When planning for retirement, one of the most important factors is how much income you will receive, and how long it will continue. In some cases – such as with Social Security or a defined benefit pension plan – you don’t have as much control over the income parameters. In other instances, though, you do. One of these is with 401(k) annuitization.
If you participate in an employer-sponsored 401(k) retirement plan, contributing funds from your paycheck is just one part of your retirement strategy. The other is converting some or all of these funds into an income stream. With that in mind, does 401(k) annuitization make sense for you?
Understanding 401(k) Annuitization
Annuitization refers to converting savings into a guaranteed stream of income for a specific period of time, or for the rest of your life. Usually, you can choose how often you will receive the income payments, such as monthly, quarterly, or annually.
The amount of your payment depends on several criteria, such as:
- The length of the payment term (shorter terms equate to higher income amounts and vice versa)
- The interest rate (higher interest rates typically mean higher income payments)
- The amount of the lump sum being converted to income
It is important to consider the pros and cons of 401(k) annuitization before you move forward. For instance, some of the advantages of converting these funds include a guaranteed stream of income that you can count on for the remainder of your lifetime, no matter how long that may be.
In addition, if the amount of these payments increases over time, you can also have the benefit of inflation protection. This, in turn, can help you to keep your purchasing power on track so that you don’t have to drastically downgrade your lifestyle in the future when prices go up.
There are also some factors to consider, though, before you annuitize your 401(k) money. The biggest of these is that once you have converted these savings to income, there is no way to reverse the process and turn the account back into a lump sum. Therefore, it is critical that you have other funds available for financial emergencies.
Is Annuitizing Your 401(k) Funds the Best Strategy for You?
Because everyone’s goals, risk tolerance, and retirement needs are different, 401(k) annuitization may or may not be right for you. If you would like to learn more about how this process works, though, as well as the amount of income you may anticipate, it can help to talk with a retirement income expert.
At Annuity Gator, our professionals will help you with narrowing down which option is best – if any. They can also assist you with comparing different retirement income strategies, as well as answer any questions that you may have.
So, if you would like to set up a time to chat, please feel free to contact us directly by phone at (888) 440-2468, or you can send us an email through our secure online contact form. We look forward to hearing from you.