3 Things 6-24-24
Thing One
Common Retirement Income Mistakes
A writer at Kiplinger.com recently reported on three mistakes people make when it comes to retirement income. See the summary below:
#1 Investing In Bonds or Bond Funds In a Rising Rate Environment
We’ve talked about this one before. If interest rates are going up, the value/price of existing bonds will go down. If/when you sell the bonds or sell out of the bond funds for cash, you will have to do so at a price which is less than what you got in for. So, knowing where we are in the interest rate cycle is critical.
#2 Purchasing An Immediate Annuity
The pros and cons of annuities, in general, have also been discussed here. We add to that the essence of Kiplinger’s take on immediate annuities specifically:
“…If you are close to or already in retirement, you may be attracted to an immediate annuity. When you buy an immediate annuity, you hand over a lump sum of money to an insurance company, and in return receive a guaranteed payout, sometimes for your whole life. This arrangement seems like it could create an attractive income stream.
However, immediate annuities definitely have some drawbacks. When you buy an annuity, you tie up your money for the rest of your life. That means you won’t always be able to access it except at certain, specified times without penalty in the event of an emergency.
Another concern is that many immediate annuities lack inflation protection. That means that over time, due to rising pricing, the income you receive from an immediate annuity wouldn’t go as far. That is significant during retirement, which may last 25 or 30 years or longer.
#3 Purchasing a Variable Annuity
As with most insurance products, the guarantees come at a cost. Here’s Kiplinger’s synopsis on variable annuities:
“…annuities tend to be complex, expensive products. Fees can include mortality and expense fees, mutual fund account management, contract maintenance fees, transactions, and other costs that can range as high as 4% a year. Variable annuities also charge back-end surrender fees that go into effect if you cash out of your annuity before 10 years – or longer, in certain cases – after you purchase it… When you buy a variable annuity, there’s the option to purchase various riders or optional add-ons… These riders can seem very attractive. However, they can come at a steep cost. That’s because you will have to spend more to get the same amount of income or accept reduced income in exchange for the benefits you want…”
While explicitly advising against the purchase of immediate and variable annuities, Kiplinger does suggest that fixed indexed annuities might make some sense in certain situations as long as the buyer is comfortable with the liquidity constraints, potentially high fees, and opaque contract language. Of course, there are alternatives to annuities and Kiplinger points out that in any case, the buyer would be well served to consult with an advisor. We’re ready to help.
Thing Two
To Rollover Or Not To Rollover, That Is The Question
We’ve often been asked by people contemplating retirement what is the best thing to do with their 401(k) plan after they retire. Should they keep it with their old employer, or should they roll it into an IRA? We are typically biased toward the rollover option in our advice but found an article called, “Five Reasons Retirees Should Stay In Their 401(k) Plans” that we thought was worth sharing. The five reasons are listed below:
“1. Unique investments: There are a number of investments that are simply not available in an IRA and that might cost considerably less inside 401(k) plans. Stable-value funds, for instance, are available in most large 401(k) plans, but aren’t available at all in an IRA. These funds have historically had short duration bond-like returns with cash-like risks. Additionally, given the large size of 401(k) plans (many exceed $1 billion in total plan assets) they often have access to more alternative-investment strategies, at lower costs, than might be available in an IRA (such as private real estate).
2. Low costs: Larger 401(k) plans are usually competitively priced, with all-in fees that average 0.5%, or less. The expenses for an IRA, meanwhile, can vary significantly—from virtually free to annual asset-based of over 2% a year, depending on the investments and services being offered. While smaller plans tend to have higher expenses, it’s important to have a decent understanding of the fees associated with your plan before making a decision, because they may be lower (or higher) than you think.
3. Access to advice: 401(k) plans are increasingly offering different ways for participants to receive guidance or advice, both at low and no cost to participants. This could include access to a personal one-on-one meeting as well as various online (robo) tools. These services also are available with IRAs, but can cost more because 401(k) plans are able to offer them at a much greater scale.
4. Fiduciary presence: 401(k)s in particular require a fiduciary be present to manage the plan. Fiduciaries are individuals or organizations that have to put their clients’ interests ahead of their own. While many financial advisers who manage IRAs act as fiduciaries, many don’t.
5. Guaranteed-income solutions: Relatively few 401(k) plans offer guaranteed-income solutions (i.e., annuities). But I expect this to change in the near future given product innovation in the space as well as increased regulatory focus on making these solutions more attractive to employers. Guaranteed income solutions available in 401(k) plans are likely to be competitively priced and attractive compared to many of the products that exist in the retail space ( IRAs).”
Of the five listed, numbers 2, 3, and 4 warrant the most extra consideration. On post-retirement costs, there are certainly “virtually free” IRA options so you should definitely avoid those charging significant fees. As it relates to access to advice, if your current 401(k) comes with a free, live advisor (which most don’t) you should definitely consider staying put. And as far as a fiduciary presence is concerned, in a 401(k) plan that presence is mostly related to the generic “suitableness” of the investment options available and the “safeguarding of the assets” with a compliant custodian rather than with individualized fiduciary advice (since most don’t offer that for free).
The bottom line is the money is yours either way. You can stay put if there are enough good reasons to do so or you can take your money and move on. But if you do choose to do a rollover and are unsure of how to navigate all of that, you should seek out the advice of a fiduciary like us.
Thing Three
Just A Thought
“The secret of getting ahead is getting started.” — Mark Twain
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