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401k to Annuity Rollovers

Rollover Your 401k to an Annuity

A lot people lost a lot of money in their retirement plans over the last couple of years. The most frequently asked question I get from these people is “how do I protect what I have without pulling my money out of the market?” A good place to start looking if you are interested in protecting your assets while still maintaining your exposure to the market is a variable annuity. A rollover of your 401k to a variable annuity can provide protection against downturns in the market in the following way. First, your money is invested in a sub account into mutual funds like you may already be invested in your 401k. This sub account will fluctuate in value as the market fluctuates. The value of the sub account is known as the cash value of your annuity contract. Generally speaking, this is the value you can “cash out” at anytime minus any surrender charges that might apply. All annuity contracts are different, so it’s very important to understand the “surrender period” and “surrender charges” that might apply to you annuity contract.

The cash value will differ from the benefit base. The benefit base is the value of the contract by which the contract holder can base a stream of payments. For example, let’s say you purchase an annuity with a 7% annual step-up. This means that each year the benefit base will increase by 7% or the value of the sub account, whichever is greater.  In this example, you invest $100,000 and the mutual funds steadily go down from day one to $80,000 at the end of year five. The cash value of the contract is $80,000. The benefit base, however, is now $135,000. Each year, even though the stock market and the mutual funds lost value, your contract increased its benefit base by $7,000 or 7%. Let’s say you are 65 and you know want to use this money in the contract. You have two choices. The first is you can take the contract value of $80,000 in a lump sum or take a partial withdraw of this value. The second option is to take the money out of the contract in the form of an annuity payment  each year. Let’s say the terms of the contract allow for a lifetime annuity payment for individuals in the 65-75 year age group of 6% for life. This would allow you to take an annual payment of $8,100 each year for the rest of your life. This income benefit is known as a living benefit.

A 401k rollover into an annuity is a great way to guarantee that your money will continue to grown even in a market that goes down. If you are thinking about rolling your 401k into an annuity it’s important to understand the cost associated with an annuity contract. The cost of this protection is usually between 1.5% and 3.0% depending on the types of riders that the policy owner wants to add. We include information about the benefits and expenses of a 401k rollover into an annuity in our 401k Rollover Kit. Please take a minute to order a 401k rollover kit to better understand annuities and 401k rollovers.

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