In relatively rare instances, you may be offered the option of liquidating the assets in your 401(k) plan and purchasing a lifetime annuity. The annuity pays you income for your lifetime or for the joint lifetimes of two people—you and the person you name.
This alternative, sometimes known as annuitization, closely resembles the way that a defined benefit pension plan pays its retired workers. The chief advantage is that you can’t outlive your assets, something that many people fear. The drawbacks are those of other annuities: potentially high management and insurance costs and lack of flexibility. In most cases, once you have annuitized you can’t change your mind or you can do so only after paying a substantial fee.
If you annuitize, you may be able to choose between a fixed annuity and a variable annuity. With a variable annuity, your income depends on the investment performance of the funds you select from among those offered by the annuity company. A fixed annuity provides the security of regular income but exposes you to inflation risk. A variable annuity offers the possibility of larger payments in the future, but carries the risk that your payments could shrink.
| Another Annuity Choice You can rollover your 401(k) and buy an individual retirement annuity. For people who want to make sure they have income for life this may seem like a good option. However, before investing, you may want to consider their potentially steep fees, lack of flexibility for making unscheduled withdrawals and the financial condition of the insurance companies that stand behind them. |
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