Wednesday, April 10, 2024

What Is A 401k Annuity

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What Is A Retirement Annuity

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No matter how long your retirement lasts, a retirement annuity may help.

Determining if you have enough money for retirement can be challenging. Even with the best goal setting and planning, there are always uncertainties. You will need to consider things such as how long will you need a retirement income, what your lifespan will be, what events may happen once you do retire and many others.

Since Social Security often isn’t enough to cover the retirement you envision, most people also depend on other savings and retirement accounts to meet their retirement goals. One of these account options is an annuity .

Patrick Blevins, a State Farm® agent in Waynesboro, Virginia, is here with some tips on how annuities can help build a financially healthy retirement.

Keep in mind, the following information pertains to fixed annuities only. Variable annuities work differently and have an investment risk component.

Three Stages Of Retirement Planning

You will need to adjust your retirement planning throughout your lifetime as you earn more income, owe more debt, raise a family and experience other major life events.

Generally, there are three stages of retirement planning played out over your lifetime that loosely take into account all these changes. Each offers opportunities and challenges to your retirement goals.

What to Consider During the Three Stages of Retirement Planning

Young Adulthood People starting careers dont have as much money to invest. You have more time for your investments to mature.
  • Take advantage of employer 401 plans.
  • Start an IRA or Roth IRA.
Early Midlife Growing debt ties up much of your income. After establishing your career, you should have higher earning power.
  • Attempt to max out 401 and IRA contributions.
  • Purchase life and disability insurance.
Late Midlife You have less time to begin retirement planning. You will likely reach the peak of your earning potential and may have many of your debts paid off.
  • Be conservative with your 401 and IRA investment options.
  • From age 50 onward, you can increase your maximum IRA contribution an extra $1,000 per year and your 401 an extra $6,500 per year.
  • Consider long-term care insurance to cover the cost of nursing home care.

What Is A 401k Rollover

A 401 rollover occurs when an individual employee separates from their employer through a job change, layoff, termination, or retirement. At that time, they will need to decide what to do with their assets in any employer-sponsored retirement plan like a 401 plan. The three most common options include keeping their assets in the plan, cashing out, or rolling their 401 over into another tax-qualified plan such as a new employer-sponsored plan, Individual Retirement Account , or IRA annuity.

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Changing Or Cancelling An Annuity

When you buy an annuity, you enter into a contract with the annuity provider. Typically, once you buy an annuity, you cant change the terms of the contract. This means you cant switch to a different type of annuity or get your money back.

Your annuity contract may have a cooling-off period. This means that you can cancel the contract without a penalty within a specific amount of time. Be sure to read your annuity contract carefully to see if it includes a cooling-off period.

The contract may give the option to cancel within a certain time period after you start receiving payments. There is usually a fee to do this which can be a percentage of the purchase price.

Contact your annuity provider for more information about the contract and your rights to change or cancel an annuity.

If you are thinking about buying an annuity, speak with a financial professional. They can help you figure out whats right for you, when to buy it and when to start getting payments.

What Is An Index Annuity


The amount you earn from an index annuity is determined by the performance of a market index, like the S& P 500. Your annual return is calculated over the course of a specified period, typically one year. When the index gains value, the value of your index annuity increases, but it also loses value when the index declines.

This potential for volatility is the main feature of an indexed annuity. However, your gains and losses are typically capped by the annuity contract. The participation rate limits how much you can gain when the index rises, and stock dividends are usually excluded from your index gain. On the downside, a floor is usually included, which limits your annual loss no matter how far the index declines.

For example, an index annuity contract might say the most you can earn in a good year is 7%no matter how much the underlying index gains in one yearbut during market downturns the annuity company guarantees you would not lose money, so in the worst case you just have a return of 0%.

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Should You Choose A 401 Or An Annuity

Choosing an annuity or a 401 is rarely an either-or situation. That said, there are some general rules of thumb to consider.

If youre already maxing out your 401 and IRA for the year and you still want to save more for retirement in a tax-advantaged account, you could put any additional savings into an annuity. You should always max out your 401 first and then spill over into an annuity, though, says Renee Pastor of Pastor Financial Group.

If youre worried about outliving your savings, an annuity with a living benefit rider might be an option worth considering, says Charnet. Living benefit riders can help you guarantee certain amounts of payment, which are particularly useful for variable annuities that otherwise would have no assured rate of return.

Outside of those situations, though, opting for a combination of both a 401 and an annuity might be the right choice if you want to shore up a guaranteed income stream while also leaving room for upside potential through the stock market.

Many people want to have some portion of their money where they can be certain theyre going to get their retirement paycheck regardless of whats happening in the market, says Pastor. They might, for instance, want to have all of their basic needs covered by Social Security income and guaranteed annuity payments. To achieve that, well roll over some, or all, of a 401 into either a variable annuity with a living benefit or an indexed annuity with a living benefit.

