Liam Gibson, Wealth of Geeks
A new option coming to 401(k) plans could turn America’s favorite savings account into a source of guaranteed lifetime income throughout retirement. This innovation couldn’t come at a better time.
According to a research report by the Alliance for Lifetime Income, a record number of people will turn 65 in 2024. While some have the resources to ride out the “silver wave,” many more could get washed up on the shores of financial ruin in the coming years.
The alarming unpreparedness for the retiree boom underscores the importance of financial stability for Americans after their working years. Investment firms recognized the need to create products that solve the retirement income challenge by adding annuities to target-date funds, typically the most popular 401(k) plan option.
More companies now offer 401(k) plans that utilize annuities for a more predictable post-work income stream. BlackRock, the largest asset manager globally, jumps into action with a new annuity offering, LifePath Paycheck funds. Several employers have already signed up to make the fund available to roughly half a million employees nationwide.
The product functions like target-date retirement funds that become more bond-heavy as employees age. Yet, instead of shifting allocation to bonds, LifePath allocates to annuities. Employees between the ages of 59.5 and 72 can choose to buy an annuity with that allocation, locking in ongoing income. The remaining 70% can be kept in stocks or bonds or cashed out. Is this unique offering a suitable replacement for a government pension or dividend income?
Financial advisors weigh the pros and cons of this unique retirement solution.
—————
Breaking point
BlackRock Chairman and CEO Larry Fink believes retirement income solutions to be one of the biggest economic challenges of the mid-21st century.
Fink didn’t mince words in a recent annual letter to shareholders: “Today in America, the retirement message that the government and companies tell their workers is effectively: ‘You’re on your own.”
The United States’ pension system pales compared to other advanced economies; 2023’s Mercer CFA Institute Global Pension Index ranked it 24th out of 47 countries. Portugal, Germany, Finland, and Australia all fared better.
Without an adequate social security safety net, Americans risk falling through the cracks. Results of the recent Schroders 2024 U.S. Retirement Survey show Americans ‘ retirement feeling the heat. Less than half (44%) of those surveyed feel they have saved enough. Roughly a quarter (24%) remain unsure, and a third (33%) are certain their savings will run out.
“I believe all American workers should be entitled to access some form of tax-advantaged retirement vehicle without employer sponsorship,” says Daniel Masuda Lehrman, Founder and Lead Advisor at Masuda Lehrman Wealth. “Of course, many vehicles like SEP IRAs and individual 401Ks exist for self-employed individuals, but the contribution limits are not consistent across these various qualified plans.”
With Social Security’s trust funds set to deplete by 2033, private sector solutions like annuity products may be a path forward.
—————
Rigid, yet reliable?
Annuities and pensions similarly issue a fixed income flow over a long period.
“Annuities can be a great substitute for pensions,” says Carman Kubanda, Certified Financial Planner at Innovative Wealth Building. “If you’ve built up a 401k and want to transfer some of the risk away from your portfolio, an annuity will accomplish this.”
Unlike exchange-traded funds or other investment vehicles, annuities may have hefty management fees. Additionally, profound life changes can make an annuity’s iron-clad guarantee more of a flaw than a feature.
“Some annuities can have long surrender periods and will penalize you if you pull funds out before the surrender period ends,” adds Kubanda. “There are many different types of annuities designed for different purposes… select one appropriate for your situation and goals.”
“Perhaps the most important issue is that once in place, annuities are relatively inflexible, thus making it more difficult to address specific financial plan situations,” says Chris Chen, Chief Financial Planner and Owner of Insight Financial Strategies.
“It’s a matter of risk tolerance. In retirement, many retirees’ risk tolerance naturally becomes more conservative,” says Masuda. “Drawing income from a fluctuating portfolio balance is scary. In my experience, many clients who buy income annuities in retirement enjoy the predictability and simplicity of receiving monthly checks and knowing their essential expenses are covered by guaranteed sources of income.”
However, a well-developed plan may not necessitate annuities.
“How to create a retirement income plan is a known technology,” says Chen. “Retirement income plans that are not based on annuities can be more flexible for variable spending from one year to the next, more income tax efficient, and more flexible for legacy planning.
Experts anticipate new strategies will arise in the quest to resolve the looming retirement crisis.
Annuity-based retirement funds may bear benefits or offer solutions, but not without drawbacks; they may provide a steady income stream and offer protection from market volatility, but often have higher fees and complex structures. Annuities may also lack the flexibility to secure emergency cash.
The debate around the merits of annuities and other products underscores the imperative for comprehensive solutions. Yet, every retiree is different, thus the value in working with an experienced financial advisor who is qualified to recommend strategies personally tailored to an individual’s needs.
