New Rule Your 401(k) as an annuity

[justme]

Later this year, possibly in the third quarter, plan sponsors will be required to include two lifetime income illustrations on participants’ pension benefit statement at least once annually. In essence, the illustrations show how much income a participant’s account balance would produce in today’s dollars if used to purchase either a single life annuity or a qualified joint and 100% survivor annuity.

So it won't make any projections - just if your account has $100k in it here's how much per month an annuity you purchase with said $100k would give you. Part of me wonders if that might scare people off. The example in the article is $125k will give you $645 a month for life. Less financially savvy people might see how long and hard it's been for them to save that much money and it'll ONLY give them $645 when they retire?!?!!? Even if they're 20 years off from retirement and the balance will increase by quite a lot if they have it invested right. 

I guess this goes hand in hand with an article I saw a while back about how 401(k)s would start offering annuities. 

www.marketwatch.com/story/how-much-income-will-your-401k-provide-2021-02-10

[minnesotapaintlady]

Feb 11, 2021 13:57:57 GMT -5 justme said:

Later this year, possibly in the third quarter, plan sponsors will be required to include two lifetime income illustrations on participants’ pension benefit statement at least once annually. In essence, the illustrations show how much income a participant’s account balance would produce in today’s dollars if used to purchase either a single life annuity or a qualified joint and 100% survivor annuity.

So it won't make any projections - just if your account has $100k in it here's how much per month an annuity you purchase with said $100k would give you. Part of me wonders if that might scare people off. The example in the article is $125k will give you $645 a month for life. Less financially savvy people might see how long and hard it's been for them to save that much money and it'll ONLY give them $645 when they retire?!?!!? Even if they're 20 years off from retirement and the balance will increase by quite a lot if they have it invested right. 

I guess this goes hand in hand with an article I saw a while back about how 401(k)s would start offering annuities. 

www.marketwatch.com/story/how-much-income-will-your-401k-provide-2021-02-10

$645/month seems awfully optimistic if it's being adjusted for inflation as you go.  That's assuming a 6% draw to start when it's not recommended to go over 4%.

eta: Typo.  I meant 6% draw, but that's still high.

[justme]

Feb 11, 2021 14:10:24 GMT -5 minnesotapaintlady said:

Feb 11, 2021 13:57:57 GMT -5 justme said:

So it won't make any projections - just if your account has $100k in it here's how much per month an annuity you purchase with said $100k would give you. Part of me wonders if that might scare people off. The example in the article is $125k will give you $645 a month for life. Less financially savvy people might see how long and hard it's been for them to save that much money and it'll ONLY give them $645 when they retire?!?!!? Even if they're 20 years off from retirement and the balance will increase by quite a lot if they have it invested right. 

I guess this goes hand in hand with an article I saw a while back about how 401(k)s would start offering annuities. 

www.marketwatch.com/story/how-much-income-will-your-401k-provide-2021-02-10

$645/month seems awfully optimistic if it's being adjusted for inflation as you go.  That's assuming a 6% draw to start when it's not recommended to go over 4%.

eta: Typo.  I meant 6% draw, but that's still high.

It's not a draw - it's an annuity. It's saying if you bought an annuity with your current 401(k) balance this would be how much the annuity would pay you every month until you die. 

[minnesotapaintlady]

Feb 11, 2021 14:16:47 GMT -5 justme said:

Feb 11, 2021 14:10:24 GMT -5 minnesotapaintlady said:

$645/month seems awfully optimistic if it's being adjusted for inflation as you go.  That's assuming a 6% draw to start when it's not recommended to go over 4%.

eta: Typo.  I meant 6% draw, but that's still high.

It's not a draw - it's an annuity. It's saying if you bought an annuity with your current 401(k) balance this would be how much the annuity would pay you every month until you die. 

Ah.  Guess I never even thought of buying an annuity with 401K money.  Seems risky.   If you die the next week all that money is gone...I mean, not that it matters much to you personally at that point, but I'd rather just make the draws myself so there is at least the potential for an inheritance for the kids.

[justme]

Feb 11, 2021 14:28:41 GMT -5 minnesotapaintlady said:

Feb 11, 2021 14:16:47 GMT -5 justme said:

It's not a draw - it's an annuity. It's saying if you bought an annuity with your current 401(k) balance this would be how much the annuity would pay you every month until you die. 

Ah.  Guess I never even thought of buying an annuity with 401K money.  Seems risky.   If you die the next week all that money is gone...I mean, not that it matters much to you personally at that point, but I'd rather just make the draws myself so there is at least the potential for an inheritance for the kids.

Yeah, the article didn't go much into why this was being implemented. Though I did see a while back that it got okayed or whatever for 401(k)s to start selling annuity. The two their showing is an annuity just for you or one with 100% survivorship. 

