Do you have a traditional 401(k) plan? If so, then you’re familiar with the advantages of saving for retirement with pretax dollars. You probably also know that within your 401(k), you have a choice of investments. Typically, you can invest your money in 澳洲幸运5官方开奖结果体彩网:target-date funds, 澳洲幸运5官方开奖结果体彩网:passively-managed index funds, and 澳洲幸运5官方开奖结果体彩网:actively-managed mutual funds. Some plans allow you to purchase 澳洲幸运5官方开奖结果体彩网:annuities, which are anot🐽her option for funding retireme꧙nt.

Annuities are not a common option in 401(k) plans, however. Even though including this option might improve workers’ retirement security, annuities are a more complicated offering than the typical fund offerings. The fees can be substantially higher, depending on the type of annuity. The choice of insurance provider also entails risk (annuities are sold by insurance companies, and some insurance companies are more financially sound than others). In short, plan sponsors increase their chances of being sued when they offer annuities.

The Setting Every Community Up for Retirement Enhancem𝔉ent (SECURE) Act, which became law in December 2019, gives employers greater leeway to include annuities in their workplace-sponsored retirement plans. Under the law, plan sponsors face less risk of being sued if the insurer that they pick to make annuity payments goes bankrupt and can’t pay claims.

Why Would You Want an Annuity in Your 401(k)?

One of the biggest concerns for workers and retirees is running out of money in retirement. Annuities are an appealing solution to this problem because they can provide a lifetime of guaranteed income, depending on what kind of annuity you buy. In an era when 澳洲幸运5官方开奖结果体彩网:defined-benefit pensions have largely been replaced by 澳洲幸运5官方开奖结果体彩网:defined-contribution plans, such as 401(k)s, the opജport🤡unity to create a sort of self-funded pension with an annuity may be reassuring to many retirees.

While 401(k) plan providers have found ways to make it easy for workers to save for retirement through automatic plan enrollment, 澳洲幸运5官方开奖结果体彩网:matching contributions, and default investments, they have not made it easy for workers to turn their savings into a steady, enduring streaꦐm of retirement income. It is up to retirees to decide how to both draw down their assets and change their as🎀set allocation throughout retirement. Many plans offer target-date funds that can simplify the process.

The Center for Retirement Research at Boston College published a study suggesting that buying an immediate life annuity would give a 65-year-old male the most income among the available options. The study’s authors make a strong case for traditional annuities by showing how annuitization is superior to investing with 3% returns, taking annual withdrawals based on remaining life expectancy, and taking 澳洲幸运5官方开奖结果体彩网:required minimum distributions (RMDs). It would also prevent the retiree from running out of money.

How Much Monthly Income Could an A☂nnuity Give You?

Let’s be clear about what not running out of money actually looks like. Let's say the 65-year-old man lives in Massachussetts. If he buys a $100,000 single premium immediate annuity with payments beginning in February 2025, his monthly income for life is estimated at only $642, according to Schwab’s Income Annuity Estimator. That payment will never be adjusted for 澳洲幸运5官方开奖结果体彩网:inflation, and his heirs won’t receive anything when he dies, even if he dies lon𝔍g before he breaks even.

He can make sure his annuity pays out for exactly 10 years. These 10 years are called a 澳洲幸运5官方开奖结果体彩网:period certain. In this case, his monthly payment would be $1,017, and the annuity will pay out at least $122,040.♏ And if he dies before the 10 years are up, his heirs would receive the funds.

Many retirees have spouses to consider. This man could inste🧜ad buy a joint-life annuity with his $100,000. It would pay $561 per month for life as long as either he or his wife (also age𒊎 65) were alive.

^Source:

By comparison, here are the payouts you might expect from having similar balances in an index fund. (Keep in mind that market fluctuations and the 澳洲幸运5官方开奖结果体彩网:sequence of returns could change things significantly.)

^{Source: . Table assumes average annual growth of 6%, an inflation rate of 3%, and a drawdown to zero after 30 years. Monthly income is based on annual withdrawals at the beginning of each year.}

Corporate revenue and earnings should keep pace with inflation, so unlike a 澳洲幸运5官方开奖结果体彩网:fixed annuity, we ca🙈n expect the index fund’s returns to increase annually to account for inflation. (That said, some fixed annuities do offer inflation protection𒀰 in exchange for receiving lower payments initially.) Keep in mind that when annuity rates are low because of a low-interest-rate environment—like the early 2020s—fixed annuity payouts will look especially disadvantageous compared to long-term stock market returns.

Also, keep in mind that your 澳洲幸运5官方开奖结果体彩网:internal rate of return (IRR) from a fixed annuity depends on how long you live. The longer you live, the more valuable the annuity. A 65-year🔥-old man might have a negative IRR in years one thr☂ough 17, break even after 18 years, and reach an IRR of 2.68% if he lives to age 95. (That’s calculated with an , with inputs of 30 years, an $100,000 initial investment, and $4,896 annual annuity payment, which is 12 times the $408 from the example above.) That’s still a lot lower than 6%.

Another way of looking at the difference between the returns of the annuity and the index fund in our example is that if you withdrew the same amount from the index fund as you would receive from a🦩n annuity each month, you 🐻would still have a substantial sum left in your index fund if you died in 30 years, but the annuity would become worthless.