What Happens When A Coworker Retires

When a coworker retires, coworkers generally sign the retirement card, participate in the scheduled festivities, and send personal greetings and gifts to honor the retirement occasion. Traditionally, when the momentous occasion of an employee’s retirement occurs, it is marked as a life passage into the next chapter for the employee.

The employer and the employee’s colleagues use the retirement event as one last opportunity to express care and appreciation for a valued coworker. As a consequence, employers and coworkers, who know not what the future brings, want to wish the retiring employee a happy retirement. This is greatly appreciated by the employee who has decided to retire.

But, the employer and coworkers are often more hesitant about how to deliver their retirement wishes effectively and successfully. They frequently use standard gifts that will remind the employee of their workplace in the coming years. Engraved watches, plaques, and desk clocks are examples of a reminder retirement gift.

You will want to make your coworker’s retirement memorable for both the coworker and the employees who remain. Use these sample retirement wishes to send a happy retirement message to a valued colleague.

Also Check: How Much Will My 401k Be Worth In 20 Years

When Should You Choose An Annuity Or A 401

While both annuities and 401s can offer long-term savings, tax-deferred growth and beneficiary options to pass down assets outside of the probate process, a financial advisor could recommend investing in an annuity later in life, especially if you are still employed and havent maxed out your 401.

Some employees use part of their 401 to buy an annuity. Some financial experts say that combining an annuity with a 401 could be an effective strategy to add a guaranteed income stream to your retirement. This option could help protect retirees from market downturns and deliver a regular paycheck in addition to Social Security income.

A 2021 study also says that annuities could be a good option for retirement as you shift assets away from stocks: We find strong evidence that households holding more of their wealth in guaranteed income spend significantly more each year than retirees who hold a greater share of their wealth in investments.

On the other hand, an annuity could fall short of your retirement goals as inflation could erode the value of your payments. For a comparison, a Goldman Sachs report points out that stock market investments historically have averaged 10-year returns of 9.2% over the past 140 years.

In either case, whether you invest in an annuity, a 401 or combine both in your retirement strategy, consulting a financial advisor could help you assess the benefits and risks for your retirement needs.

Rollover: The Complete Guide

Retirement Advisor Gives Advice

Shawn Plummer

CEO, The Annuity Expert

How much do you know about 401k rollovers? 401 plans are a great way to save money tax-free, and 401s typically have many investment options. However, there may come a time when the 401k participant decides they would like to change jobs or retire from their current position. This is where 401 rollovers become important. Unfortunately, rolling over retirement funds can be difficult with so many different rules and regulations that govern what can be done with 401ks. In this guide, I will discuss some of the basics of 401k rollovers and provide information on how you can make sure your plan complies with all federal requirements before rolling it over to another employers qualified plan or an IRA.

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When To Buy An Annuity

The best time to buy depends on your personal income needs and sources of income.

For example, you may want more money early in your retirement to pay for travel or new hobbies. Or you may want more guaranteed income later in your retirement to pay for health care costs or accommodations.

If you want more money later you could consider waiting to buy an annuity, or buying a deferred annuity. This means that you pay for the annuity ahead of time but wont start receiving payments right away. Deferred life annuities provide higher regular payments than immediate life annuities. This is because you will receive fewer payments during your life.

If you buy an advanced life deferred annuity with money from your employer pension plan or your registered retirement savings, certain tax rules apply in terms of age and amount limits.

Deferred Annuity Vs Immediate Annuity

Under the annuity definition, there are two kinds of contracts, depending on when you start collecting payments. If your payments begin within a year of your purchase, its called an immediate annuity. If youd like to wait a year or longer to start receiving payments, its called a deferred annuity.

Either way, the annuity company invests your money in the market so it grows over time. The kinds of investments depend on the type of annuity you choose, which we explain below.

Note that there is a specialized deferred annuity called a qualifying longevity annuity contract . You fund a QLAC with a one-time lump sum payment from your IRA accounts or a 401 balance, and opt for period payments guaranteed to last for the remainder of your lifespan, starting between when you turn age 72 and age 85.

The longer you wait for your payout, the bigger the payouts become. You may invest up to 25% of the total balance of your IRAs and 401s, or a maximum of $135,000 .

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Your Other Sources Of Retirement Income

Your retirement income may come from a number of places.

This may include:

  • employer pension plan or Pooled Registered Pension Plan
  • registered savings, such as a Registered Retirement Savings Plan or a Tax-Free Savings Account
  • public pensions and benefits, such as Old Age Security , Canada Pension Plan or Quebec Pension Plan
  • personal savings and investments

Having an annuity can make it easier to create a budget and manage your money. Its especially the case if you dont have another regular source of retirement income.

However, an annuity may not be the best option for you if your regular income and savings will already cover your expenses when you retire. Speak with a financial professional to figure out whether youll have enough money for your needs when you retire.

