By the time you reach your 50s, you should start to get a handle on how much you’ll have in savings when you retire, and whether the money will last as long as you do.
Most financial planners say you should plan on replacing 75 percent to 80 percent of your income in retirement—more if you retire before age 65 and need to buy your own health insurance.
If your estimates suggest you could come up short, here are some options to consider.
A single premium immediate annuity is basically a DIY pension. In exchange for a lump sum, an insurance company will provide you with a monthly payment for a specified period or the rest of your life.
You’ll receive the largest amount each year with a life-only annuity, which stops payouts when you die. If you’re married, you also have the option of purchasing a joint-life annuity, which will reduce your payout but continue to provide income as long as either spouse is alive.
In the past, many individuals waited until retirement to annuitize a portion of their savings, but now some 401(k) plans offer participants an investment option that can be turned into guaranteed lifetime payments after you retire. For example, TIAA-CREF’s Secure Income Account is designed to replace a portion of the fixed-income holdings in a target-date fund. Upon retiring, the participant has the option of annuitizing some or all the money in the account or taking a lump sum.
Fidelity Investments, meanwhile, is providing its 401(k) clients with a menu of immediate annuities from up to five different insurance companies. The annuities are available to workers age 59½ and older, who will have the option of converting any portion of their savings to an annuity when they retire. Funds that aren’t converted can remain invested in the Fidelity plan.
Some financial planners say you’re better off waiting to purchase an annuity until after you’ve retired, because payouts increase as you age. And if interest rates continue to rise, you’ll benefit from that, too, because payouts from immediate annuities are tied to rates for 10-year Treasuries.
Barbara Selig, senior wealth management adviser at TIAA, says annuities purchased through 401(k) plans benefit from institutional pricing, which means they’re less expensive than annuities you buy on your own. In addition, the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act mandates that annuities purchased in a 401(k) plan must be portable, which allows employees who change jobs or retire to move their annuity to another plan or IRA without paying surrender charges or fees.
Annuities, both inside and outside 401(k) plans, come in a variety of flavors, with varying degrees of costs and complexity. TIAA-CREF’s Secure Income Account is a deferred fixed annuity that offers a guaranteed interest rate, depending on the size of the plan. Later this year, Fidelity plans to offer 401(k) clients a qualified longevity annuity contract, an annuity that starts payouts when a participant reaches a specific age, typically 80 or older.
(Sandra Block is a senior editor at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)
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