of incorporating other types of investment accounts into your retirement plan.
So what can you do? Financial advisors recommend opening traditional and Roth IRAs and exploring health savings accounts (HSAs). But one often-overlooked source of retirement income financial advisors are recommending more and more is an annuity.
What Is an Annuity and How Does It Work?
Simply put, an annuity is a contract between you and an insurance company that provides guaranteed income in retirement. It often offers higher return potential than a typical savings account or certificate of deposit (CD).
Essentially, you invest money into the annuity, which grows tax-deferred. Once you reach age 59 1/2, you can start receiving regular, steady payments from the annuity, though most financial advisors recommend waiting until your late 60s or early 70s to begin withdrawals.
Annuities Offer Security in Uncertain Times
If you read market reports with your heart in your throat, fretting about your 401(k), an annuity might give you some peace of mind. Many annuities, including fixed and fixed-index annuities, offer principal protection, meaning your initial investment is guaranteed even if the market declines. Since you’re not investing directly in the stock market, you gain a layer of distance and stability.
Experts like David Blanchett, Ph.D., CFA, CFP, managing director and head of retirement research for PGIM DC Solutions, and Michael Finke, professor of wealth management at the American College of Financial Services, agree that annuities can be a great buttress against the unknown.
In an article for ThinkAdvisor, they wrote, “An annuity can not only reduce the risk of an unknown lifespan, it can also allow retirees to spend their savings without the discomfort generated by seeing one’s nest egg get smaller.”
You Can Blend Them With Other Income Sources
A well-rounded retirement strategy combines multiple income sources. The Social Security Administration even published an issue paper comparing Social Security and private annuities, concluding that “both provide a stream of lifetime income that can help maintain a person’s standard of living throughout retirement. The impact of having a relatively small amount of retirement income later in life can be significant.”
While some people may turn to real estate investments to boost their future retirement income, this strategy comes with its own risks. Depending on your threshold for how hands-on you want to be, you might get tired of the dirty work (and the work can get quite dirty) of being a landlord. Sure, you can hire a property manager to do that work for you, but that cost can eat into your returns.
Unlike an annuity, which guarantees payments, real estate investments fluctuate based on market conditions. However, that’s not to say you couldn’t explore real estate investments while also enjoying regular payouts from an annuity for steady income.
Bottom Line
It takes many types of seeds to grow a garden of stable retirement income. Your 401(k) provides a strong foundation, but adding other investment tools, like annuities, can help you achieve your financial goals for retirement.
This article is part of GOBankingRates’ Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Got a question of your own? You could win $500 just for asking — learn more at GOBankingRates.com.
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