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Save with 401k Plans, Then Use Annuities for Income


In a two part series for Bankrate, Chris Kissell interviewed a finance professor from Baltimore on the subject of retirement planning.  The first article, “Roth IRAs, Annuities, and Your Retirement,” was published in Fox Business’ personal finance section.  The first question asked whether one should invest in a Roth 401k or a Roth IRA when planning for retirement.  The professor believes that Roth 401k’s are too new to recommend and thinks that it will still be awhile before these types of plans are more widely offered through employers.  He says that it’s better to compare a traditional 401k plan to IRAs in general.  Contributing money into a traditional 401k plan with an employer match should be your first retirement savings priority.  The free money from your company and the tax benefits make this a great retirement savings vehicle.

Another perk of traditional 401ks is that companies often offer many different mutual fund choices that span an array of asset classes.  If you have maxed out your 401k plan contributions and are looking to invest extra cash in an IRA, the professor recommends putting some money in a Roth IRA and some in a traditional IRA.  He says that this is an effective way to prepare for tax payment in the future, since we don’t know exactly what the tax structure at that time will look like.  By minimizing the retirement income that they receive each year in retirement and using the right investments, a married couple may never have to pay taxes on 401k plan retirement income.

Next, the professor was asked if immediate annuities were a good product to use for generating retirement income.  Some people think that they are too expensive or that they should wait to buy an annuity because of low interest rates.  Shopping around for the right annuity is an important part of your retirement planning strategy.  Annuities are important for their fixed income stream that can last through your entire retirement.  Annuity payments can be used to pay for something specific every month, whether it be your basic living expenses or a hobby like golf.  By viewing annuities not only as an income stream, but one that pays for a specific expense, it can be easier for people to see their inherent value.  Social Security is in fact an annuity, a connection that many people do not make when they say they are opposed to annuities.  The basic advice from this article is to maximize your 401k savings and use some of the money to buy IRAs and some to buy annuities that will provide you with an income stream in the future.

Written by Rachel Summit

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