"Turning 401(k) Plans into Lifetime Investments"

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Taylor Larimore
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"Turning 401(k) Plans into Lifetime Investments"

Post by Taylor Larimore »

Bogleheads:

Good news for 401(k) investors. Starting next year, 401(k) investors will regularly receive information about the amount of income that their plan assets might deliver during retirement. Bogleheads can read the details by using the link below:

Turning 401(k) Plans into Lifetime Investments

Best wishes.
Taylor
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by sport »

I note within the article, it states:

"That is what insurance companies desire. By its own admission, the Insured Retirement Institute, which represents companies that sell annuities (along with any other insured retirement strategies), “fought hard” to include this provision in the SECURE Act. Ultimately, insurers would like to place annuities inside 401(k) plans, so that employees who wish to convert their lump sums into income can accomplish that task within the plan."

If this is so good for the insurance companies, I not so sure that it is "good news" for the plan participants. From my experience and many Boglehead posts, it is clear that life insurance companies are more than happy to take advantage of their customers.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by TomatoTomahto »

Thanks for the link. I learned today that “interim final” is a thing. :D
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by Broken Man 1999 »

Honestly, I have seen those who would have had a much better retirement had they annuitized their retirement accounts.

For better or worse, once done there would be no selling assets at the absolute wrong time, or trading, running to/from cash, or other account destroying activities.

Not everyone is a BH. And, we often see the same issues here.

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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by abuss368 »

Interesting and thank for sharing Taylor. I think this is a step in the right direction and will provide clarity to investors.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by GlennK »

From the article, it states

"But if retirees do forgo the annuity, they will have difficulty matching its payout, even if they start at age 67. Annuities have their disadvantages, but they do yield more than most investment alternatives."

Is this true? What other investment alternatives are they comparing annuities to? And if true, why doesn't everybody use single premium annuities rather than live off the assets?
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by anon_investor »

Broken Man 1999 wrote: Wed Aug 26, 2020 11:30 am Honestly, I have seen those who would have had a much better retirement had they annuitized their retirement accounts.

For better or worse, once done there would be no selling assets at the absolute wrong time, or trading, running to/from cash, or other account destroying activities.

Not everyone is a BH. And, we often see the same issues here.

Broken Man
That is definitely true, not every can stay the course. I have a coworker in his late 30s, who had his 401k 100% in S&P500, and in March he absolutely panicked, he shifted his entire 401k from S&P500 to an intermediate bond fund and he stopped contributing to it. In June after the historic run up he felt comfortable again and shifted 50% of his 401k back into S&P500, and resumed contributing. By August he was 100% in S&P500 again. He basically locked in all the losses, and lost out on his contributions buying at lower prices as well as the company match (you have to contribute per paycheck to get the match per pay period). Someone like that would be better off with some kind of annuitized plan... Sad thing was he was 100% in a target date retirement fund until 2019, when he saw how well the S&P500 was doing...
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by dbr »

The article mentions some issues with the plan. A major one of these is assuming retirement at age 67. While this probably lines up close to Social Security Full Retirement Age (FRA), there is a good point that this is an arbitrary and not necessarily realistic result to quote. Classically financial planning has sometimes assumed that assets would be consumed by being converted to an annuity, so this is actually a bit of a mainstream concept. The article also points out that annuity rates are not predictable into the future. In fact the whole exercise is without bounds on a range of outcomes.

I was surprised to see no mention of inflation. One would assume the quoted annuities are not inflation indexed, and this results in a very misleading piece of information. This is a huge issue.

I think it is an excellent idea to plant the seed that income from the saved wealth is the important thing and not just an uninterpreted forecast of accumulated wealth. Unfortunately from all the discussion on this forum we know that what income you can get from what plan is a complicated and sometimes "contentious" discussion.

It is always a debate whether or not retirement plans should come with a package of advice or be left as content neutral as possible.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by MathIsMyWayr »

In a nutshell, does it turn a 401k into a private pension plan if you want to?
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by dbr »

GlennK wrote: Wed Aug 26, 2020 11:43 am From the article, it states

"But if retirees do forgo the annuity, they will have difficulty matching its payout, even if they start at age 67. Annuities have their disadvantages, but they do yield more than most investment alternatives."