According to a research report by the Alliance for Lifetime Income, a record number of people will turn 65 in 2024. While some have the resources to ride out the “silver wave,” many more could get washed up on the shores of financial ruin in the coming years.
The alarming unpreparedness for the retiree boom underscores the importance of financial stability for Americans after their working years. Investment firms recognized the need to create products that solve the retirement income challenge by adding annuities to target-date funds, typically the most popular 401(k) plan option.
More companies now offer 401(k) plans that utilize annuities for a more predictable post-work income stream. BlackRock, the largest asset manager globally, jumps into action with a new annuity offering, LifePath Paycheck funds. Several employers have already signed up to make the fund available to roughly half a million employees nationwide.
The product functions like target-date retirement funds that become more bond-heavy as employees age. Yet, instead of shifting allocation to bonds, LifePath allocates to annuities. Employees between the ages of 59.5 and 72 can choose to buy an annuity with that allocation, locking in ongoing income. The remaining 70% can be kept in stocks or bonds or cashed out. Is this unique offering a suitable replacement for a government pension or dividend income?
Financial advisors weigh the pros and cons of this unique retirement solution.
—————
Breaking point
BlackRock Chairman and CEO Larry Fink believes retirement income solutions to be one of the biggest economic challenges of the mid-21st century.
Fink didn’t mince words in a recent annual letter to shareholders: “Today in America, the retirement message that the government and companies tell their workers is effectively: ‘You’re on your own.”
The United States’ pension system pales compared to other advanced economies; 2023’s Mercer CFA Institute Global Pension Index ranked it 24th out of 47 countries. Portugal, Germany, Finland, and Australia all fared better.
Without an adequate social security safety net, Americans risk falling through the cracks. Results of the recent Schroders 2024 U.S. Retirement Survey show Americans ‘ retirement feeling the heat. Less than half (44%) of those surveyed feel they have saved enough. Roughly a quarter (24%) remain unsure, and a third (33%) are certain their savings will run out.
“I believe all American workers should be entitled to access some form of tax-advantaged retirement vehicle without employer sponsorship,” says Daniel Masuda Lehrman, Founder and Lead Advisor at Masuda Lehrman Wealth. “Of course, many vehicles like SEP IRAs and individual 401Ks exist for self-employed individuals, but the contribution limits are not consistent across these various qualified plans.”
With Social Security’s trust funds set to deplete by 2033, private sector solutions like annuity products may be a path forward.
—————
Rigid, yet reliable?
Annuities and pensions similarly issue a fixed income flow over a long period.
“Annuities can be a great substitute for pensions,” says Carman Kubanda, Certified Financial Planner at Innovative Wealth Building. “If you’ve built up a 401k and want to transfer some of the risk away from your portfolio, an annuity will accomplish this.”
Unlike exchange-traded funds or other investment vehicles, annuities may have hefty management fees. Additionally, profound life changes can make an annuity’s iron-clad guarantee more of a flaw than a feature.
“Some annuities can have long surrender periods and will penalize you if you pull funds out before the surrender period ends,” adds Kubanda. “There are many different types of annuities designed for different purposes… select one appropriate for your situation and goals.”
“Perhaps the most important issue is that once in place, annuities are relatively inflexible, thus making it more difficult to address specific financial plan situations,” says Chris Chen, Chief Financial Planner and Owner of Insight Financial Strategies.
“It’s a matter of risk tolerance. In retirement, many retirees’ risk tolerance naturally becomes more conservative,” says Masuda. “Drawing income from a fluctuating portfolio balance is scary. In my experience, many clients who buy income annuities in retirement enjoy the predictability and simplicity of receiving monthly checks and knowing their essential expenses are covered by guaranteed sources of income.”
However, a well-developed plan may not necessitate annuities.
“How to create a retirement income plan is a known technology,” says Chen. “Retirement income plans that are not based on annuities can be more flexible for variable spending from one year to the next, more income tax efficient, and more flexible for legacy planning.
Experts anticipate new strategies will arise in the quest to resolve the looming retirement crisis.
Annuity-based retirement funds may bear benefits or offer solutions, but not without drawbacks; they may provide a steady income stream and offer protection from market volatility, but often have higher fees and complex structures. Annuities may also lack the flexibility to secure emergency cash.
The debate around the merits of annuities and other products underscores the imperative for comprehensive solutions. Yet, every retiree is different, thus the value in working with an experienced financial advisor who is qualified to recommend strategies personally tailored to an individual’s needs.
