Deferred Income Annuities
For those worried about draining their nest eggs, the government is promoting the use of deferred income annuities in 401(k) accounts. The Treasury Department and IRS released guidelines Friday to allow employers to voluntarily allow employee contributions to be placed in deferred income annuities. That means employees can elect to trade a lump-sum portion of their 401(k) contribution for monthly income payments that are guaranteed to last for life.
Whether that makes sense, though, depends on your situation. Annuities are attractive because they provide the ability to build tax-deferred savings and generate a steady stream of income in retirement. But they can also come with hefty fees—of as much as 3 percent a year or more—and returns vary depending on the annuity.
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"Some of the benefits of an annuity, such as tax deferral, are already present in retirement accounts without any additional costs," said Jason P. Flurry, a certified financial planner and president of Legacy Partners Financial Group in Georgia, adding, "There are other ways to earn a safe, more competitive return."
Still, for those who are at or near retirement, annuities can provide peace of mind.
"The one fear that all retirees share is running out of money during retirement," said Jeff Rose, CEO and founder of Flemington, N.J.-based Alliance Wealth Management. "Having a deferred income annuity will solve much of that by offering an income stream that will last a lifetime."