"Aside from Social Security and other pensions, retirees may obtain guaranteed income from 1) traditional bonds, 2) inflation-protected bonds, or 3) annuities. For ease of presentation, this article narrows the list to one version of each: 1) Treasury bonds, 2) ladders of Treasury Inflation-Protected Securities, and 3) single-premium immediate annuities, also known as lifetime annuities....."
https://www.morningstar.com/bonds/retirement-income-treasury-bonds-tips-ladders-or-annuities
Comments
The article's early suggestion to be able to purchase additional social security benift is one idea I hadn't thought of before. Sure sounds like it could be a great idea, but alas, not likely to happen.
Annuities are complex because they are insurance CONTRACTS and come with thick prospectuses. But don't let that fool you.
Some low-cost accumulating annuities have all-in ERs that are less than those of typical mutual funds.
Several company and state retirement plans offer annuitized payouts that may be too good to pass up. Some may tie continuing group health coverage to annuitants only, so early retirees, take note. On the commercial side, low-cost SPIAs may be fine. Partial annuitization to meet basic expenses may work for many who don't have time, expertise or aptitude to manage money.
The flip side is that retirees may be offered lump-sum payout that are more favorable to companies/institutions than retirees. So, think before taking the money and run.
Like anything, look into details before accepting or rejecting annuities.
What is bad? Plenty. Many high-cost annuities pay the highest commissions of any product around to salesman/brokers. Some bad players may pitch unnecessary annuity replacements for extra commissions. There may be surrender charges. Many school districts just handover their 403bs to annuity companies and their salesmen to feast. It's a jungle out there.
Yes, the term “TSA” is testament to the importance of annuities to early 403Bs for public employees. I’ll double-check, but am pretty certain the 403-B preceded the 401-K. From hazy memory, the public institution where I began work in 1970 offered us either an annuity or the ability to invest in a front loaded Templeton mutual fund of our choice. But, ISTM, the latter was a newer option and that prior to the 70s employees there were limited to a traditional annuity (as described by @Yogibearbull). And thanks Yogi for the interesting additional information.
A unique annuity.
Fidelity Personal Retirement Annuity
A 'lite' overview: Fido's annual fee = .25%. There are 55+ fund choices for investments, each having their own ER's. So, if fund 'x' has an ER of .75%, + the .25% fee, ones total annual charge would be 1%.
Tax deferred growth.
There may be some changes since I first read through the prospectus several years ago.
The link will provide the full overview.
@msf and I discussed this annuity choice several years ago.
And @hank, if I recall properly, 403B's were pushed by lobbying groups of the insurance companies to become part of the IRS code. 401k's came later.
401k for corporations came later and accidently. Their rules are more complex and features more restrictive. The fear was that companies with lots of resources would play games with direct-contribution 401k as they did with their direct-benefit pensions. Some 401k reforms only now provide features that were already available in 403b, and many were asking, "So, where is the beef?"
The insurance industry lobbied hard to include annuities among the default options for auto-signups for 401k/403b but only the TDFs were approved. Most recently, a 401k reform allows income/annuitization within the TDF framework and that has forced cooperation among the fund families and insurance companies (only they can provide annuities).
Workplace annuity leader TIAA should be mentioned. There are only 8 CREF VAs covering stocks, bonds, hybrid, m-mkt. The ERs for the cheapest R3 class (for large institutions) range from 0.17-0.26% (all-in), while the ERs for the most expensive R1 class (for small institutions) range from 0.41-0.49% (all-in). These are low ERs by any standard. Some workplace plans may have additional plan level fees that vary depending on whether the institutions subsidize 403b program as HR benefit.
CREF Stock VA is the oldest VA around (1952).
Of course, TIAA also has general (non-workplace) annuity programs that are much more expensive, but that isn't TIAA's main business.
Pension plans are little more than annuities funded by employers who put money into them; money that could instead have been used to increase employee pay. Section 403(b) makes this relationship between pension funding and reduced pay more explicit. It lets employees elect to forgo even more of their pay in exchange for greater employer pension contributions. Same as with Keoghs and 401(k) plans that came later.
That’s an invitation for further demur ... There were likely many reasons for the 401-K’s emergence - by and large workers’ welfare paramount. But a skeptic might suggest some of the motivation had to do with a desire of big corporations to shed their costly defined benefit pension plans. It also seems to me that the 403B’s growing popularity and success were an important factor leading to the establishment of the 401-K. The rules for the 403-B (as Yogi mentions) weren’t as stringent. In the early 90s I happened upon a read in the WSJ relating how it was possible for 403-B participants to easily transfer funds (while still employed and contributing) to another custodian other than the workplace sanctioned one. Wow! What an eye opener. I doubt many participants knew of that loophole. Transfer I did! That option / loophole was closed sometime around 2000 or a bit later.
Workplace tax-deferred annuities (401k/403b/457b) can be rolled over into T-IRA - in-service cash rollovers if allowed by plans, and cash rollovers on retirement/resignation/termination from jobs.
ISTM that ability stemmed from a loophole in the IRS code. I suspect courts had taken a look at it and chosen not to curtail the process.
Wish I had known about it earlier in my career.
I always felt their was a knowledge vacuum when it came to 403(b) plan choices. More often that not, individual teachers had poor choices. It usually was an uphill battle to try and promote better options. This lead me to look beyond my local 403(b) offerings.
The 401(a) plan, at the state level, was one of those choices for me. Glad I pursued it.
https://investopedia.com/terms/1/401a
401a-plans-rollover-rules
401k/403b are optional plans with employee contributions.
All of this is under the IRS code section 401 and within it are subsections 401k, 403, 457, 457b.
Lots of 401k plans offer employer matches.......