Is this true? What other investment alternatives are they comparing annuities to? And if true, why doesn't everybody use single premium annuities rather than live off the assets?
That statement is both true and "not even wrong." There are so many differences between the annuitization they propose and alternate says to use wealth for retirement income that I would probably have to type for an hour to get into what I know about it, and I am not an expert.

You might google "the annuity paradox" for academic literature on the topic of why people don't use annuities as much as academic theory would suggest they should.

Just a few things to think about are:

1. The money invested is gone forever and cannot be used for an emergency, a discretionary expenditure, or accumulated and grown for heirs. The annuitant loses all control of their wealth. 4% withdrawal schemes almost all the time leave behind more money in real dollars than the investor started with.

2. The annuities they talk about are not inflation indexed, though fixed increment annuities can be had. What they pay then is much less.

3. The payout is secured only by the underwriter and any state guarantees. There is risk that needs to be managed.

4. Total annuitization of all the wealth is clearly a bad idea for all kinds of reasons. I have the idea it used to be a rule that no one should be sold annuities for more than half their wealth. I don't know where I got that, but it would be a good idea. The article does not suggest advice at that level of complexity. A lot of people would argue that annuitizing some of your income stream is a good idea. At the least Social Security provides an inflation indexed annuity that can be increased by delaying SS until age 70, a common recommendation on this forum.

Etc., etc., etc. so that one can see this is a complex issue that needs more consideration than just plugging a notice into a plan document.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by Dominic »

Broken Man 1999 wrote: Wed Aug 26, 2020 11:30 am Honestly, I have seen those who would have had a much better retirement had they annuitized their retirement accounts.

For better or worse, once done there would be no selling assets at the absolute wrong time, or trading, running to/from cash, or other account destroying activities.

Not everyone is a BH. And, we often see the same issues here.

Broken Man
Behavioral errors will cost more than annuities for some people.

And in principle, annuities as longevity insurance could be a useful tool. The issue is that inflation-adjusted annuities are basically gone, as far as I know, and costs haven't been pushed down in this market the way they have in the mutual fund world.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by abuss368 »

I would think the insurance companies would love this.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by Broken Man 1999 »

There is a lot of hate for annuities, but love for pensions, which are annuities. :confused

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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by 7eight9 »

My wife and I never signed up to be financial planners. A pension would have been preferable. In hindsight I wish every time I left an employer I had purchased a deferred annuity with my 401k money instead of rolling it into an IRA. Instead I've basically made nothing over the years by keeping it basically all in CDs and money market funds which are now paying essentially nothing. It is probably getting a bit late in terms of years to buy a deferred annuity but maybe I still should. I wish my 401k plans had educated me about the opportunity to annuitize years ago.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by Dottie57 »

I would hope that one would not have to annuitize the entire amount. I can see putting 1/2 in an annuity and leaving half mostly in equities for growth/inflation.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by Grt2bOutdoors »

abuss368 wrote: Wed Aug 26, 2020 1:22 pm I would think the insurance companies would love this.
They do, go look at the group annuity purchases by Prudential. There’s also an annuity only insurance company called Athene Ltd. that is focusing on this market.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by Grt2bOutdoors »

Broken Man 1999 wrote: Wed Aug 26, 2020 1:35 pm There is a lot of hate for annuities, but love for pensions, which are annuities. :confused

Broken Man 1999
What’s the difference? One is usually employer provided with little to no contribution on the part of the participant. The other day is money you directly send to your retirement accounts from your paycheck or bank account. That’s why people detest giving up control of it.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by Broken Man 1999 »

Grt2bOutdoors wrote: Wed Aug 26, 2020 1:52 pm
Broken Man 1999 wrote: Wed Aug 26, 2020 1:35 pm There is a lot of hate for annuities, but love for pensions, which are annuities. :confused

Broken Man 1999
What’s the difference? One is usually employer provided with little to no contribution on the part of the participant. The other day is money you directly send to your retirement accounts from your paycheck or bank account. That’s why people detest giving up control of it.
Of course. Though, for many, having no control would be optimal.

