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I just realized that my employer offers 401k annuities when I retire. Anyone familiar with these? On paper it looks appealing because I would be receiving alot more each year than I would just drawing down my 401k taking withdrawals. But, I know...if it looks too good to be true...
I would read the fine print VERY carefully if I were you. and who guarantees the annuity company??? what if they go under? does it cover both you and spouse if one of you dies? Lots to consider.
check your state laws ,the states usually back them somewhat.
usually they are issued by insurance companies and in the event of a failure they are just rolled into another healthy company by the state regulators.
part of the agreement of selling insurance in a state is usually knowing a failing company can be merged into yours.
Definitely check the payout terms of the annuity choices. I'm thinking that some with a guaranteed 5, 10, or 15 year payout may not be so great after the period. You should compare them to other options available to you. For instance, you can rollover your 401k into an IRA. The main advantage is you'll have a larger selection of investment choices. Also, in the end, your estate or beneficiary will have the residual value as an inheritance, versus nothing on the annuity, assuming you're past the guaranteed period.
fidelity and vanguard offer lower cost annuities but they still arent there yet.
fidelity and vanguard ones are still very costly.
they both work the same way pretty much so lets look at the fidelity variable annuity which offers a 4-6% guaranteed payout depending on age .. and if the markets do better you only go up from there.
sounds great right? so lets take a closer look.
if you check the total annual annuity fees and fund expenses from fidelity for that the guaranteed income on their variable annuity ,they are taking back about 3% a year from your return in expenses for an annuity that passes to a spouse .
couple that with a 4-6%minimum guaranteed payout depending on age when you draw your income and that just about assures if the markets achieved their long term average return ,at best you will always only get the minimum payment. they tell you your annuity withdrawl can increase with the markets over time but that almost cant happen by design.
since your balance will by design always be worth less then you gave them after the payout and expenses ,you are pretty much locked into the minimum payments forever. a 100k put in the annuity, after 30 years at 8% will only have a balance of 84k left if markets even achieved 8% . since thats less than you started with your never going to earn more than the minimum. the fund managers would have to do better than the 8% historical return for that mix of stocks and bonds. thats more than likely not happening.
the way fidelity comes in 1% or so less than others in fees is there is no guaranteed minimum death benefit that most others have built in either. to equal that option you need a seperate life insurance policy.
so whats it all mean? depending on your age you may get a withdrawl rate of 4-6% thats fixed for life and no principal left for heirs... you could have gotten the same return from a tax free muni and had all your principal left for heirs. an immeadiate annuity has amnost a 40-50% greater payout rate depending on age. instead of 4% you can get just under 6% payout today.
in neither case are we taking return only withdrawl rate so dont start comparing this to something with a 4-6% return. they are very different.
Last edited by mathjak107; 04-25-2012 at 02:35 AM..
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