Annuities often get a bad rep in the public market place. You'll read they have high fees. You'll read they have high commission. You'll read that financial advisor salespeople love to sell them. However, if you talk to some of the happiest people in retirement like my own mother, one of the main financial reasons she is happy is that a fixed pension paycheck comes to her each and every month for the rest of her life. She doesn't worry about the stock market, the bond market, or the real estate market. The reason is because she gets an annuity for the rest of her life.
Consider for a moment that pensions have all but disappeared from major Fortune 500 corporations and most people today are suspect about how much they will get from Social Security. The burden of saving for retirement is squarely on the shoulders of you, the individual. While most 401(k)'s offer 10 to 20 choices on where to direct your funds (and now most offer target based funds), it is still extremely confusing and challenging for the average investor to know how to allocate their 401(k) funds. In fact, in my own recent study I did at oXYGen Financial, I asked 100 individuals if they use the automatic rebalancing feature available to them through their online login within their 401(k), and 98 of the 100 didn't even know what automatic rebalancing was as an actual feature. Each one of these professionals are making more than six figures and have more than a $100,000 401(k) balance.
Guaranteed Income Annuities (or other types of Guaranteed Annuities) may in fact be more expensive than a low cost ETF or mutual fund strategy, but given the choice would consumers want to spend the extra cost to know that they will have a retirement income they cannot outlive? The challenging part about this discussion is employers can set up the 401(k) in many different shapes and sizes today when it comes to investments. Although there are new fiduciary standards, there is no mandated option that would allow for an unsophisticated investor to simply click a button and be guaranteed to have an income for the rest of their life. Wouldn't this be a debate worthwhile having or should we just assume that 401(k) participants will not only know how to accumulate money in their 401(k)'s, but also have the skill to know how to distribute from them in retirement?
Written by: Ted Jenkin
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