Recently, a popular bill was passed in Congress to help people in retirement with the implementation of new rules concerning annuities in regards to 401(k)s.
Annuities are designed to ensure that the person enrolled would continue to receive a guaranteed income after retirement based off of how much money is paid into it during your working years. These are provided by insurers and insurance companies, who write the annuity policy.
While adding annuities to a 401(k) could undoubtedly help with income in your retirement years, to think that it is a perfect solution may be far from the truth. The main problem is this: putting enough money into the program to have a big enough payout later to be worth it. And it certainly doesn’t help that many annuities come littered with fees and other hidden costs while being notoriously complex to figure out for average investors. It is very easy for people to become confused.
The way 401(k) are built right now, you’d have a slew of different mutual funds to pick and choose from, but the amount you would stand to gain or be able to draw an income off of in retirement with this is not always totally apparent. The idea behind annuities is to structure a policy that would have a guaranteed income of a certain amount. Annuities are built that way, to be a more dependable investment than some of the other options.
But is this the best option? In 2016, the average household’s 401(k) and other investments were about 135,000 dollars. If you started collecting on your annuity at age 65, and lived an average human lifespan, as to how the payouts on these are structured, that would only equal a guaranteed monthly income of 600 dollars.
401(k)s, and other IRA often end up being the most solvent of equities for retired people, aside from their own homes. A guaranteed income through an annuity would certainly be good to help cover day to day living expenses, in the event of an emergency or the need for a large amount of quick cash, 600 dollars a month certainly isn’t going to cut it. If you’re one bad day away from financial ruination, annuities are, in essence, not as secure as they seem to be.
There are other options outside of annuities that would certainly make for a more sound financial future. Social Security is one of these, which you are entitled to collect at age 62 for three-fourths of their full earned benefit. While it might be necessary for some people to collect that young, your Social Security benefit goes up as long as you defer collecting on it. This can easily surpass 600 dollars monthly.
And unlike annuities, Social Security also has a cost of living adjustment built into it. The money will last longer and be more significant. This will typically surpass the guaranteed income you’d find with an annuity. So while Congress might have their heart in the right place, looking to help Americans with their future retirements, annuities might not be the magic solution that they’re being propped up as.