Continuing from Part 3, here are a seventh and eighth scenario in which it might make sense to contribute to a workplace retirement plan.
(7) You want to lock in favorable terms on an annuity that’s available through your plan
Annuities have received a lot of bad press, but they do fill an important niche. An annuity is like a pension you can buy for yourself. It’s a contract by which the annuity provider (a life insurance company) guarantees to send you a check each month for the rest of your life, no matter how long you live. In other words, it’s insurance against outliving your money. If this concept intrigues you, I should warn you: annuities are facing a headwind, one that’s also being faced by pensions and Social Security. This headwind is that we’re living longer than ever before. I’ve heard of nursing homes that have stopped celebrating 100th birthdays because they’ve become so commonplace. And as life expectancies go up, anyone who’s willing to guarantee us lifelong income has to take on a heavier burden. As a result, some annuity providers are getting out of the business: refusing to issue new annuity contracts, selling existing contracts to other companies, and even going so far as to “buy out” existing contracts from customers. And those companies that are staying in the business are managing their liabilities in part by reducing the size of the monthly checks that new customers can look forward to. (Not unlike a company telling new employees that their pension checks won’t be as generous as those of existing employees.) So, if the idea of guaranteed income for life appeals to you, you may want to consider locking in a contract now, even if you’re still a long way off from the age at which you plan to start collecting those monthly checks. Because if you wait till you get closer to that age, there’s a good chance that there’ll be fewer choices and that the size of your monthly checks and other terms won’t be as favorable. (If you are considering an annuity, one company worth taking a look at is Jackson National Life Insurance. Jackson is one of the few annuity providers in the U.S. whose credit rating wasn’t downgraded in the financial crisis of 2008-09. They’re a large and highly stable company, and they make good annuities. And I say that as someone who isn’t affiliated with them and doesn’t stand to receive any sort of compensation for endorsing them.)
Of all the different workplace retirement plans, the type that’s most likely to make an annuity available to you is the 403(b) (though not every 403(b) plan offers annuities). What’s the advantage of getting an annuity through a 403(b) rather than on your own? Normally, to purchase an annuity, you need to put down at least $10,000, if not more. (The exact minimum varies by product.) But what if you find an annuity with terms you like, and you want to lock in those terms before you’ve been able to accumulate that much money? Well, if that annuity is available through your 403(b), your minimum to get started could be amazingly low. For example, I’ve seen an annuity that requires a minimum of $20,000 to open on your own but only $50 a month if you open it as a 403(b) participant! Of course, you should plan to continue funding your 403(b) annuity for many years before initiating the monthly income checks. To help you proceed from realistic expectations, suppose that your goal is for the annuity to provide a monthly check of $1000. In order to make this happen, you’ll likely need to have at least $200,000 accumulated inside the annuity by the time you want to start collecting those checks.
Annuities are an important, not to mention controversial, topic. Rest assured that I’ll be providing further insight on them in the near future!
(8) You’re younger than 59½ and think you might be heading for a divorce
Divorce is something I never want to experience, and I hope you never have to. But if you do, and the settlement requires you to hand over a portion of your tax-sheltered assets to your ex, then where that money is located could make a significant difference. If it’s located in a workplace retirement plan, and you’re not yet 59½, then you qualify for an exemption to the early withdrawal penalty (see Part 3). This exemption is called a QDRO (qualified domestic relations order). But for some reason, money in an IRA (of any type) doesn’t qualify for the QDRO exemption. So, if you’ve been making regular contributions to an IRA, it might make sense to reroute future contributions to your workplace retirement plan. You should definitely consult your lawyer on this one. But I wouldn’t think a judge would have a problem with this, since you aren’t trying to “cheat” your ex out of any money; you’re just trying to minimize adverse tax consequences to yourself.
Well, there you have it. We’ve covered eight different scenarios in which it might make sense for you to invest some money in your workplace retirement plan. There may be others as well that I haven’t thought of, but I don’t think you’ll find a more thorough list of such scenarios than the one I’ve provided in this multi-part post.
In the next and final part of this post, we’ll shift to the question of how to invest sensibly in your workplace plan.