What Are Some Benefits Of Investing In Annuities

Roll Over IRA or 401(k) into an Annuity: Rollover Strategies

The primary benefit of investing in annuities is a guaranteed income source in the form of regular payments in or before retirement. Your contributions are tax-deferred, and annuities do not have a contribution limit or a required minimum distribution . Benefits include:

  • Guaranteed income source. For retirees and pre-retirees, a guaranteed income source reduces concerns about losing money from retirement savings in a downturn, or outliving retirement savings. With an annuity, you fund the account and typically earn a predetermined amount of interest, regardless of what happens in the stock market. However, this can be different with variable annuities.
  • Tax advantages. You can also defer taxes on the money you contribute to an annuity. Unlike other tax-deferred retirement savings accounts such as IRAs and 401Ks, there isnt a contribution limit, a limit to how much you can put away each year. Annuities can provide a vehicle for tax-deferred savings if you have maxed out other retirement accounts.
  • No RMDs. Traditional retirement accounts require that you begin making withdrawals at age 70 ½. Retirement annuities, however, don’t carry that same stipulation, meaning that the funds can continue to grow in the account until you need them.

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When You Retire You Have To Decide What To Do With Your 401 Money Generally Speaking You Will Have Some If Not All Of The Following Five Choices: Leave Your Money Parked In The Plan Take A Lump

Keep in mind, not all employers allow retired workers to remain participants in their 401 plan, but if yours does, here’s a quick look at the pros and cons of the various distribution options:

Lump-sum distribution

If you need a wad of cash right away, this option will serve that purpose. There are two key downsides: you forfeit the benefits of tax-deferred compounding by cashing out all at once and you’ll have to pay income taxes on your distribution for the tax year in which you take it, which can be a big bite out of your nest egg all at once.

Leave the money as is

Financial advisers often recommend retirees tap taxable accounts first in order to keep as much money growing tax-deferred as possible.

So if you’re retiring and have money outside of your 401 that you plan to live on, you may leave your account untouched until you’re 70-1/2. That’s when Uncle Sam requires all retirees to begin taking mandatory annual distributions from their 401s and traditional IRAs.

Of course, if your plan’s investment choices are very limited or have performed poorly relative to their peers, you might be better off rolling the money into an IRA.

Rolling money into an IRA

This is the option often recommended by financial advisers since an IRA offers greater investment choice and control, and is especially recommended if your plan has few investment options and not very good ones at that.

There are two advantages your 401 has over an IRA.

Periodic distributions


Why Do Employees Choose Retirement

An employee may choose retirement for reasons other than the wish to stop working. Employees may suffer ill health or debilitating physical problems that require retirement. Family problems and responsibilities may require retirement.

An employer may require employees to take early retirement in order to cut costs and preserve the business. Whatever the reason, retirement from employment marks the start of the next chapter of an employee’s life.

Employees choose diverse methods of retirement. They may leave employment completely or start a second career or part-time work. They may semi-retire or pursue phased retirement during which they gradually decrease the number of hours worked. Some employees retire and then return to work for their same employer in a part-time, temporary, or consulting role.

Fortunately for retiring employees, many options exist to meet their financial, emotional, and social needs in retirement. With sufficient financial resources, the employee may decide to pursue interests other than work and career in retirement.

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Thing Everyone Gets Wrong About Early Retirement

Its not about not working. Its about having the financial security to find a job you love.

Its fairly easy to beat up the idea of early retirement.

You could point to the fact that early retirees often lose their sense of purpose, get bored, and end up returning to the workforce . Or you could point to the absurd amount of money a 40-something needs in order to generate enough passive income to live comfortably. Or you could even point to the fact that humans are social creatures and retiring early means exiting from the very place where adults make friends: the office.

But amid this criticism, theres something everyone is getting wrong about early retirement: its not about not working. Its about having the financial security to find a job you love.

Why Would You Want An Annuity In Your 401

What is Wrong With You People?

One of the biggest concerns for a retiree is running out of money. In a 2018 survey by Aegon, 52% of respondents expressed this fear. Annuities are an appealing solution to this problem because they can provide a lifetime of guaranteed income, depending on the kind of annuity you buy. In an era when defined-benefit pensions have largely been replaced by defined-contribution plans, such as 401s, the opportunity to create a self-funded pension with an annuity may be reassuring to many retirees.

While 401 plan providers have found ways to make it easy for workers to save for retirement through automatic plan enrollment, matching contributions, and default investments, they have not made it easy for workers to turn their savings into a steady, enduring stream of retirement income. It is up to retirees to decide how to draw down their assets and how to change their asset allocation throughout retirement. Many plans offer target-date funds that can simplify the process.

The Boston College Center for Retirement Research published a study in October 2019 theorizing that buying an immediate life annuity would give a 65-year-old male the most income among the available options. There is a strong case made for traditional annuities by showing how annuitization is superior to investing with 3% returns, taking annual withdrawals based on remaining life expectancy, and taking required minimum distributions . It would also prevent the retiree from running out of money.

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