Written By: Cal Burgess, Retirement Servicing Group
Today, with the amount of layoffs and the number of workers being forced to change career paths, the need to protect their 401k, 403b, or other employer sponsored plan (ESP) is taking a sideline to the need of finding another income source. Ironically, they could be bettering their retirement position by helping to secure an income stream for their future retirement needs. Many employees do not know all of the options that they have with respect to their old ESP; down the road they will regret not investigating other viable options for their 401k. They are just assuming that they have to roll over their prior ESP cash value to their new employer’s plan when they start a new job.
An ESP is a deferred compensation plan, usually funded monthly or bi-weekly, set up to help you prepare for your retirement needs. These plans were designed to replace the traditional pension plan. Most corporations can no longer afford to fund the income stream that pensions would traditionally provide during retirement, and the ESP takes the burden off of the employer. These new vehicles, mainly consisting of a 401k or 403b, are managed by the employer while the employee bears all of the risk. Most ESPs are dependent upon the performance of the stock market, and over the last 15 years the majority have either incurred a loss or broken even. However, employees are still urged to stay the course with their ESP contributions and often assume that their contributions must continue on to another ESP when they part ways with their current employer. Unfortunately, this is causing many employees to further delay their retirement goals, and many are missing opportunities to redirect their funds to gain an edge with an income stream for life.
When the employee departs from an employer, they have the perfect opportunity to get a jump start on their retirement goals. Many employees who are concerned about an income stream down the road (because they do not have a pension and are not counting on social security) are deciding to transfer their group sponsored plan to one that focuses on the individual goals, known as an Individual Retirement Account (IRA). Basically what they do is convert the funds from a group annuity within the employer sponsored plan to an individual annuity. Now that benefits are directed to the policy owner, as opposed to the employer, the funds become eligible for lifetime income offered through a fixed indexed annuity (FIA). The FIA is the only safe money vehicle that can contractually guarantee you an income stream for life, regardless of future market performance, while still allowing you to maintain control of your cash value. Not only can a FIA provide lifetime income for the annuity owner, the lifetime income can be set up to extend lifetime income to the spouse as well.
How is lifetime income guaranteed? Insurance companies who offer FIAs have attached income account values (IAV) known as an income rider. An IAV is a non-cash value that grows at a fixed rate, regardless of market performance. The goal of the IAV is to help determine the amount of income an annuity owner is eligible for at a later date. For example, an annuity owner who is 55 years old may plan on retiring at the age of 70. The IAV would be able to tell the annuity owner what their income is at the age of 70. Once the IAV is established by the predetermined interest rate, the insurance company determines what percentage of the IAV would be paid out annually for life. Typically, the older an annuity owner is the higher the payout they will receive. Once again, it is the only way to predetermine an income stream for life, regardless of future market performance.
FIAs are state regulated products that have been deemed financially secure enough to offer lifetime guarantees. Insurance companies that offer these fixed assets must have total assets exceed total liabilities. They are able to do this by setting aside reserve pools of cash to protect the future interests of the annuity owner. In fact, if an insurance company were to go insolvent (where total assets were unable to exceed total liabilities) , by law regulators step in and take over the operations of the insurance company in order to protect the interests of the annuity owner.
When you don’t have a pension in place, what income can you count on? I sincerely hope that you don’t plan on social security as being your primary income. Workers departing from employment are starting to redirect their ESP to lifetime income guarantees they don’t have. ESP plans were initially designed to replace pension plans that employers can no longer afford. Essentially the employer has shifted the responsibility of retirement planning onto the employee. If you fail to embrace this responsibility you will likely result in either a delayed retirement or having to become a burden to your loved ones. Without protecting your income needs in retirement, what is your plan of attack?