Should I split my retirement money between an indexed annuity and company 401(k), or invest it all in an annuity?
I am retiring at age 63 and planning to live on savings until age 66 (full retirement age) and then dip into Social Security. I am trying to decide if I should keep some money in my existing company 401(k) and invest the rest in an indexed annuity. Alternatively, should I invest everything in an indexed annuity? Is there another investment option I should consider?
Hi thanks for asking the question before jumping into an annuity. Annuities can be useful tools in retirement planning and may have a place in your planning if your level of savings may not be enough to sustain your desired lifestyle.
What is the reason you are considering the indexed annuity?
Generally speaking you buy an annuity to protect against outliving your assets. So you therefore want to use up the least amount of savings to purchase as much income as possible. Typically a single premium immediate annuity or a qualified longevity annuity contract will provide that. Variable annuities and indexed annuities, for example, are not going to get you the same level of income without a higher premium.
I'd suggest taking a step back and reviewing your situation, your needs and objectives. If you have a qualified advisor, one who doesn't earn commissions based on selling you a product like an annuity, speak with him or her. Have the advisor help you project the likelihood of you funding and sustaining your desired lifestyle and if an annuity has a place or need in there. Also take a look at the benefits of delaying your Social Security income beyond full retirement age as well as review an appropriate investment strategy and plan for your 401(k) savings and any other savings/investments you may have. Good luck and all the best!
I’m so glad you posted the question to learn before making any irrevocable decision. Annuity is a wonderful tool to plan for retirement, but the cost for an annuity can be much higher than a regular investment account. Thus, the questions you must ask to yourself:
1) Why am I purchasing an annuity? Is it because I have an income gap (they money you will get from social security, RMD from retirement accounts, etc. & your annual living expenses)?
2) What other annuity options do I have? Why do I choose an index annuity? Is it for safety, signing bonus, or something else? In comparison, will my situation be improved if I select a SPIA (single premium immediate annuity) or a variable annuity with a lifetime income benefits rider?
3) How will the annuity best benefit for me? What’s the cost for each option?
4) Can I achieve the same result without the annuity? Say, use my investment account, a home-line of credit, a reverse mortgage, etc. to bridge the immediate cash needs until I’m at my full retirement age for social security benefits?
5) Lastly, how do those choices benefit my spouse if I pass away?
The questions can go on and on, but you need to do your due diligence. With the help from a RICP®, you can make an educated decision to know if an annuity works for you and which one will best benefit you and your family. Best!
There are a lot of other investment options available. I suggest you sit down with a “Fee only” independent Registered Investment Adviser (RIA). RIA’s are fiduciaries and will have your best interest at heart. Find one who is a Certified Financial Planner professional ™ (CFP®). You can find advisers at the following websites:
National Association of Personal Financial Advisors - https://www.napfa.org/financial-planning/how-to-find-an-advisor
Financial Planners Association - http://www.plannersearch.org/
Let me start with the indexed annuity. You will earn over time probably 2-3 points above current CD rates. You can certainly use the conservative part of your allocation here, as opposed to bonds, which will continue to drop in price as the Fed increases interest rates. Yes, the maximum interest crediting may be much higher than that, but remember that the participation rate and maximum crediting both move year by year at the discretion of the insurance company. My point here is that at age 63, your retirement could easly span 30 years. Consequently I'd recommend that you have at least some money invested for long-term growth.
Whether the account you'll draw from now is in the 401K or an IRA doesn't matter tax-wise, as you've aged out of any 10% penalty. Look at the underlying investments available to you in 401K vs. the entire universe of investments available to you in an IRA.
I would strongly encourage you to delve deep into your retirement cash flow picture to determine the "paycheck" you need from your retirement savings in order to meet your desired living expenses. With proper investment advice you should be able to design a portfolio that will be a better option than an indexed annuity. You could set aside a warchest of bonds and cash within the portfolio that you will use for withdrawals in early retirement, with the remainder in low cost passive equity ETFs for long term growth, knowing that you won't touch that portion of the account for 10+ years.
Annuities are often sold and rarely bought. They come with high fees and they provide less flexibility because they lock up your money. While they are appropriate in some cases, I would advise that you speak with to explore whether designing your own retirement portfolio is possible. When it is, it's usually the better option, but it all depends on your individual circumstances.