Should you roll over your 401(k) to an annuity this August?

Today’s uncertain economic environment, dotted by sticky inflation, high interest rates and market volatility, has many pre-retirees rethinking their long-term financial strategy. And, if you’re sitting on a sizable 401(k) balance, you might also be wondering whether now is the right time to shift gears. For some, that means converting a portion of their retirement savings into a guaranteed income stream, such as an annuity. After all, predictable monthly income can be a welcome buffer against inflation and market swings. 

But making a substantial move, like rolling over your 401(k) to an annuity, isn’t a good decision for every soon-to-be retiree. Doing so can offer long-term security, but it can also limit your flexibility and tie up your funds in ways that might not align with your goals. This is especially relevant now, as annuity rates have remained high amid the Federal Reserve’s extended rate pause, but so have rates on other fixed-income investments, like certificates of deposit (CDs) and Treasury bonds.

So, how do you know if this August is the right time to take the plunge and roll over your 401(k) balance to an annuity? Below, we’ll take a look at what you need to know before making that move, along with some key considerations that can help you determine if it makes sense for your retirement plan.

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Should you roll over your 401(k) to an annuity this August? 

Converting a 401(k) into an annuity can make sense in some situations, especially if your primary retirement goal is to secure a steady income that lasts for life. With interest rates still elevated, many types of annuities are offering more attractive payout rates than they have in recent years. That means your rollover dollars could now generate higher monthly income with an annuity than if you made the move in a different climate.

And, with stock market volatility remaining a concern in the current economic landscape, some retirees and near-retirees are looking for ways to protect their nest eggs from downturns, which is where fixed annuities, in particular, come in. This type of annuity can provide principal protection and peace of mind, which can be hard to come by if your 401(k) is invested primarily in stocks or mutual funds.

That said, rolling over your entire 401(k) into an annuity isn’t always the best approach. These unique insurance products tend to come with fees, surrender charges and limited liquidity. Once your money is in an annuity, it’s often locked in for years, and getting it out early could cost you. And, if you’re still relatively young or want more control over your investments, moving a large portion (or all) of your retirement funds into an annuity may limit your growth potential.

If you’re still employed, there’s also a chance that this isn’t an option. Not all 401(k) plans allow rollovers while you’re working, so you may need to wait until retirement or a job change before this becomes available.

In short, while current conditions may make annuities more appealing than they were in the recent past, a rollover should be part of a broader retirement income strategy, not a standalone solution.

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How to decide if a 401(k) to annuity rollover is right for you

If you’re considering this type of rollover, start by thinking about your retirement income needs. Ask yourself: Do I have enough in Social Security and other sources to cover my basic expenses? Or would a guaranteed income stream from an annuity help fill the gap?

You’ll also want to consider your tolerance for market risk. If you’re risk-averse and don’t want to worry about portfolio performance in retirement, an annuity could offer a helpful safeguard. Some people choose to roll over just part of their 401(k) — generally enough to purchase an annuity that covers their core expenses — while keeping the rest invested for growth or flexibility.

Another factor to consider is how close you are to retirement. If you’re within five years of retiring, locking in current annuity rates could work in your favor, especially if you anticipate rates dropping again soon. On the other hand, if you’re younger, your money may have more earning potential if left in a well-diversified portfolio.

You should also evaluate the type of annuity you’re considering. Immediate annuities start paying income right away, while deferred annuities build value over time. Fixed annuities offer predictable payouts, while variable annuities carry market exposure and typically higher fees. The right option generally depends on your timeline, risk tolerance and income needs.

If you still aren’t sure, consider meeting with a trusted financial advisor or retirement planner. These experts can help you crunch the numbers and map out whether rolling your 401(k) into an annuity makes sense for your specific goals.

The bottom line

Rolling over your 401(k) into an annuity this August might make sense, especially if you’re looking to lock in higher payouts, protect your principal or create guaranteed income for retirement. But doing so is not the right move for everyone, and the timing alone shouldn’t drive your decision.

So, before making any changes, take a close look at your retirement needs, investment goals and overall financial picture. A partial rollover may offer the best of both worlds — security and flexibility — but every retirement plan is different, and it’s important to build a strategy that fits your life, not just the current market.