What are the benefits to rolling my 401(k)/403(b) into an IRA with a financial advisor versus an annuity? Obviously you want your hard earned retirement money to provide you with a reliable income in retirement as well as continue to grow for you. There are many strategies to consider, which one is best for you depends on many variables.
In retirement the last thing you want to worry about is your income, and replacing your current paycheck can be anxiety producing for a lot of retirees. It is important to remember that your retirement may last 20 or more years, assuming good health. Consequently, that means that your retirement plan should consider both short term and longer term investment strategies. In addition, other investments need to be considered, as your retirement accounts should be spent down after your brokerage accounts to take full advantage of tax deferred growth potential.
There are two basic options for your 401(k)/403(b), a rollover IRA or an annuity. Which one is best for you? Consider the following: Costs, guarantees, growth potential, income, as well as the financial strength of the insurance company offering the annuity.
Let’s first take a look at costs. I’m reminded of a saying my dad used to share with me, he’d say, “if the deal sounds too good to be true, it probably is!” Annuities can provide peace of mind, a steady stream of income, and growth potential. However, they carry the highest costs of almost any retirement income generating investment. Why? Well the annuity has two components, the investments, typically mutual funds which have an annual operating expense as well as an upfront commission typically. In addition an annuity has what are called M&E expenses, which are the insurance costs of the product. You didn’t really think you could get a guarantee of income for life without paying for it did you? Remember what my dad said.
So when all is said and done you will be paying for operating expense of the mutual funds within the annuity, typically 1.25% plus the M&E expense, which can run as high as 1.75%, for a total of 3.0% or more annually.
In contrast, with a rollover IRA, if you used mutual funds only, or even better, Exchange Traded Funds, also known as ETFs, you would pay half as much annually.
The other reason an IRA with mutual funds or ETFs may be more attractive is that you have an extremely wide range of investment options, which you or your financial advisor can adjust as markets, interest rates, and your risk tolerance change over time.
The bottom line is this, do some research, talk to your financial advisor, or have a friend refer you to one they trust. And finally, make sure you fully understand the investment you are rolling your 401(k)/403(b) into, as you balance the risks and rewards of what is being offered to you.