Evaluating Lifetime Income Options Inside Your 401(k)

Workplace retirement plans are beginning to offer more ways for participants to convert accumulated savings into retirement income. For investors nearing retirement, these options raise an important planning question: should a portion of a 401(k) be used to create a predictable lifetime income stream? 

In this episode, Derek Gabrielsen, CRPC® and Dave Abate, CFP® discuss the evolution of 401(k) plans, the increasing availability of annuity and lifetime-income options, and the potential limitations of relying too heavily on a single solution. The conversation considers flexibility, spending needs, taxes, investment risk, product quality, and the role these options may play within a broader retirement plan. 

The discussion is designed to provide educational perspective for investors evaluating how their workplace retirement plan fits into their overall retirement strategy.

Transcript

SPEAKER_01 0:00

For decades, your 401k had one job accumulate money. Now the retirement industry is trying to give it a second job, pay you an income for the rest of your life. Today we're going to explain exactly what that means, what's actually changing inside workplace plans right now, and how to decide if any of it is right for you. Alright, welcome to the Capitalist Investor. As always, you got me, Diamond Hands D, and back again this week, Dave Abate. Dave, how you doing, man? Great to be here. Looking forward to our chat today, Derek. Absolutely. Well, thanks for hopping on. Tony's on assignment again this week. So um, so yeah, you know, we got a pretty good topic here. So um, and you know, Dave and I were just really kind of kicking it around before we started recording here. Um, you know, back when we first uh started in this industry, um, you know, company plans, uh, you know, 401k plans, maybe 403B plans, um, they were they were not great, right? They were um, you know, very rigid, they had lots of rules. You know, oftentimes the funds on the inside were were really not very good at all. Uh limited choices there. Um, so you know, basically, um, you know, as soon as you could get that money out, you you wanted to get it out. Um, now that still may kind of be the case, but I think it's important to kind of go through some of the changes that we've seen um inside the 401k plan so so people so people kind of uh so people understand what what what they're looking at. And then, you know, obviously um we don't we don't mention these things uh super often, but you know, if you have a 401k plan um and you want to know how it works, um, how it works, you know, and if you're using it correctly, uh, you know, that's that's one of the things that that we're happy to take a look at here for you as well.

SPEAKER_00 2:01

Yeah, Derek, and you know, to me, I'm as I think about this change, it's almost like a kind of like a full circle thing. What I mean by that is like if we take a step back, your employer, like one of their one of their roles was to kind of help you get into retirement and have some income in retirement so that you could, you know, pay your bills in retirement. Right. Right. So back, you know, several decades ago, almost everyone had a pension, right? A defined benefit plan where you were gonna get an income stream at retirement, right? And then there was a shift where most companies moved away from those defined benefit pension plans and they unleashed this 401k where basically the employee was on their own, right? To save for their own retirement, which is a you know good for those that are self-initiated, self-starters and and and motivated, and maybe not so good for those that don't save as a first nature. Now uh this latest change where Dirk, you kind of introduced it, it's like now they're introducing options where essentially you may be able to buy like a personal pension inside you know your 401k plan with an annuity inside an annuity wrapper. I I feel like it's trying to bridge that gap of trying to get people an income stream in retirement and helping them kind of stay within the you know the beaten path.

