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Advisor weighs target date funds against annuities for retirement income
The question centers on replacing a dependable income stream after required minimum distributions begin, including assets in a low cost 0.12% target date fund versus an annuity purchase.
A retirement saver asked an advisor whether they should shift retirement assets into a target date fund or instead buy an annuity to help fund income in retirement, according to a Yahoo Finance Q&A.
The investor described a combined pension and Social Security income of $8,400 per month that would fall to $6,730 if one spouse dies, and said required minimum distributions will soon begin. They also cited about $1.6 million in a 401(k) with a low cost 0.12% expense ratio total return target fund, plus $350,000 in Roth accounts and $300,000 in a taxable brokerage account.
They asked whether they could use the target date fund in an IRA, with RMDs drawn automatically, in place of purchasing an annuity. They also said they own their home outright and compared their approach to using a robo-advisor that they described as charging between 0.3% and 0.8%.
The advisor framed an annuity as an insurance product intended to reduce the risk of outliving assets, particularly if someone lives longer than expected. In this case, the advisor suggested that relying on the existing portfolio, supported by pension and Social Security income that functions like a guaranteed lifetime stream, may be a reasonable approach rather than purchasing an annuity.