Advantages of 401k Annuities

If, in retirement, you want to collect guaranteed income in the form of a predictable pay check for the rest of your life, you’ll need to purchase an annuity. Purchasing an annuity through your 401k plan offers some advantages not available in a traditional annuity.

Psychologically Easier

Nobody wants to had over a large chunk of their lifetime savings to an insurance company. By letting you contribute small increments over time, 401k annuities help you get over that psychological stumbling block.

Lower Costs

Annuities typically carry high fees to cover investment management, administrative costs and commissions. These fees reduce the amount of income you’ll receive when you retire. Company 401k plans can buy annuities at institutional rates, which means you should get a better deal on annuities from your 401k plan than you can get on your own.

Also, annuities have been getting more expensive because people are living longer. Increased life expectancies have boosted the cost of annuities around 20% over the past two decades. By starting to buy now, you may be paying less that you would when more longevity gains push prices up even more.

Lower Interest-Rate Risk

The more important variable when you buy an annuity is interest rates. The higher the rates are, the greater your eventual income will be. If you buy an annuity when the benchmark interest rate is at, say, 3%, you’ll get a lower monthly payout than if you bought one for the same amount at a 6% rate. But when you invest through a 401k annuity, the price of your annuity will be based on average rates during the period you invest in the option — which could include most of your working lifetime. That reduces the risk of sharp interest-rate fluctuations.