My wife and I are 55 and 53 respectively, and we have $160K and $220K (also respectively) in 401K plans currently sitting in accounts at [firm name removed] (a lady my Mother-In-Law recommended). We consolidated 3 plans into 2, and I am trying to determine if annuities are a good way to go for those $, or if they should simply be invested into some fund to grow outside of an annuity. I have received information that if we invest the $380K now in variable annuities, and begin taking income at age 65-67, the monthly income will be approximately $2500-3000 a month, depending upon the type of survivor type features chosen. I do not care as much about the beneficiaries benefiting from this as our kids have our house, freedom fund, etc…And I want the monthly income stream to continue for the surviving spouse when the other dies.
I read in your book [No, it is Andy’s book] to avoid annuities, but I wanted to ask your opinion on what to do with those 401K monies. I do not know whether to consider a fixed or variable annuity, or rather to let the $ “grow” for 10+ years and hope and pray we have enough to take out monthly $ and not outlive the nest egg…???
I work, make good $, and we have no debt. Our house is probably worth $700K and is paid for…I am currently putting max $ in a 401K with my current employer (although going to be limited by being a highly compensated employee)…We have other $ in a “Freedom fund (brand new)”, and I have been extremely conservative over the years and have avoided market volatility probably at the expense of gain. I (think I) want a known income stream, in addition to our social security, a $600/mo pension from a previous employer to begin at age 65 for me, and I plan to work (God willing) to age 67…
Thanks, and your input, counsel, and suggestions would be appreciated.
Answer: The easy part of this question to answer is whether you should be investing your 401k funds in an annuity now: ABSOLUTELY NOT. Even if it turns out to be a good idea when you retire to annuitize the money, paying the annual expenses of an annuity for the next decade or so before you’re ready to start receiving payments is a waste of money. Keep it invested in low cost mutual funds until you retire and you will have significantly more money available to annuitize than if you purchased the same funds within a variable annuity today. The only plausible argument for investing in a deferred annuity (one which doesn’t start making payments for several years) is to gain the benefit of deferred taxation on the growth in value prior to withdrawal. But the income in a tax-sheltered account is ALREADY deferred until withdrawal. So why buy an annuity now?
Also, I hate to tell you this, but buying an annuity, whether fixed or variable, does NOT eliminate the need to hope and pray. The estimate you received on what a variable annuity would start paying out in the future is dependent on the future returns of the investments made in the variable annuity, no differently than if you had just bought mutual funds directly. If the variable annuity investments do poorly, you won’t receive $2,500-$3,000 per month. As for a fixed annuity, the interest rates are comparable to bond investments, and you know how low those are. And unless it is an inflation-adjusted annuity, you have no protection from changes in the cost of living.
You already know that excessive concern over volatility is costing you returns, and with more than a decade to go until retirement, playing it “safe” means accepting a lower level of assets in the future and greater risk associated with financing your retirement needs. I would, of course, recommend a globally diversified equity portfolio for your long-term investment assets. Because I believe it is a safer choice in the long run.
Now, it might well be a good idea to annuitize some or all of your tax-sheltered money when you actually retire. But you have a decade, and I think it deserves a clear discussion of its own, which I’ll provide in my next blog post. Which I promise won’t take a decade to write: just one week.