I believe many on this site do not realize the financial ignorance rampant in the workforce.

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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by abuss368 »

Grt2bOutdoors wrote: Wed Aug 26, 2020 1:49 pm
abuss368 wrote: Wed Aug 26, 2020 1:22 pm I would think the insurance companies would love this.
They do, go look at the group annuity purchases by Prudential. There’s also an annuity only insurance company called Athene Ltd. that is focusing on this market.
Interesting. Thanks for sharing. Insurance companies must look at this as the next massive pool of untapped fees!
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by anon_investor »

abuss368 wrote: Wed Aug 26, 2020 2:15 pm
Grt2bOutdoors wrote: Wed Aug 26, 2020 1:49 pm
abuss368 wrote: Wed Aug 26, 2020 1:22 pm I would think the insurance companies would love this.
They do, go look at the group annuity purchases by Prudential. There’s also an annuity only insurance company called Athene Ltd. that is focusing on this market.
Interesting. Thanks for sharing. Insurance companies must look at this as the next massive pool of untapped fees!
Their lobbiests definitely pushed for this...
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by snailderby »

I like the idea. I bet many employees currently have no idea whether they are saving enough for retirement, or what their 401(k) balance means in terms of a monthly income stream during retirement.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by arcticpineapplecorp. »

Broken Man 1999 wrote: Wed Aug 26, 2020 1:35 pm There is a lot of hate for annuities, but love for pensions, which are annuities. :confused

Broken Man 1999
I have to pay the full freight of the annuity.

I contribute a percentage (6.25% of salary) to my pension and my employer contributes 4% per year.

Difference?

With the annuity I'm only getting my contributions and earnings returned to me.

With the pension I'm getting my contributions, my employer's contributions and earnings on my contributions and my employer's contributions returned to me.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by an_asker »

TomatoTomahto wrote: Wed Aug 26, 2020 11:08 am Thanks for the link. I learned today that “interim final” is a thing. :D
I'm assuming you've heard of "Draft Final" (though I don't know if it is the same as "Final Draft" or not lol).
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by marcopolo »

arcticpineapplecorp. wrote: Wed Aug 26, 2020 2:50 pm
Broken Man 1999 wrote: Wed Aug 26, 2020 1:35 pm There is a lot of hate for annuities, but love for pensions, which are annuities. :confused

Broken Man 1999
I have to pay the full freight of the annuity.

I contribute a percentage (6.25% of salary) to my pension and my employer contributes 4% per year.

Difference?

With the annuity I'm only getting my contributions and earnings returned to me.

With the pension I'm getting my contributions, my employer's contributions and earnings on my contributions and my employer's contributions returned to me.
I don't understand this at all. This is not a difference between annuities and pensions, but rather difference between employer compensation plans.

many 401k plans, particularly from large companies, have employer matching. In that case, when you convert to annuity you are not paying full freight, and you are getting earnings on that as well.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by arcticpineapplecorp. »

marcopolo wrote: Wed Aug 26, 2020 3:03 pm
arcticpineapplecorp. wrote: Wed Aug 26, 2020 2:50 pm
Broken Man 1999 wrote: Wed Aug 26, 2020 1:35 pm There is a lot of hate for annuities, but love for pensions, which are annuities. :confused

Broken Man 1999
I have to pay the full freight of the annuity.

I contribute a percentage (6.25% of salary) to my pension and my employer contributes 4% per year.

Difference?

With the annuity I'm only getting my contributions and earnings returned to me.

With the pension I'm getting my contributions, my employer's contributions and earnings on my contributions and my employer's contributions returned to me.
I don't understand this at all. This is not a difference between annuities and pensions, but rather difference between employer compensation plans.

many 401k plans, particularly from large companies, have employer matching. In that case, when you convert to annuity you are not paying full freight, and you are getting earnings on that as well.
sure but the argument wasn't between annuities and 401ks, but rather between annuities and pensions (of which a 401k is not. A 401k can run to $0. A pension can not.)

