The days of guaranteed pensions from work are long gone, but can annuities make up the difference for millennials?
Congress is on the cusp of passing legislation that will open 401(k) plans to annuity products which guarantee lifetime income, alongside the more typical offerings of mutual funds, target-date funds and bonds.
Yet most people do not consider annuities until they are nearing retirement. At that point, they might take $100,000 or so from the sale of a house or a business and plunk some of it down on an annuity policy that will either delay payments for a few years or start immediately, getting something like $750 a month for life once they turn 65.
While it is rare for millennials to be interested in annuities, Arizona certified financial planner Ashley Folkes does have some clients who ask about lifetime income. "There are some that are really against risk," Folkes said.
For those clients, Folkes said there are annuities products that will give you more return than just a money market fund. He does not stray into the more risky and fee-laden variable annuities.
Clients of Shane Morrow, a Texas certified financial adviser, invest in annuities outside of their workplace retirement plans, which means they keep control of them even if they change jobs. The portability of the new 401(k) annuities that Congress will now permit is not clear yet.
Also unclear in the bills moving through Congress is what type of annuities will be offered, what fees will be charged, how taxes will be assessed and what the limits will be.
"Are they going to be reversible, so you can change your mind?" asked Glenn Daily, a fee-only insurance consultant in New York, something that is typically not possible today without huge surrender fees.
Daily also questioned the administrative costs, which can be considerable.
"I'm really skeptical that giving up investment flexibility at a young age is smart," Daily said. "You really have to be well compensated for giving up flexibility."
How much could millennials get out of annuities in a 401(k) while investing small amounts per payroll period? Maybe not too much, because they would still want to stick mostly with stocks — the recommended split between stocks and fixed income is 60-40 or 70-30.
It would take a 25-year-old making $50,000 and contributing 6% a long time to save anywhere close to $100,000 toward an annuity, considering they might just be putting in $50 a pop toward it.
Beth Pinsker writes for Reuters.
