The month of May saw the passing of a new act in Congress, The Secure Act, which is designed for companies to add newer options for annuities to their 401(k)s along with other retirement plans to help ensure a guaranteed income for enrollees.
While The Secure act sill needs approval from the Senate, it is a good idea to know about the positive and negative aspects of this new Act that could soon be affecting you.
As the Insured Retirement Institute’s Vice President in charge of research, Frank O’Connor, wisely notes “As with any investment, It’s important to understand how it works, what it costs and how it fits into your overall financial plan.”
Annuities can help provide a steady income stream for retirees, and as it currently stands, only 9 percent of companies offer annuities as part of their 401(k) plans. Fear of being held liable if the annuity provider fails is what keeps a lot of companies from pushing annuities with their plans, but The Secure Act aims to eliminate that.
Currently, the average age of a retiree is 84 (for a man) and 86 and a half (for a woman) respectively, with a third of all people living past the age of 90. For those people getting up there in age, a continued income is a primary concern, and outliving your nest egg is certainly not an ideal situation for anyone. That is why annuities are so important. To make sure you have enough money going forward. But it can often get confusing, and there are different hidden costs and options that could trip up less experienced investors. It would make sense to enlist the help of an advisor or fiduciary to help guide you through the red tape.
The payout for your annuity can begin right away, if you choose, or come many years in the future, giving the fund time to mature and get bigger. They can come in variable options, which are often the most expensive, but have the best options, or fixed, which is a simple return to investment ratio set up when the contract is drawn. This is the safest option, and market fluctuations don’t affect the amount of money paid.
To further elaborate, variable annuities are typically a mix of stocks and bonds, meaning they are subject to the ups and downs of the market.
On the other hand, index annuities are a blend of the stocks, but as protection against ruin only a portion of it is based off the how well, or poorly the index is doing, topping off at 60 percent. And indexes are often capped, meaning if a fund is doing particularly well, you only get so much in return before you can no longer collect on it.
Most 401(k) plans are interested in expanding their portfolios with annuities for their enrollees. Research done by the Employee Benefit Research Institute says nearly three-fourths of 401(k) would like to take advantage of this market. It is the hope that The Secure Act can work towards getting more companies to that goal and help secure the financial future of their employees.
Regardless, the idea behind annuities isn’t to make you rich, but rather work as a fraction of a solid retirement income alongside programs like Social Security.
Your financial future is in your own hands, of course, but The Secure Act looks to be a big step in making that journey easier for you and your financial providers.