SPEAKER_01 3:27

Yep, for sure. So yeah, so let's uh let's get into it. So um, you know, in case uh in case um you know you you don't know, uh and that's fine. That's that's why we're talking about this. Um, you know, so typically I would say the the normal progression of things, uh, you know, you're saving this is nowadays. So you're saving into your 401k plan. Um, you know, let's say you hit 55, um, you're you're looking to retire by 62. Um, so maybe you start talking to someone like us, or you know, you start working on your own plan. Um, but typically um around 59 and a half is really like the first opportunity that most people have to kind of roll that money out of their plan. Um I would say and it's it's gonna be a plan by plan case, case by case basis, so it's gonna be different for everybody. So you'll have to check into your own plans rules, but so oftentimes you have to separate from service, you know. So basically, maybe you change jobs or you know, quit or whatever the case may be. You usually have to there usually has to be some sort of uh qualifying event before you have access to to that cash. Um, and then you know, let's let's go to 62 or whatever, you retire, you make a phone call, you roll that money into an IRA account, and then you that's kind of where your your real retirement planning begins. Um you know, really since um I'd say 2020, when uh the government's uh IRS, uh whatever we want to say, started kind of messing with a lot of the rules that that we've been used to for a long time. Um and and part of that was kind of um incentivizing plans to give employees more options. Yes, yes. So um so essentially what what we can what we have the option to do now is uh basically take our 401k and like Dave said, uh full circle moment, turn turn turn that into uh an income stream, right? So um before we before we get into that, um you know maybe I'll ask you Dave. I'll put you on the spot here. So why why do you why would that be a good or a bad idea to to kind of go all or nothing, go all in to a into a personal pension plan created from your 401k?

SPEAKER_00 5:59

So I'd say on the on the positive side, you could turn it into a practical paycheck, and a lot of them I'm assuming are going to be like a lifetime income stream. So it's gonna be something you cannot live. Um the biggest negative that I see off the bat is like like we've said another you know other times, like this one size fits all, it it reduces your flexibility, right? So if now if you've got this guaranteed same amount every single year, does that actually make sense for your lifestyle, how you spend your money, your tax situation, um, whether you wanted to take more or less risk than what that is providing, like it really locks you in to one course. And I think that's the biggest biggest flaw with that.

SPEAKER_01 6:44

Yeah, for sure. Um I and I would say I would, you know, maybe take it one step further in my example. Um, you know, we we talk a lot about planning. Uh, you know, we talked about it uh last week as well with the the spending numbers, right? You want to get comfortable with your spending numbers. But typically, once we roll that money over into an IRA, there's usually at least three different things that that we're trying to do with that. One of them usually is some sort of steady income stream. Um, but we're able to do that with annuity products that are we're always going out to find the very best product out there right now. Um now, uh inside of you know, inside of our notes here, that there are there are definitely um there's more options, right? The there there used to be basically an insurance company that would be hooked into like the 401k company, right? And it it was the illusion of choice. It's like, oh well, why don't you just you know take some of your money and and you can have a guaranteed income stream. Really, that was just a a hookup that that insurance company had, and they're only offering one product, right? And was it the best of the best at the time? Well, probably not, you know, based on on the some of the things that I've seen. So so yeah, Dave, maybe maybe talk just a little bit about that, about you know the multiple uses that that we have for the retirement funds.

SPEAKER_00 8:12

Yeah, that that just is it like that. I think there's good and what do they say? Like the the road to hell is paved with good intentions. Yes, like it's to me that's what's like resonating right now. It's like they have good reasons why this change has come up, you know, upon us. That being said, like the execution of it, meaning like what the the details, the devils in the details, like what products are actually offered inside of that plan, Derek and I can tell you there's hundreds of these different products, and there's good, bad, and ugly. Right, right. And without like doing the proper analysis of like understanding how they actually work, the chances are that that particular product offered inside of your plan is the best fit for you, I'd say it's it's probably a low probability. So that you know, that goes back to kind of like what you can do is understand your plan lineup, your your options in your plan. And if you have some of these now available in your plan, put it in front of the professionals. Let us put the diagnostic tools to it to understand how it's working and it and to like find out if the is there a better way to do this if you're interested in the concept of getting one of those income streams as part of your plan.