While you may be able to convert a 401k to an annuity, that might or might not be a good idea. My mother converted her 401k to an annuity, but unfortunately it will pay out entirely not at death, but rather, at age 92. It's a shame because it's forcing higher withdrawals than if she had taken RMDs...and she doesn't need the money to live on. She didn't ask me at the time she made the decision.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by marcopolo »

arcticpineapplecorp. wrote: Wed Aug 26, 2020 3:50 pm
marcopolo wrote: Wed Aug 26, 2020 3:03 pm
arcticpineapplecorp. wrote: Wed Aug 26, 2020 2:50 pm
Broken Man 1999 wrote: Wed Aug 26, 2020 1:35 pm There is a lot of hate for annuities, but love for pensions, which are annuities. :confused

Broken Man 1999
I have to pay the full freight of the annuity.

I contribute a percentage (6.25% of salary) to my pension and my employer contributes 4% per year.

Difference?

With the annuity I'm only getting my contributions and earnings returned to me.

With the pension I'm getting my contributions, my employer's contributions and earnings on my contributions and my employer's contributions returned to me.
I don't understand this at all. This is not a difference between annuities and pensions, but rather difference between employer compensation plans.

many 401k plans, particularly from large companies, have employer matching. In that case, when you convert to annuity you are not paying full freight, and you are getting earnings on that as well.
sure but the argument wasn't between annuities and 401ks, but rather between annuities and pensions (of which a 401k is not. A 401k can run to $0. A pension can not.)

While you may be able to convert a 401k to an annuity, that might or might not be a good idea. My mother converted her 401k to an annuity, but unfortunately it will pay out entirely not at death, but rather, at age 92. It's a shame because it's forcing higher withdrawals than if she had taken RMDs...and she doesn't need the money to live on. She didn't ask me at the time she made the decision.
I thought that comment was in the context of the thread, which is to essentially create a pension by annuitizing your 401K.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by arcticpineapplecorp. »

marcopolo wrote: Wed Aug 26, 2020 4:03 pm
arcticpineapplecorp. wrote: Wed Aug 26, 2020 3:50 pm
marcopolo wrote: Wed Aug 26, 2020 3:03 pm
arcticpineapplecorp. wrote: Wed Aug 26, 2020 2:50 pm
Broken Man 1999 wrote: Wed Aug 26, 2020 1:35 pm There is a lot of hate for annuities, but love for pensions, which are annuities. :confused

Broken Man 1999
I have to pay the full freight of the annuity.

I contribute a percentage (6.25% of salary) to my pension and my employer contributes 4% per year.

Difference?

With the annuity I'm only getting my contributions and earnings returned to me.

With the pension I'm getting my contributions, my employer's contributions and earnings on my contributions and my employer's contributions returned to me.
I don't understand this at all. This is not a difference between annuities and pensions, but rather difference between employer compensation plans.

many 401k plans, particularly from large companies, have employer matching. In that case, when you convert to annuity you are not paying full freight, and you are getting earnings on that as well.
sure but the argument wasn't between annuities and 401ks, but rather between annuities and pensions (of which a 401k is not. A 401k can run to $0. A pension can not.)

While you may be able to convert a 401k to an annuity, that might or might not be a good idea. My mother converted her 401k to an annuity, but unfortunately it will pay out entirely not at death, but rather, at age 92. It's a shame because it's forcing higher withdrawals than if she had taken RMDs...and she doesn't need the money to live on. She didn't ask me at the time she made the decision.
I thought that comment was in the context of the thread, which is to essentially create a pension by annuitizing your 401K.
yes, but broken man wasn't comparing the annuitizing of a 401k with commercial annuities, he was comparing pensions with annuities (and I assumed he meant commercial annuities). I was only commenting on that. I was drawing a distinction between a commercial annuity (in which there's no employer contribution) with a pension (of which there is).
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by Walkure »

an_asker wrote: Wed Aug 26, 2020 3:00 pm
TomatoTomahto wrote: Wed Aug 26, 2020 11:08 am Thanks for the link. I learned today that “interim final” is a thing. :D
I'm assuming you've heard of "Draft Final" (though I don't know if it is the same as "Final Draft" or not lol).
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by venkman »

