皆さんは長年、雇用主がスポンサーとなっている税制適格退職口座に拠出し、貯蓄をしてきたことでしょう。その中で、税繰延貯蓄と複利の恩恵を受けています。ご自身の退職貯蓄を使って日々の相場に手を出したいという誘惑を回避してきました。そして今、退職間近の方にとっては、難しい部分は終わったはずですよね。ご自身の退職後所得をどのように受け取るかを計画していく中で、想定以上に多くの毎月の支払いオプションがあることを実感したことでしょう。定期的支払いおよび年金を含め、加入する退職制度に柔軟な引き出しオプションがある場合、どのようにそれらを見分けて、最良のオプションを決定しますか。
You’ve contributed to your employer-sponsored qualified retirement account for years and built up your nest egg. You’ve taken advantage of the tax-deferred savings and compounding interest. You’ve avoided the temptation to try to play the daily market with your retirement savings. Now you’re on the verge of retirement. The hard part should be done, right? As you are planning how to tap into your retirement income, you may realize there are more monthly payment options out there than anticipated. If your retirement plan offers flexible withdrawal options, including periodic payments and annuities, how do you differentiate between them and decide what’s best for you?
What is an annuity?
An annuity is a contract that is purchased through an insurance company. It offers a specific income at regular intervals for a fixed period or contingent period of time. For example, you could purchase an annuity that would pay $5,000 per month for the rest of your life, with $2,500 per month continuing to your spouse after your death. Once you purchase an annuity, the fixed amounts are set in stone, which could provide peace of mind that you won’t outlive your savings, but is less flexible than other options. If you purchase an annuity, the money actually leaves your employer-sponsored retirement plan and moves to the insurance company.
Annuities used to be a fairly common withdrawal option when the first defined contribution plans were created. In fact, when money purchase plans began converting to profit-sharing plans in the 1980s, many of those plans offered annuities as the default payment method. Annuity payout options were easy for plan sponsors and even participants to understand because they were very similar to defined benefit plan payout options. As retirement plans began offering more immediate options for accessing qualified plan money, the demand for annuities dwindled, but the annuity trend is slowly making a comeback. In 2020, CNBC estimated only 10% of 401(k) plans offered annuities but that annuity offerings under defined contribution plans as a whole were on the upswing due to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.1
A quick summary of some of the most commonly seen types of annuities under qualified retirement plans is shown in the table in Figure 1.
Figure 1: Commonly Seen Types of Annuities
| Type of Annuity | Single Life Annuity | Joint and Survivor Annuity | Qualified Preretirement Survivor Annuity |
|---|---|---|---|
| Who receives the payment? | Participant | Participant and surviving spouse | Surviving spouse |
| Drawbacks | No payments after participant’s death, even if there is a surplus | Typically, must be married at least a year prior to participant’s death; no payments after both participant and spouse have died | Available to spouse of participant who dies before receiving payments |
| Example | $6,000 per month for participant’s life | $5,000 per month for participant’s life and $2,500 per month for spouse’s life after participant’s death | $5,000 per month for spouse’s life |
What are periodic payments?
Periodic payments, also known as installment payments or recurring payments, are a way for qualified retirement plans to mimic or even replace regular paychecks for retiring or terminated participants. An installment payment allows the participant to leave their money in the qualified plan and continue to invest their remaining account balance while enjoying the benefit of a steady stream of payments. Participants tend to like the flexibility of this approach because they can still have control over their money. According to a 2017 study by Alight and PlanSponsor, almost two-thirds of qualified plans included installments as a withdrawal option.2
Here is a quick summary of periodic payments within a qualified plan and how they work.
- Also known as “installments.”
- Frequency: May vary by plan, but are often offered on a monthly, quarterly, semiannual, and/or annual basis.
- Amount of payment: May also vary by plan. Most retirement plans typically offer these two common elections to choose from:
- Number of payments: Participant chooses the number of payments desired, and the account is paid out in that number of payments. Payments typically are not the same dollar amount due to market fluctuation and are determined as a fraction of the remaining account balance each time a payment is liquidated.
- Dollar election: Participant chooses a flat gross dollar amount and payments are issued until the account balance is depleted.
Weigh your options carefully
So how do I decide what’s best for me? Here are some questions to consider before choosing:
Flexibility. Some qualified plans allow you to start, stop, adjust the gross amount or tax withholding on periodic payments throughout the year, or even take an additional ad hoc payment. Choosing an annuity may lock you into a fixed payment for the remainder of your or your spouse’s life. If you need flexibility, an annuity may not be your best option.
Costs. Nothing in life is free, right? It's the same with retirement income payments. Fees (per payment) can be detrimental and can (and more than likely will) exist in both qualified plans and annuities. It’s worth asking both providers what type of costs you’ll be assessed on both an annual basis for administration and a per payment basis when weighing your options. This may help you determine both the appropriate avenue for payment and the frequency of payment. Oftentimes, leaving your retirement account under your employer’s qualified plan allows your personal assets to remain invested in low-cost investment options at fairly low administrative cost to you. If you do decide to purchase an annuity, beware of additional riders with additional fees that you may incur, such as renewal rate or “management” fees and commissions.
