In USA Today’s article “Your Money: Some companies offer 401(k) annuity option,” Sandra Block explains how you can avoid the possibility of outliving your income. It’s quite hard to determine how much money to withdraw from savings during your retirement. You risk not being able to pay your bills withdrawing too little or outliving your savings withdrawing too much. Some employers have started offering 401k annuities to their employees. Annuities offer guaranteed income over an investor’s lifetime in exchange for a lump sum payment to an insurance company. While some investors may be wary of handing out a large sum of money on their own, having a portion of one’s 401k put into an annuity is more appealing to many people.
While not many companies are offering this 401k annuity option just yet, those who do offer both fixed and variable annuities. Your fixed payment is based on fixed annuity rates and will not change, while variable annuity payments are based on a portfolio of stocks or bonds. Some of the advantages to buying 401k annuities are the lower costs and lower risk of low interest rates. Since your company will buy annuities at institutional rates, your fees, commissions, and administrative costs will usually be lower than purchasing the annuity on your own. When purchasing an annuity on your own, the interest rate at the time of purchase will determine your monthly payment. 401k annuity plans take the average interest rate over the period of your contributions, usually most of your career. You can have a better chance for higher interest rates over time, especially in a time of recession like we are in currently.