A problem I foresee with showing an annuity payout rate to people with little financial knowledge is that they will anchor on that number as the amount that their portfolio should be producing, and assume they can safely withdraw that amount, even if they don't annuitize.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by ChrisBenn »

Broken Man 1999 wrote: Wed Aug 26, 2020 1:35 pm There is a lot of hate for annuities, but love for pensions, which are annuities. :confused

Broken Man 1999

There is a lot of hate for high expense mutual funds, but love for low expense passive mutual funds - both of which are mutual funds.

I think good annuities have their place and can be great investments. I also believe it's much more difficult to differentiate good/mediocre/bad annuities as they tend to be more complex contracts with caveats.

Fiduciary duty with respect to 401k's already feels like a joke (witness the 1%+ expense ratio index funds in many 401k's, which should not pass any reasonable fiduciary standard), so I would expect annuities to only further muddy the waters.

caveat: I haven't read the act, so if there are reasonable restrictions in place that might be mitigated (or standards for comparison). But I'm not holding my breath.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by JoMoney »

venkman wrote: Wed Aug 26, 2020 11:27 pm A problem I foresee with showing an annuity payout rate to people with little financial knowledge is that they will anchor on that number as the amount that their portfolio should be producing, and assume they can safely withdraw that amount, even if they don't annuitize.
I don't see that as a problem, it is a reasonably conservative number they should be able to expect to withdraw from the portfolio, but they do need to realize that's with the expectation that they're drawing down principal as well, with the expectation that it will diminish the portfolio over their remaining expected lifespan.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by Monster99 »

JoMoney wrote: Thu Aug 27, 2020 6:34 am
venkman wrote: Wed Aug 26, 2020 11:27 pm A problem I foresee with showing an annuity payout rate to people with little financial knowledge is that they will anchor on that number as the amount that their portfolio should be producing, and assume they can safely withdraw that amount, even if they don't annuitize.
I don't see that as a problem, it is a reasonably conservative number they should be able to expect to withdraw from the portfolio, but they do need to realize that's with the expectation that they're drawing down principal as well, with the expectation that it will diminish the portfolio over their remaining expected lifespan.
You overestimate the general population's comprehension of financial matters....
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by N.Y.Cab »

It would be good if they show us the math. Right now I take the 401k balance and divide that by 300 to get the monthly 4% SWR.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by dbr »

I wonder if some participants might not understand that when you annuitize your assets are gone in exchange for income. How does this compare to thinking that you keep the assets and cash coupons to live on.

Dealing with the fact that the asset is gone might be a number one explanation for why annuitization is not very popular.

A good decision could be to partially annuitize.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by prd1982 »

Broken Man 1999 wrote: Wed Aug 26, 2020 1:35 pm There is a lot of hate for annuities, but love for pensions, which are annuities. :confused

Broken Man 1999
I see 3 big differences:

* Pensions don't pay anyone a commission for selling a pension.

* The company doesn't try to make a profit from the pension.

* The company probably over-promised the employee, which is why most private companies have dropped/frozen pensions, and government pension plan are way underfunded.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by sls239 »

The difference still remains that with a traditional pension, the final years of employment generally have disproportionate impact whereas with a 401k, even if it is eventually annuitized the early years tend to have disproportionate impact.

Not to sidetrack the conversation, but I feel that has a large impact on how a person views their “lifetime account” and how they relate their employment to income in retirement.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by 6bquick »

sls239 wrote: Thu Aug 27, 2020 9:42 am The difference still remains that with a traditional pension, the final years of employment generally have disproportionate impact whereas with a 401k, even if it is eventually annuitized the early years tend to have disproportionate impact.

