Do-it-yourself retirement income: IRA rollover
(MoneyWatch) When it comes to generating retirement income from your 401(k) plan, you're unfortunately on your own. At least that's the message sent by the majority of 401(k) plan sponsors, which don't provide retirement income options in their plans.
But don't despair. My last post described how you can turn your 401(k) funds into a retirement paycheck by using the installment payment feature in your 401(k) plan. I also describe another way to generate that retirement paycheck: rolling your 401(k) account to an IRA. You'll want to use an IRA rollover if the installment method in your employer's 401(k) plan won't work for you, either due to the lack of an installment feature, low-performing/high-cost funds in your employer's 401(k) plan, or if you'd rather have a guaranteed lifetime retirement paycheck.
The challenge is finding a financial institution that provides a variety of effective retirement income offerings and gives you a fair shake on fees and performance. Let's take a look at two such IRA providers: Fidelity Investments and Vanguard.
Fidelity's retirement income options
Fidelity offers four products (described below) that can generate a retirement paycheck. The products differ in whether your retirement income is guaranteed for life, and whether your income is protected from investment fluctuations.
Income replacement funds: These are managed payout funds that invest your savings in a Fidelity mutual fund that's balanced between stocks and bonds, and then make monthly payments to you consisting of both principal and investment earnings. Each fund has a target year at which your money is expected to be exhausted, so it's pretty clear there's no lifetime guarantee. For this option, you should either choose a target year that's well beyond your projected life expectancy or have other sources of retirement income that will kick in after the target-year deadline.
Fixed income annuities: Fidelity sponsors the Fidelity Insurance Network, which consists of a number of participating insurance companies that provide immediate annuities that guarantee a lifetime retirement income in a fixed dollar amount. For an additional charge, you can buy an optional, cost-of-living adjustment, either as a flat percentage increase or as an adjustment based on the Consumer Price Index.
Variable income annuities: These immediate annuities guarantee a lifetime retirement income that varies according to the performance of an underlying portfolio of Fidelity mutual funds. Your monthly income is adjusted either up or down to the extent the underlying portfolio's return is different from an annual rate of return of 3.5 percent (the assumed investment return, or AIR).
Growth and guaranteed income: Fidelity offers a guaranteed lifetime withdrawal benefit (GLWB) product through MetLife (MET) that provides you with a lifetime guaranteed income that comes with limited upside potential if the underlying investments perform well but that won't decrease your income if investment performance is poor. You also have limited access to your retirement savings in case you need to make unanticipated withdrawals.
Fidelity has excellent online tools that can estimate how much income you'll receive from each of these products so you can more easily decide which of these retirement income products might work best for you. One such tool is the Fidelity Income Strategy Evaluator, which helps you estimate your fixed and discretionary living expenses and then offers suggestions for income sources to cover your living expenses. It asks you simple questions about your goals regarding leaving a legacy and how important it is that you have guaranteed sources of retirement income. It then suggests the mix of retirement income products that best meet your goals and circumstances.
Fidelity also employs telephone representatives who can answer your questions on the above products.
Vanguard's retirement income options
Vanguard offers lineup of retirement income products that are similar to Fidelity's products. Here's the rundown:
Managed payout funds: These funds invest your savings in one of three Vanguard mutual funds that are balanced between stocks and bonds and then make monthly payments consisting of principal and investment earnings. With this option, it's intended that your savings will last indefinitely, although there's no actual lifetime guarantee if you happen to live well past your projected life expectancy or experience poor investment performance.
Immediate fixed annuities: Vanguard has partnered with Hueler's Income Solutions annuity bidding service to shop immediate annuities that guarantee a lifetime retirement income in fixed dollar amount. You can also buy an optional, cost-of-living adjustment, either as a flat percentage increase or as an adjustment based on the CPI.
Immediate variable annuities: Vanguard has partnered with American General Life to provide access to immediate variable annuities that offer a guaranteed lifetime retirement income that varies according to the performance of an underlying portfolio of Vanguard mutual funds. Your monthly income is adjusted up or down to the extent that the underlying portfolio's return is different from an AIR that you select (either 3.5 percent or 5 percent). The higher your AIR, the higher your initial retirement income. But then your income will change at a rate that's lower compared to the 3.5 percent AIR -- an example of "pay me now or pay me later."
Vanguard doesn't have the robust online modeling and decision support that Fidelity does, but you can schedule telephone consultations with a Vanguard Certified Financial Planner.
Both Fidelity and Vanguard offer a handful of reasonable products that will help you generate retirement income that meets a variety of possible financial goals and circumstances. And with an IRA at either institution, you can always implement the installment payment solution that I described in my previous post. It's possible for "do it yourselfers" to implement these retirement income offerings, but you'll have to put in a fair amount of time and effort to understand all your choices.
It's entirely possible you might need the assistance of a financial professional to help you with these decisions. If you choose to hire someone, make sure the person has your best interests at heart and can help you understand the pros and cons of each approach. It's well worth the effort -- your financial security for the next 20 to 30 years is at stake.
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