[buystoys]

They were talking about this on another forum last month.  The consensus was that it pretty much makes no sense to buy an annuity.  I can't think of why it would be a good reason other than people not knowing how much to take out of their 401 (k) every month or every year.  That's an expensive price to pay for convenience though.

[teen persuasion]

Feb 11, 2021 14:33:37 GMT -5 justme said:

Feb 11, 2021 14:28:41 GMT -5 minnesotapaintlady said:

Ah.  Guess I never even thought of buying an annuity with 401K money.  Seems risky.   If you die the next week all that money is gone...I mean, not that it matters much to you personally at that point, but I'd rather just make the draws myself so there is at least the potential for an inheritance for the kids.

Yeah, the article didn't go much into why this was being implemented. Though I did see a while back that it got okayed or whatever for 401(k)s to start selling annuity. The two their showing is an annuity just for you or one with 100% survivorship. 

Yep, that's why.  Gotta wonder how many palms they had to grease to get this monstrously bad idea into law.

Yes, people are bad with math.  That doesn't mean you should give the insurance industry the opportunity to prey on those people - you should protect them!

Biggest thing NOT said in this glowing endorsement - those annuities are not going to be inflation indexed as SS is.  People want a monthly income, but it's not protecting them if it loses ground to inflation over decades.


Badly written article, too: "A richer — no pun intended — is certainly what those saving for retirement deserve."  A richer _what_?

[Tiny]

I think the majority of people would like a 'sure thing' number which the annuity gives (even if it doesn't account for inflation.)

back in the day when I needed some way to "quantify" how the money in my 401K might give me in retirement (mind you I was 30 years or more away from retirement) I just took the current balance and applied the 4% rule thingy and then divided by 12. So, 100K would be 4K per year or $333 a month for life (and maybe some left over for my "heirs".) I knew it wasn't perfect but it did give me "a number" that was a good guesstimate.

I'm kind of seeing this like how credit card statements show you how long it will take and how much it will cost to pay off a balance if you only pay the minimum due.


Strangely enough back in my late 20's - a "financial advisor" selling a Variable Life policy calculated that I would need about 2.5 million in investments/savings to retire at 65 (it assumed no SS, no pension - just living off the money I had saved/invested). And that number is about right (I'm 57) - if I had no pension and no SS

I remember being speechless and overwhelmed by that 2.5 million number. It's stuck with me all this time. (I didn't buy the "insurance").

[justme]

Feb 11, 2021 15:30:21 GMT -5 @bamafan1954 said:

Feb 11, 2021 13:57:57 GMT -5 justme said:

So it won't make any projections - just if your account has $100k in it here's how much per month an annuity you purchase with said $100k would give you. Part of me wonders if that might scare people off. The example in the article is $125k will give you $645 a month for life. Less financially savvy people might see how long and hard it's been for them to save that much money and it'll ONLY give them $645 when they retire?!?!!? Even if they're 20 years off from retirement and the balance will increase by quite a lot if they have it invested right. 

I guess this goes hand in hand with an article I saw a while back about how 401(k)s would start offering annuities. 

www.marketwatch.com/story/how-much-income-will-your-401k-provide-2021-02-10

I'd be even more dismayed if I saw that a 4% withdrawal against that $100k would only pay me $333.33 a month!  Sure, you are likely to be gaining at least that much so are not touching your principal, but that would really depress me.  

I actually think the futility factor is one of the reasons that some people don't save more for retirement.  People on this board like to dream about the million or two they are striving, but 1 million will only provide you with $40k worth of income, which will be worth a whole lot less than today's $40k when you retire.  You still end up dependent on SS for a decent (not luxurious but decent) lifestyle.  

Of course, smart people still save.  But it is disheartening whichever way you think about it.

I can only go by the two 401(k)s I have and both show your potential income with assumptions. Contributions staying the same (or going up with inflation/salary increase), a certain amount of investment return, currrent age, retirement age, etc then it says based on these assumptions you're likely to have $X a month in retirement. So mine have never done estimates based on current balance. 

[Tiny]

Feb 11, 2021 15:17:44 GMT -5 teen persuasion said:

Feb 11, 2021 14:33:37 GMT -5 justme said:

Yeah, the article didn't go much into why this was being implemented. Though I did see a while back that it got okayed or whatever for 401(k)s to start selling annuity. The two their showing is an annuity just for you or one with 100% survivorship. 

Yep, that's why.  Gotta wonder how many palms they had to grease to get this monstrously bad idea into law.

Yes, people are bad with math.  That doesn't mean you should give the insurance industry the opportunity to prey on those people - you should protect them!

Biggest thing NOT said in this glowing endorsement - those annuities are not going to be inflation indexed as SS is.  People want a monthly income, but it's not protecting them if it loses ground to inflation over decades.


Badly written article, too: "A richer — no pun intended — is certainly what those saving for retirement deserve."  A richer _what_?