Not to sidetrack the conversation, but I feel that has a large impact on how a person views their “lifetime account” and how they relate their employment to income in retirement.
Astute observations. Thanks for the perspective.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by dbr »

sls239 wrote: Thu Aug 27, 2020 9:42 am The difference still remains that with a traditional pension, the final years of employment generally have disproportionate impact whereas with a 401k, even if it is eventually annuitized the early years tend to have disproportionate impact.

Not to sidetrack the conversation, but I feel that has a large impact on how a person views their “lifetime account” and how they relate their employment to income in retirement.
It is a good point that traditional pensions are backloaded and that affects what a person does. The last few years I was employed my pension income stream was increasing at a rate of 12% a year. I didn't set my retirement year based on that, but it was a tailwind adding to other reasons to stay employed a year or two more.*

I have a family member whose behavior was hugely affected by qualifying for a pension at age of retirement at all, meaning an age 50 special retirement issue.

Pension formulas can have large and seemingly irrational consequences for employment decisions. It might be a good thing to have those systems replaced by the 401/403 system -- or maybe not.

*Working a couple of more years was mainly about wanting to stay involved in some projects.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by backpacker61 »

Broken Man 1999 wrote: Wed Aug 26, 2020 1:35 pm There is a lot of hate for annuities, but love for pensions, which are annuities. :confused

Broken Man 1999
A pension is an annuity acquired at wholesale.
Those purchased from insurance companies are acquired at retail.

I've had two buyout offers from a prior employer for a small pension that I am qualified for, but I chose to take it as an annuity instead.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by venkman »

JoMoney wrote: Thu Aug 27, 2020 6:34 am
venkman wrote: Wed Aug 26, 2020 11:27 pm A problem I foresee with showing an annuity payout rate to people with little financial knowledge is that they will anchor on that number as the amount that their portfolio should be producing, and assume they can safely withdraw that amount, even if they don't annuitize.
I don't see that as a problem, it is a reasonably conservative number they should be able to expect to withdraw from the portfolio, but they do need to realize that's with the expectation that they're drawing down principal as well, with the expectation that it will diminish the portfolio over their remaining expected lifespan.
Single life annuity payout rate for a 67-year old is around 6%. In an era of low bond yields, a 6% withdrawal rate runs a pretty decent risk of depleting the portfolio before death.
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JoMoney
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by JoMoney »

venkman wrote: Thu Aug 27, 2020 10:30 pm
JoMoney wrote: Thu Aug 27, 2020 6:34 am
venkman wrote: Wed Aug 26, 2020 11:27 pm A problem I foresee with showing an annuity payout rate to people with little financial knowledge is that they will anchor on that number as the amount that their portfolio should be producing, and assume they can safely withdraw that amount, even if they don't annuitize.
I don't see that as a problem, it is a reasonably conservative number they should be able to expect to withdraw from the portfolio, but they do need to realize that's with the expectation that they're drawing down principal as well, with the expectation that it will diminish the portfolio over their remaining expected lifespan.
Single life annuity payout rate for a 67-year old is around 6%. In an era of low bond yields, a 6% withdrawal rate runs a pretty decent risk of depleting the portfolio before death.
I'm not sure how to quantify "pretty decent", but I bet the actuaries for the insurance company selling the policies think they have a "pretty decent" chance they'll make a profit on the annuity.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by prd1982 »

venkman wrote: Thu Aug 27, 2020 10:30 pm Single life annuity payout rate for a 67-year old is around 6%. In an era of low bond yields, a 6% withdrawal rate runs a pretty decent risk of depleting the portfolio before death.
Remember, when people talk about investment withdrawal rates such as 4%, they assume you grow the withdrawal amount by the rate of inflation. Most annuity payouts are fixed.
Last edited by prd1982 on Fri Aug 28, 2020 10:49 am, edited 1 time in total.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by Dottie57 »

dbr wrote: Thu Aug 27, 2020 9:00 am I wonder if some participants might not understand that when you annuitize your assets are gone in exchange for income. How does this compare to thinking that you keep the assets and cash coupons to live on.

