Kevin McCormally: I am Kevin McCormally of Kiplinger's and I am here with Kim Lankford, the Insurance Editor of Kiplinger's Personal Finance Magazine, to talk about annuities inside of 401(k)s. Kim, this sounds kind of strange, we always tell people not to put tax deferred annuities inside of tax deferred 401(k)s. What's this new product that's been marketed?
Kim Lankford: Well, people who don't have a pension through work, many of them are concerned about how they are going to have lifetime income. So, many of them have gone to their employers and asked if they can have something like this and this is a way that their employer offers them an investment option in their 401(k) that lets them accumulate lifetime income for after they retire.
Kevin McCormally: How does it work?
Kim Lankford: Well, every time you contribute money to your 401(k), some of that money can go towards the annuity and that money buys a piece of lifetime income based on current interest rates and your age that then can pay off after age 65.
Kevin McCormally: So, each month the contribution to the 401(k) is buying a little tiny annuity that's going to start paying out much later.
Kim Lankford: Exactly, and it adds up through time. Eventually, you will have a decent amount of monthly lifetime income that every paycheck you buy a small amount.
Kevin McCormally: Well, let me ask this; why not go ahead and invest in stock mutual funds which probably offer better return and at retirement use that money to buy an immediate annuity that gives you lifetime income?
Kim Lankford: Well, that is definitely an alternative and that's something that many people do that provides with a lifetime income as well, but you really are taking a risk at what interest rates will be when you retire.
Kevin McCormally: I don't understand the risk.
Kim Lankford: Well, if interest rates are low when you retire then your lifetime income could be much less than it would have been if you bought these little pieces of the annuities through the years.
Kevin McCormally: But what if interest rates are higher when you retire than the average during your working career?
Kim Lankford: Well, that is exactly the flip side, then you could get a lot more money and have the flexibility through the years.
Kevin McCormally: Any other downsides to annuities inside of 401(k)s?
Kim Lankford: Well, if you leave your job and your new employer doesn't offer one of these, you will not be able to make future contributions; you may just have a little piece of lifetime income.
Kevin McCormally: Okay, thank you, Kim.
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