Yeah, I have a sibling that "gloats" over how awesome it is that he has an annuity that will provide X dollars per month for life!.   He was convinced to buy the annuity by his "financial advisor".      He is very conservative - so I guess there's some comfort in knowing this money will be available every month.  I'm sure at some point in the future his "gloat" will turn to "angry whining" when inflation eats away at the buying power of that money.  

I don't think the annuity is a major part of his retirement money.  I'm not sure if it has some sort of survivor benefit if he dies before his wife (when I asked he looked at me like I had two heads and I'm not sure what that meant). 

I can see where that single/survivor benefits thing may screw over spouses if the person converting their 401K to an annuity doesn't consider their spouse.   (which isn't too far fetched - because people are bad at math AND make assumptions on how things work.)    


 

[minnesotapaintlady]

I can maybe see buying an annuity with a small portion of retirement to supplement SS for a bare bones budget in case you needed to go several years without touching investments in a down turn, but the no increase for inflation could get really ugly if we're talking 20-30 years.  I think have several years in liquid or safe investments makes more sense.

If selling annuities gets to be common with 401Ks I can see a lot of people choosing that option same as so many pick the annuity for lottery payouts when it makes no sense mathwise.  But...I guess if it means you don't blow it all in the first few years it might be worth it to some people.

[Deleted]

Feb 11, 2021 15:34:24 GMT -5 justme said:

Feb 11, 2021 15:30:21 GMT -5 @bamafan1954 said:

I'd be even more dismayed if I saw that a 4% withdrawal against that $100k would only pay me $333.33 a month!  Sure, you are likely to be gaining at least that much so are not touching your principal, but that would really depress me.  

I actually think the futility factor is one of the reasons that some people don't save more for retirement.  People on this board like to dream about the million or two they are striving, but 1 million will only provide you with $40k worth of income, which will be worth a whole lot less than today's $40k when you retire.  You still end up dependent on SS for a decent (not luxurious but decent) lifestyle.  

Of course, smart people still save.  But it is disheartening whichever way you think about it.

I can only go by the two 401(k)s I have and both show your potential income with assumptions. Contributions staying the same (or going up with inflation/salary increase), a certain amount of investment return, currrent age, retirement age, etc then it says based on these assumptions you're likely to have $X a month in retirement. So mine have never done estimates based on current balance. 

You were responding as I was deleting that post.  I was afraid my math was wrong, but it wasn't.

I still remember the Primerica (or whatever it was called) telling me that I would have 2.5 million dollars when I retired based on the 95k in my divorce settlement and what I was contributing to my Roth.  All I had to do was invest with them instead.  Man, I could use that missing 2 million these days. 

[Deleted]

Feb 11, 2021 15:46:27 GMT -5 minnesotapaintlady said:

I can maybe see buying an annuity with a small portion of retirement to supplement SS for a bare bones budget in case you needed to go several years without touching investments in a down turn, but the no increase for inflation could get really ugly if we're talking 20-30 years.  I think have several years in liquid or safe investments makes more sense.

If selling annuities gets to be common with 401Ks I can see a lot of people choosing that option same as so many pick the annuity for lottery payouts when it makes no sense mathwise.  But...I guess if it means you don't blow it all in the first few years it might be worth it to some people.

Actually an annuity is one way that a caretaker spouse can protect part of the family income from Medicaid for nursing home costs.  So it is not entirely a senseless move.  

[justme]

Feb 11, 2021 16:20:31 GMT -5 @bamafan1954 said:

Feb 11, 2021 15:34:24 GMT -5 justme said:

I can only go by the two 401(k)s I have and both show your potential income with assumptions. Contributions staying the same (or going up with inflation/salary increase), a certain amount of investment return, currrent age, retirement age, etc then it says based on these assumptions you're likely to have $X a month in retirement. So mine have never done estimates based on current balance. 

You were responding as I was deleting that post.  I was afraid my math was wrong, but it wasn't.

I still remember the Primerica (or whatever it was called) telling me that I would have 2.5 million dollars when I retired based on the 95k in my divorce settlement and what I was contributing to my Roth.  All I had to do was invest with them instead.  Man, I could use that missing 2 million these days. 

Oh my I remember my ex after we broke up but were still amicable trying to get me - a senior economics major that was part of the business college so I was taking all business classes too - to buy into Primerica. Though more as a seller than give them money. I just googled - kinda surprised it still exists lol

[jerseygirl]

Some annuities do pass to heirs, usually the amount first put in is guaranteed ( most annuities are from insurance companies).
I taught in a college for 10 years and that money can be from an annuity. Think of it as a pension. Usually get more money monthly than 4% and some people like to have some guarantee for income instead of all in the stock market.
Bonds (or CDs) pay very little now so the old 60/40 stock/bonds is not very feasible for many

[Deleted]

Feb 11, 2021 17:59:07 GMT -5 jerseygirl said:

Some annuities do pass to heirs, usually the amount first put in is guaranteed ( most annuities are from insurance companies).