Dealing with the fact that the asset is gone might be a number one explanation for why annuitization is not very popular.

A good decision could be to partially annuitize.
This.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by cheezit »

venkman wrote: Thu Aug 27, 2020 10:30 pm
JoMoney wrote: Thu Aug 27, 2020 6:34 am
venkman wrote: Wed Aug 26, 2020 11:27 pm A problem I foresee with showing an annuity payout rate to people with little financial knowledge is that they will anchor on that number as the amount that their portfolio should be producing, and assume they can safely withdraw that amount, even if they don't annuitize.
I don't see that as a problem, it is a reasonably conservative number they should be able to expect to withdraw from the portfolio, but they do need to realize that's with the expectation that they're drawing down principal as well, with the expectation that it will diminish the portfolio over their remaining expected lifespan.
Single life annuity payout rate for a 67-year old is around 6%. In an era of low bond yields, a 6% withdrawal rate runs a pretty decent risk of depleting the portfolio before death.
A non-inflation-adjusted SPIA will indeed have a payout of about 6% annual (give or take a bit depending on whether the annuitant is male or female); an SPIA with a fixed 2% annual "inflation" adjustment has a payout of about 4.8%, and SPIAs with CPI inflation adjustments are no longer sold by anybody but paid out less when they existed.

And of course, neither the annuity payout nor any portfolio withdrawal scheme is truly risk-free. Evaluating issuer risk/default risk for the annuity and the robustness of the backstop of the relevant state guaranty association, compared to the risks of "Trinity study-style" portfolio withdrawals, is a complex topic.
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Taylor Larimore
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Annuities

Post by Taylor Larimore »

Bogleheads:

If annuities (like pensions) give us sufficient lifetime income, it will allow us to give our heirs their inheritance while we are still alive--which is exactly what I have done.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: I (probably prefer) an immediate annuity (SPIA), which starts paying you right away.
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by venkman »

JoMoney wrote: Thu Aug 27, 2020 10:49 pm
venkman wrote: Thu Aug 27, 2020 10:30 pm Single life annuity payout rate for a 67-year old is around 6%. In an era of low bond yields, a 6% withdrawal rate runs a pretty decent risk of depleting the portfolio before death.
I'm not sure how to quantify "pretty decent", but I bet the actuaries for the insurance company selling the policies think they have a "pretty decent" chance they'll make a profit on the annuity.
Insurance companies get to balance out the annuity purchasers who outlive their life expectancy with the annuity purchasers who die sooner than their life expectancy. Individuals don't have that luxury.

It isn't necessarily that there's a very high percentage probability that one will outlive one's portfolio; but the consequences of doing so are potentially severe enough that a relatively small chance might be too high for the average risk-averse person.
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by Frugal Al »

Grt2bOutdoors wrote: Wed Aug 26, 2020 1:49 pm
abuss368 wrote: Wed Aug 26, 2020 1:22 pm I would think the insurance companies would love this.
They do, go look at the group annuity purchases by Prudential. There’s also an annuity only insurance company called Athene Ltd. that is focusing on this market.
There are some concerns with the financial structural of Athene, its reinsurance/coinsurance scheme and it's ownership by a private equity firm. https://www.nbcnews.com/business/person ... k-n1229226
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Re: "Turning 401(k) Plans into Lifetime Investments"

Post by Grt2bOutdoors »

Frugal Al wrote: Thu Sep 03, 2020 7:35 am
Grt2bOutdoors wrote: Wed Aug 26, 2020 1:49 pm
abuss368 wrote: Wed Aug 26, 2020 1:22 pm I would think the insurance companies would love this.
They do, go look at the group annuity purchases by Prudential. There’s also an annuity only insurance company called Athene Ltd. that is focusing on this market.
There are some concerns with the financial structural of Athene, its reinsurance/coinsurance scheme and it's ownership by a private equity firm. https://www.nbcnews.com/business/person ... k-n1229226
They might have concerns but the regulators clearly don’t as they are letting it happen.
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