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Retirement Planning for the Laid Off

Question: I'm 57 and I think there's a good chance I'll be laid off this year. If that happens, I'll have to move my 401(k) balance to an IRA. On the recommendation of a finance professional, many of my former co-workers have transferred their 401(k) savings into annuities. Do you think this is the way to go? -- E.Z., Deer Park, N.Y.

Answer: When I saw your question, that old expression "to a man with a hammer everything looks like a nail" popped into my mind.

Why? Well, there are lots of "finance professionals" who see annuities as the answer to almost every retirement planning situation. So I'm not surprised that many of your former colleagues ended up owning annuities.

I can't discern other people's motivations. So I can't say whether the advisers who are so quick to flog annuities genuinely believe they're the best choice or whether annuities' generous sales commissions are a factor or whether something else makes them so eager to recommend annuities.

But I can tell you that you shouldn't be too quick to follow your former co-workers' example.

For starters, although rolling your savings out of your ex-employer's 401(k) into an IRA in the wake of a layoff or job switch is often the right move, it's not the only way to go. There are other options you may want to consider depending on your particular circumstances.

And even if you should decide that rolling your 401(k) into an IRA is the right thing to do, it doesn't necessarily follow that an annuity is the appropriate investment for your IRA stash.

I say this not because I have anything against annuities, per se. On the contrary, I think they can sometimes play a valuable role. In the right circumstances, I'm particularly a fan of immediate annuities, which are an excellent way of turning a portion of your savings into steady income that will last the rest of your life.

But immediate annuities aren't the type that are usually being touted to people who have 401(k) bucks to roll over. More likely, your former co-workers have been steered into variable annuities, and more specifically into variable annuities with a type of rider known as a guaranteed lifetime withdrawal benefit.

On the surface, such annuities look very appealing. They typically guarantee that you can withdraw a certain percentage, usually 4% or more, of your initial account value as long as you live. Some even offer a guaranteed rate of return before you start drawing income. And since your money remains invested in the annuity's subaccounts, which operate much like mutual funds, there's a chance your account value, and future income, might grow. Perhaps the biggest allure, though, is that your income won't be disrupted even if the financial markets get pummeled like they did in 2008 and early 2009.

Not surprisingly, there are drawbacks. The fees can be onerous, which reduces the chances of future hikes in guaranteed income. And these annuities can get pretty complicated, making it easy for investors to misunderstand exactly what is and what isn't being guaranteed.

My advice: Before you stick your 401(k) dough into an annuity, consider speaking with an adviser whose livelihood doesn't depend mostly on annuity commissions. That might be a fee-only financial planner or an adviser willing to work with you on an hourly or project basis.

The conversation shouldn't just be about the pros and cons of annuities. Rather, you and the planner should focus on the best way to handle your 401(k) money given when you want to start drawing retirement income from it and how much you'll need. In short, you and the adviser should be thinking strategies more than just specific products.

Any number of strategies can work, including ones that involve an annuity or maybe even more than one type of annuity. But you may not hear about these alternatives if you're dealing with someone dead set on putting you into an annuity.

One final note: There is absolutely no reason to hurry this process. You're not going to miss out on some great opportunity by methodically sorting through your options. So if and when the time arrives that you must figure out what to do with the money in your 401(k), bide your time. It's taken you an entire career to build your nest egg. The last thing you want to do is undermine all your effort with a hasty decision.

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