Pr𝔉os and Cons of Buying an Annuity Within Your 401(k)

All of this means that there are a🌃 number of factors to consider when thinking a൩bout whether it makes sense to hold an annuity in your 401(k).

Pros

Sharing his expertise with The Wall Street Journal, , head of research for Morningstar Investments,🍸 wrote about the advantages of buying an annuity within a 401(k).

Non-gendered pricing. One advantage of buying an annuity within your 401(k) if you’re female is that your gender won’t affect the price. Annuity prices reflect life expectancy, an🎉d outside of a 401(k), women can expect to pay more (that is, receive a lower monthly payout for the same principal amount) because they live longer on average💟. On the other hand, bought within a 401(k), this smoothed-out pricing means men might pay more.

Logical choice. People tend to hold most of their net worth in their retirement accounts and in their 澳洲幸运5官方开奖结果体彩网:home equity. And you will always need 澳洲幸运5官方开奖结果体彩网:cash on hand in c🐷ase of an꧙ emergency. You may not have enough non-retirement funds to buy an annuity outside your 401(k). For these reasons, it becomes logical to tap a 401(k) to buy an annuity. It’s also☂ logical to use the money you’ve specifically set 🔴aside for retirement, rather than some other pot of savings, to provide a retirement income stream.

Possibility for a higher payout. Annuity payments also might be higher within a 401(k), Blanchett writes, because insurers can save money on marketing when they have a large pool of potential customers supplied by an employer. But you shouldn’t assume that payments are better without seeing what outside annuities have to offer, he cautions.

Cons

Slower growth. If you were to buy a 澳洲幸运5官方开奖结果体彩网:deferred annuity, where you wouldn’t start receiving an income stream until perhaps a decade or more after buying the annuity, your annuity principal would grow over that decade. You could expect to receive an 澳洲幸运5官方开奖结果体彩网:interest rate similar to what a 澳洲幸运5官方开奖结果体彩网:certificate of deposit (CD) would pay, which would be similar to the inflation rate. That is, your money will likely grow more slowly than it might if invested in stocks or 澳洲幸运5官方开奖结果体彩网:exchange-traded funds (ETFs).

Hard to change your mind. Getting money out of an annuity while still in the 澳洲幸运5官方开奖结果体彩网:accumulation phase is complicated and can entail 澳洲幸运5官方开奖结果体彩网:surrender charges. The fewer years you’ve paid into the annuity, the larger the surrender charge may be. Also, once you’ve 澳洲幸运5官方开奖结果体彩网:annuitized, or started receiving payments, your decision is usually irrevocable.

No additional tax benefit. Annuities have the same 澳洲幸运5官方开奖结果体彩网:tax-deferral benefit that traditional (non-Roth) 401(k)s have. You don’t pay taxes on the growth in an annuity—or on the money in a traditional 401(k)—until you take the money out. Morningstar’s Blanchett suggested purchasing an annuity using the money in a taxable account if you have the funds. It doesn’t make sense to buy an annuity in an account where you already get the benefit of deferred taxes. However, many people don’t have the funds in a taxable account to buy an ♍annuity.

Failure to at least break even. A concern that people have about buying annuities is dying before they’ve at least broken even with the principal they’ve put into the product. Money that you use to buy an annuity is money that you generally cannot leave to your spouse, childr🔯en, or other heirs. But you can if you’re willing to pay more to obtain principal protection or period certain benefits.

Types of Annuities Allowed in 401(k) Plans

A 澳洲幸运5官方开奖结果体彩网:qualified♚ longevity annuity contract (QLAC) is a type of advanced life deferred annuity funded with an investment from a 澳洲幸运5官方开奖结果体彩网:qualified retirement plan, such as a 401(k) or an 澳洲幸运5官方开奖结果体彩网:individual retiremeꦅnt account (IRA). You can use up to $145,000 of your retirement savings account to buy a QLAC.

The main benefit of a QLAC is a deferral of taxes that accompany 澳洲幸运5官方开奖结果体彩网:requꦿired minimum distributions (RMDs). The QLAC’s value is not included in RMD calculations. It must begin paying out by age 85. A retiree or near-retiree might wish to buy a QLAC at age 70 before RMDs kick in at age 73 if they have plenty of retirement income from other sources. (RMDs used to kick in at age 72 before the passage of the SECURE 2.0 Act, but the new age is 73.)

The QLAC is not the only type of annuity that you may be able to purchase in your 401(k) plan. You may be able to buy other types, such as a simple fixed immediate annuity (shown in the first table earlier in this article), the far more complicated and expensive 澳洲幸运5官方开奖结果体彩网:variable annuity, and the slightly less complicated and expensive 澳洲幸运5官方开奖结果体彩网:indexed annuity.

The Bottom Line

Few 401(k) plans offer annuities today, and even when they do, workers usually don’t choose them. But that's changing, as the SECURE Act demonstrates. That said, whether to buy an annuity within a 401(k) is a complicated decision that can have a big impact on your 澳洲幸运5官方开奖结果体彩网:retirement. It’s highlyꦫ personal, and what your co-worker is doing may not be ওthe right choice for you. It’s important to have all the facts and compare your options so you can make the right decision.