Many annuities have a Guaranteed Minimum Death Benefit but that's at the cost of a lower payment when you're alive- or a higher premium.

I'm not opposed in principle to showing people what level of annuity their projected nest egg would buy in the market at retirement (expressed in current dollars)- most people have a hard time with compound interest calculations and it might give them a idea of what they might collect in retirement at their current savings level (maybe with some assumption about annual increases in contributions).

I'd have a big problem with selling them- apparently they're a very bad idea inside a 401(k) because you lose the usual tax advantages of an annuity (I'm not an expert on this).  I hadn't even thought of the ugly scenario in which a worker purchases an annuity with no survivor benefit.  That used to happen a lot with pensions and typically the first time the widow found out was shortly after the funeral.  Most states now require spousal signoff on that option and I'd hope they would for annuities as well.

[Deleted]

Feb 11, 2021 20:29:30 GMT -5 @athena53 said:

Feb 11, 2021 17:59:07 GMT -5 jerseygirl said:

Some annuities do pass to heirs, usually the amount first put in is guaranteed ( most annuities are from insurance companies).

Many annuities have a Guaranteed Minimum Death Benefit but that's at the cost of a lower payment when you're alive- or a higher premium.

I'm not opposed in principle to showing people what level of annuity their projected nest egg would buy in the market at retirement (expressed in current dollars)- most people have a hard time with compound interest calculations and it might give them a idea of what they might collect in retirement at their current savings level (maybe with some assumption about annual increases in contributions).

I'd have a big problem with selling them- apparently they're a very bad idea inside a 401(k) because you lose the usual tax advantages of an annuity (I'm not an expert on this).  I hadn't even thought of the ugly scenario in which a worker purchases an annuity with no survivor benefit.  That used to happen a lot with pensions and typically the first time the widow found out was shortly after the funeral.  Most states now require spousal signoff on that option and I'd hope they would for annuities as well.

Yes, my ex would have had to sign off on my 401K at Macy's since we were still married when I started although we divorced soon after.  Fortunately (or unfortunately), they closed that store, at that time the only Macy's in Alabama, so they simply let me roll it over to my IRA.  Now that I think about it, they probably would have let me do that, anyway, when I eventually quit.

I was surprised that DH didn't have to sign off on my pension choices--100% all me, an amount with a survivor benefit, or an amount that was drawing against an account balance.  The account balance will last 10.5 years total, but I have been retired about 1.5 years.  That is the one I chose.  By the point when I retired, it was clear that DH wouldn't outlive me unless I got hit by a bus.  Buses do hit people, which is why I chose the draw against the account balance.  The account balance is made up of what I contributed.  It is about $100 difference.

I stupidly bought a variable annuity inside an IRA when I first got divorced.  I had never dealt with retirement accounts before, and that is what my bank's guy recommended.  Lol.  Then he moved to Merrill Lynch, took me with him, and had to put up with me doing surrendering according to a 5-year schedule so as not to have to pay surrender charges.  A variable annuity has different choices, and he set those up to match the ones that the ML projections said.  They did as well as ML, which surprised his boss who took over the account after my original guy left.  So the first guy really sort of had my best interests at heart . . . within the parameters of earning him commissions. 

I am so glad I am with Vanguard now!

[bookkeeper]

Feb 11, 2021 16:24:07 GMT -5 @bamafan1954 said:

Feb 11, 2021 15:46:27 GMT -5 minnesotapaintlady said:

I can maybe see buying an annuity with a small portion of retirement to supplement SS for a bare bones budget in case you needed to go several years without touching investments in a down turn, but the no increase for inflation could get really ugly if we're talking 20-30 years.  I think have several years in liquid or safe investments makes more sense.

If selling annuities gets to be common with 401Ks I can see a lot of people choosing that option same as so many pick the annuity for lottery payouts when it makes no sense mathwise.  But...I guess if it means you don't blow it all in the first few years it might be worth it to some people.

Actually an annuity is one way that a caretaker spouse can protect part of the family income from Medicaid for nursing home costs.  So it is not entirely a senseless move.  

This!  I have been wondering for 5 years why my Dad bought an annuity when both he and Mom got Social Security and had plenty of property and investments to boot.

My Dad was in the hospital when his "investment guy" sold him this annuity.  I didn't find out about it until after he died two years later.  My Dad had his wits about him, so I knew there had to be a reason that he purchased such a product (when he absolutely hated paying for insurance of any sort).

He bought an annuity for 1 M and principal was guaranteed.  Growth was not. Protection for the spouse from being cleaned out by nursing home costs must have been the selling point. The balance didn't do much for several years, but now it is earning a respectable return.

Still unraveling the mystery.