The new and lucrative way to turn your 401(k) into income

The image shows a couple reviewing their retirement plan. Fidelity Investments plans to launch a new product next year that will allow people to move a portion of their employer-sponsored retirement plan into an annuity.

Creating reliable retirement income streams is one of the most important elements of a person’s financial plan. A retirement industry giant says it now has a new way for retirees to meet this vital challenge.

Fidelity Investments plans to launch a new product next year that will allow people to move a portion of their employer-sponsored retirement plan into an annuity. The offering, called Guaranteed Income Instant, will allow participants in 401(k) and 403(b) plans to convert their retirement savings into a guaranteed stream of retirement income similar to pension payments.

Fidelity’s product is not the first of its kind. Since the passage of the SECURE Act in 2019, the financial services industry has begun offering annuities within retirement plans to meet the growing demand for annuity income streams.

It is important to note that annuities are often maligned for their high costs and complex structures. A financial advisor can help you determine whether an annuity is the right investment option for you.

Fidelity’s new product

The image shows a woman reviewing her finances.  Fidelity Investments plans to launch a new product next year that will allow people to move a portion of their employer-sponsored retirement plan into an annuity.

The image shows a woman reviewing her finances. Fidelity Investments plans to launch a new product next year that will allow people to move a portion of their employer-sponsored retirement plan into an annuity.

Fidelity says Guaranteed Income Direct will allow employers to offer an immediate income annuity to employees through an insurer of their choice. Fidelity will provide digital tools through its employee benefits portal to help employees determine the appropriate amount of guaranteed income, Fidelity said in a press release announcing the new product.

Participants in the scheme will be able to convert any amount of retirement savings into an annuity that will act as a “personal pension”, the company said. Individuals can convert savings regardless of whether the money is in mutual funds, individual stocks or other assets.

Any money not converted into an annuity can remain in the workplace savings plan.

“The transition from saving for retirement to retirement is one of the biggest transitions a person will make in their lifetime, and one of the top challenges people face during this transition is how to ensure they have enough predictable income to to cover their basic expenses. Keri Dogan, senior vice president of retirement solutions at Fidelity, said in the press release.

Fidelity said the product will be available to select customers in the first half of 2022 before becoming more widely available in the second half of the year.

Annuities in retirement plans: A growing trend

The image shows a person looking at his finances.  Fidelity Investments plans to launch a new product next year that will allow people to move a portion of their employer-sponsored retirement plan into an annuity.

The image shows a person looking at his finances. Fidelity Investments plans to launch a new product next year that will allow people to move a portion of their employer-sponsored retirement plan into an annuity.

Fidelity is the latest financial services company to add an annuity option to its retirement plans.

BlackRock, the world’s largest asset manager, has added a target date strategy called LifePath Paycheck, which allows pension plan participants to buy a lifetime income stream using their retirement savings.

Meanwhile, Nationwide announced last month that it was teaming up with Capital Group to launch a similar product that packages a target-date fund with a lifetime annuity.

This proliferation of annuities in retirement plans is a byproduct of the SECURE Act, the comprehensive retirement legislation signed into law in 2019. The law made it easier for plan sponsors to incorporate annuities into retirement plans by defining the ways in which a sponsor can satisfy fiduciary obligations when offering guaranteed income streams to participants.

The shift also comes at a time when traditional pension plans are becoming increasingly rare.

According to the Bureau of Labor Statistics, only 15% of private sector workers have access to both defined benefit plans (pensions) and defined contribution retirement plans in 2021. Meanwhile, only 3% have access to only defined benefit plans . That’s a significant drop from 1975, when about 74 percent of private workers were enrolled in defined benefit pensions, according to Labor Department data.

With Social Security facing significant funding challenges that could reduce future benefits by 25%, retirement savers will likely look for new ways to add reliable sources of income to their financial plans.

Conclusion

Annuities have become an increasingly popular offering in retirement plans since the passage of the SECURE Act. Fidelity Investments will roll out its own annuity option in 2022 that will allow participants of 401(k)s and 403(b)s to turn their retirement savings into guaranteed lifetime income streams. However, with high costs and complex structures, annuities are not a one-size-fits-all solution for all retirees. A financial advisor can help you determine if it should be part of your retirement plan.

Tips for managing your retirement savings

  • Are you saving enough? Experts say your expenses in retirement will be about 80% of what they were before retirement. SmartAsset’s Retirement Calculator can help you determine how much you’ll need in your golden years and whether you’re on track.

  • A financial advisor can be a trusted partner as you plan for retirement, helping you determine what your needs will be and how to meet them. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisors at no cost to decide who is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Photo Credit: ©iStock.com/Tinpixels, ©iStock.com/Sneksy, ©iStock.com/Chainarong Prasertthai

The post There’s a new way to turn your 401(k) into a pension-like income stream appeared first on SmartAsset Blog.

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