Portability. Substantially equal periodic payments that are made from a qualified plan for a period of less than 10 years are often rollover-eligible. This may mean that if you choose to stop your periodic payments, you may be able to roll your remaining balance to an IRA or other qualified plan to consolidate your accounts. Alternatively, some plans allow you to set up periodic payments that liquidate directly to a rollover institution. This way, if you want to diversify your retirement savings across different investments, you may do so at regular intervals.
Beneficiary impact. Where does the money go if you pass away before it’s gone? If you purchase one of the annuity options outlined previously, it will be very clear what ongoing payments, if any, will continue after your death. However, not often highlighted is the fact that if both you and your spouse or beneficiary pass away before the annuity is fully paid, the insurance company that administers the contract gets to keep the remainder of your contract as income. It does not pass along to any of your relatives or to your estate. One benefit of leaving your money in a qualified retirement plan is that if your money happens to outlive both you and your beneficiary, the money is passed along to the next assignable beneficiary according to the plan document (that is, if your beneficiary did not elect their own beneficiary), meaning your money is not automatically reclaimed by the plan or plan sponsor and your hard-earned money continues to benefit those you love.
Consistent income stream. Both payment options offer a regularly paid income stream following retirement. For most annuities or periodic payments, you can choose to be paid monthly, quarterly, annually, or in a lump sum. The specifics for what is allowed under each annuity or qualified plan, however, will be laid out in the agreement or plan document, so plan to read a bit before choosing the option that is right for you.
Individual tax impact. Be aware that if you initiate substantially equal periodic payments from a qualified plan that span 10 years or more, the administrator or recordkeeper will automatically withhold the mandatory 20% federal taxes from each payment. With both a qualified annuity and periodic payments, you will still be subject to required minimum distribution (RMD) requirements once you reach age 72. The RMD may result in an additional payment from the plan beyond your regularly scheduled payments, if necessary.
Returns. Guaranteed versus variable returns and hypothetical illustrations—it’s a lot to take in. Keep in mind that hypothetical illustrations offered by an annuity are just that—hypothetical, and oftentimes reflect best-case scenarios. Make sure you’re inquiring about the assumptions used to generate the illustration before relying on it, and determine whether it may be too good to be true. If a fixed period annuity is purchased, you are guaranteed the fixed amount for a definite number of payments, which are not subject to market volatility. On the other hand, choosing a variable annuity or leaving the account invested in a qualified plan and subject to market volatility could yield dramatically different results.
Scenario 1: Participant elects a total number of 100 installment payments. Each time a payment is made, the account is divided by the remaining number of payments and liquidated. The amount per payment could vary drastically.
| Payment 1 | Payment 2 | Payment 3 | |
| Market Value on Payment Date | $ 1,000,000.00 | $ 1,100,000.00 | $ 880,000.00 |
| Remaining Number of Payments | 100 | 99 | 98 |
| Payment Liquidated | $ 10,000.00 | $ 11,111.11 | $ 8,979.59 |
Scenario 2: Participant elects gross payments of $10,000. If the market does well, the participant will receive more than 100 payments, but if the market doesn’t do well, the participant will receive fewer than 100 payments and only time will tell.
| Payment 1 | Payment 2 | Payment 3 | |
| Market Value on Payment Date | $ 1,000,000.00 | $ 1,100,000.00 | $ 880,000.00 |
| Estimated Remaining Number of Payments | 100 | 110 | 88 |
| Payment Liquidated | $ 10,000.00 | $ 10,000.00 | $ 10,000.00 |
As with any financial decision, there is a lot to consider. No matter which direction you decide to go, we highly recommend that you do your research before choosing, and shop around if you’re leaning toward an annuity. Kiplinger recommends visiting http://www.immediateannuities.com/ to shop annuity types and compare payouts (https://www.kiplinger.com/slideshow/investing/t003-s003-7-common-annuity-mistakes-and-how-to-avoid-them/index.html),3 get multiple quotes, and ask a lot of questions. Remember that this is your retirement income, and you should ultimately do what is best for you and your spouse, if applicable.
1 Iacurci, G. (January 3, 2020). More people may soon have annuities in their 401(k) plans. CNBC. Retrieved December 2, 2021, from https://www.cnbc.com/2020/01/03/more-people-may-soon-have-annuities-in-their-401k-plans.html#:~:text=Only%2010%25%20of%20401(k,from%20adding%20annuities%20en%20masse.
2 Barney, L. (March 14, 2019). Installment Payments Encourage More Retirees to Keep Assets in DC Plans. Plansponsor. Retrieved December 2, 2021, from https://www.plansponsor.com/installment-payments-encourage-retirees-keep-assets-dc-plans/.
3 Lankford, K. (October 4, 2018). 7 Common Annuity Mistakes and How to Avoid Them. Kiplinger. Retrieved December 2, 2021, from https://www.kiplinger.com/slideshow/investing/t003-s003-7-common-annuity-mistakes-and-how-to-avoid-them/index.html.