SPEAKER_01 9:30

Yep, for sure. Um, because that income stream is also going to be based upon your lifestyle, right? Um, so understanding exactly what you have to do to hit your goals. Um for some people, they they might not be able to get a bunch of money into annuities because their their lifestyle is such where they're they're going to have a need for a higher rate of return in their retirement, uh, which is a bad bad place to be. But um understanding those things uh is a very important first step. Um so you know, maybe I'll just pile on right here with one of my comments. Um just because the 401k provider, you know, gives you a bunch of tools, it doesn't necessarily mean mean that that you're gonna be able to pick all those tools and put them in the right order together.

SPEAKER_00 10:24

That's exactly right. Or you know, the tools might be the wrong brand. Right. Right. You get you ever go to like Harbor Freight, you ever make the mistake of getting a tool from Harbor Freight? If you want one to last, right, there's gonna be kind of like different quality levels. You might get like a you know, a Milwaukee or I'm not really a carpenter, so I don't know the best of the best, but a Milwaukee or you know, um a DeWalt, and it's like it's gonna last you 10 years, right? But you go into Harbor Freight, you can find the same kind of tool, but it's gonna be some knockoff, you know, foreign-made brand that might last you that project, and then it kind of kind of gives out. So you really got to know what you're buying. Yep, for sure.

SPEAKER_01 11:03

Kind of like um remember uh the portable CD players back in the day in the car, yeah, right with the the tape that you plug in. But if you got one that didn't have a stabilizer or something, it would just be skipping all over. Pretty pretty worthless, right? Yeah, exactly. So yeah, you basically, you know, lots of analogies there, lots of different ways to say you gotta know what you're getting into, right? It's it's fantastic that that um these plans have become better with more offerings. There's there's no doubt about that. And like I said, because Dave and I have seen them, you know, be built up from nothing, right? Basically just uh a plan with you know 10 options that you can invest in and that's it. And and no one's a call to ask for advice um to what they are today. And then they're much better with a lot of different uh things uh that are plan specific again. So, you know, if you want to know kind of the details of your plan, uh this is really kind of maybe the first step to spur you along to at least check into it.

SPEAKER_00 12:03

Yeah. Yeah, go ahead. I th I think it's a great you know opportunity to just raise awareness, to have you check back in on your plan lineup, see what's going on, you know, connect with your advisor, ask them, you know, take a look over my shoulder, see what's are these things any good? Yeah. So at least you have information you know going forward where you know where you want to be, you know, at the end of this.

SPEAKER_01 12:24

Yep, for sure. And I think uh, you know, we can kind of wrap up um touching back on on the financial plan. So you know that that's really gonna be the the main tool to give you confidence to to be entering into retirement and and maintaining that that style, uh, your lifestyle, I should say. Um so make sure you're you're asking your you know your advisor those questions, building out though those different scenarios in that plan, because like Dave mentioned up top, um it's pretty unlikely that the best option forward is to take all of your money and do only one thing with it. Um so so yeah, you know, definitely check into these plans. Like I said, they become much more robust, lots, lots more options. You know, this is a different topic, but we we've touched on it recently, you know, Roth 401ks versus regular 401ks, you know, lots, lots to talk about on that one too. Uh but yeah, make sure you you understand what's going on in your plan, but you know, make sure that you still realize that the 401k plan, 403Bs, uh they're really just one tool. And oftentimes, you know, we you need to get a little bit uh fancier for lack of a better term, you know, as you get closer to retirement.

SPEAKER_00 13:43

Well said, D. Well, I'm glad we kind of went through this because it is a hot button, and I think everyone's gonna start seeing some new uh changes to their plans, so you're probably gonna get some notices, and that's a good time to connect with your advisor. For sure.

SPEAKER_01 13:56

All right. Well, Dave, thanks for filling in again uh this week. And uh thanks everyone out there for listening. If you guys have any uh questions, comments, uh ideas for a show, hit us up at info at swpconnect.com, and we'll talk to you next week.

SPEAKER_02 14:13

The opinions expressed in the podcast are for general informational purposes only, and are not intended to provide specific advice or recommendations for any investment. Legal, financial, or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.