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Annuities historically have not had a good reputation for helping Americans save for retirement, mostly due to their costs.
However, recent changes in how annuities can be included in certain types of investment funds, such as 401(k) plans, are making them a popular option for retirement savers again.
"When you want to retire, ... you have the option to take a portion of your assets and get guaranteed income — get a paycheck for life," Anne Ackerley, head of BlackRock's Retirement Group, told Bob Powell in the latest episode of Decoding Retirement (see video above; listen below). "We think that has brought some benefits of the traditional pension to the 401(k) space."
An annuity is a contract between an individual and a life insurance company in which the contract holder pays premiums over time, and then the insurance company agrees to give payments back to the contract holder at a later date. An annuity is not life insurance; a life insurance policy provides benefits to your family if you die.
Both the SECURE Act of 2019 and the subsequent SECURE 2.0 Act of 2022 aim to make it easier for workers to save for retirement by providing more flexibility for savers and incentives for employers to offer retirement options for employees.
Ackerley explained that the SECURE 2.0 law allowed for annuities to be included in target-date funds — so long as the insurance companies have met specific criteria to reduce the risks for the person investing their retirement fund.
"This is people's retirement money — we should be incredibly protective of it," Ackerley said. She added that SECURE and SECURE 2.0 are "trying to encourage employers to really think about income and to include some form of income into the 401(k) plan."
According to BlackRock's 2024 Read on Retirement survey, 60% of those surveyed admitted they feared the possibility of outliving their retirement savings — and of those people, 80% claim it's currently impacting their mental health.
To address the issue, BlackRock has been working to "reinvent annuities" by creating an option available within a person's 401(k) fund or other target-date fund.
"If you have an income annuity, … you’re building some security, some certainty into however long you’re going to live," Ackerley said. "And then you can use the remaining assets [and] have it invested in part in the market, in part in equities, which should help you against inflation."
As Powell explained, those saving for retirement should look to "match your guaranteed sources of income with your essential expenses, and then match maybe your [risky] assets with your discretionary expenses."
That is what this annuity option is meant to do, according to Ackerley.
"We said that, based on everything we looked at, if people had Social Security, and they took about 30% of their assets and annuitized them, that would probably be able to cover fixed expenses," she said. "And then they could take the other 70% that they have within the 401(k) and invest that for what we call more flexible income."
Each Tuesday, retirement expert and financial educator Robert Powell gives you the tools to plan for your future onDecoding Retirement. You can find more episodes on ourvideo hub or watch on yourpreferred streaming service.
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