Rollover 401(k) - Here Come Annuities

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This week:

In this episode of the Insurance Experts called Rollover 401(k) – Here Come Annuities, I interview Charlie Gipple of CG Financial Group. Charlie has decades of experience working with insurance companies, advisors, and personal clients. In this video, Charlie shares a strategy that helped his client, Matt, transform current retirement assets into a guaranteed lifetime income. This allowed Matt to not have to guess how much to spend each year in retirement, and worry about running out of money.

Annuities offer a solution to this retirement decumulation dilemma by providing longevity insurance. By pooling the money from people who live both shorter and longer lives, annuities are able to provide lifetime income for those people who might otherwise outlive their money. There are many different types of annuities, insurance company products, and features, each with their own distinct use cases and price points. Annuities can be complex to analyze, which is why it is important to work with an annuity insurance specialist and also a financial and tax professional to decide the best way to fund the annuity. 

401(k) Rollover to IRA - Annuity Funding Strategy

401(k) plans may allow an option for employees to take an “in-service non-hardship withdrawal,” where they can rollover their 401(k) funds into a traditional individual retirement account (IRA) without it being considered a withdrawal that incurs taxation. The IRA can then be used to purchase an annuity from an insurance company to provide a guaranteed lifetime income. Employees should contact their employer or financial advisor both to see if the 401(k) plan offers this option and if it is appropriate for them to move money given their situation. 

The SECURE Act, which is being considered by Congress, has a provision in its current form that makes it more likely annuities will be offered directly in 401(k) plans. However, it may take many years for the market to adopt the changes. To learn more about this subject, read this fantastic article on the topic: It’s time to get over how much we hate annuities. Get familiar with annuities now because they are becoming even more critical given the massive shift to 401(k) savings. 

For the past few decades, the vast majority of employers have been offering defined contribution 401(k) plans instead of defined benefit pension plans that used to provide a lifetime income for retirees. With the defined contribution approach, employees accumulate assets into retirement accounts pre-tax. However, at retirement there may not be a plan to convert these savings into an income stream that can last the rest of their lives.

“How much to spend and how much to invest in retirement has been called by Nobel Prize winning economist, Bill Sharpe, ‘the nastiest, hardest problem in finance.’” 

Many people overestimate the amount that they can take out of their retirement accounts each year and still maintain a balance to provide for future income. It used to be the rule of thumb was a 4% withdrawal. However, given people living longer lives and lower interest rates today, the amount that should be withdrawn is likely to be lower. This does not even account for health care and long-term care costs later in life. 

There are also people that underestimate the amount they can spend in retirement. The uncertainties keep them from enjoying their retirement years because they feel they have to save more "just in case" money than is necessary. “Evidence suggests people don’t spend their savings in retirement until they or their spouse gets sick, then they spend almost all of it on health expenses.” This is just one key reason why more financial advisors are considering long-term care insurance for their clients.

Insurance can be a valuable tool to provide protection against these fears and allow your clients to live the lifestyle that they spent their working lives saving for!

Want to Learn More?

Visit www.buddyins.com. BuddyIns is a community of client-first insurance specialists dedicated to helping financial professionals across the country get their clients customized solutions. We partner with leading general agencies around the country to provide point-of-sale client support.