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The pros and cons of in-plan annuitization

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) that was passed at the end of 2019 has provisions that are aimed at preventing retirees from outliving their income and assets while they are still needed. One way that it did so was by allowing employer-sponsored 401(k) plans to include annuities.

An annuity is designed for generating a regular income stream, either for a set period of time, or for the remainder of the income recipient’s (i.e., the annuitant’s) lifetime – regardless of how long that may be.

Understanding In-Plan Annuities

Since the passage of the SECURE Act, several insurers have rolled out annuities for use inside retirement plans. These “in-plan” annuities can be fixed, indexed, or variable, which in turn, allows the plan participants a wide array of options, based on risk tolerance, goals, and time frame until retirement.

Allowable in-plan annuities may also be either immediate or deferred. With an immediate annuity, income can begin right away – or at least within 12 months. A deferred annuity isn’t converted to income, or annuitized, until a time in the future – and in some cases, this could be 30 or more years.

These annuities allow tax-deferred growth of the funds in the account. This means that there is no tax due on the gain until the time of withdrawal. So, over time, these tax-advantaged funds can really add up. This, in turn, can provide a larger base of funds to draw income from.

There are several advantages to having an in-plan annuity, such as:

  • Diversification of guaranteed retirement income sources
  • A minimum guaranteed amount of growth
  • Potential for more initial income

Other than Social Security, an annuity is the only other source of guaranteed lifetime income in retirement. So, having an in-plan annuity can diversify lifetime income sources, while at the same time providing a known dollar amount on a regular basis.

Many annuities will also provide a minimum, or “floor” rate below which the return won’t fall. So, for instance, while a fixed indexed annuity can generate a return that is based on the growth of an underlying market index (such as the S&P 500), if the index performs poorly, the annuity’s account will still continue to grow.

Annuities may also be able to provide higher levels of initial income in retirement as compared to the “traditional” 4% portfolio drawdown strategy that many financial advisors still recommend. As an added bonus, the lifetime income option from an annuity can also eliminate the risk of running out of income.

Factors to Consider Before Converting an In-Plan Annuity to an Income Stream

Although there are many enticing features of in-plan annuities, there are some factors that you should consider before you convert one of these financial vehicles into an income stream. For instance, as with stand-alone annuities, there can be surrender charges if withdrawals are taken within a specified time period (which is commonly referred to as the surrender period).

In some cases – primarily with variable annuities – there can be a long list of fees, such as investment management charges, annual contract fees, mortality and expense (M&E) fees, and/or administrative charges.

What is the Best Retirement Income Strategy for You?

Although annuities can provide a number of advantages for retirement income generation, these financial vehicles are not right for everyone. So, it is important that you discuss your short- and long-term financial objectives with a retirement income specialist before you make a commitment to an annuity.

At Annuity Gator, we specialize in annuity education and reviews. You’ll find hundreds of annuity reviews and annuity buying tips on our website. You can also set up a time to talk with a retirement income specialist. So, feel free to reach out to us by calling (888) 440-2468 or contact us via email going to our secure online contact form. We look forward to talking with you.

The pros and cons of in-plan annuitization

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