Mutual fund companies are increasing access to a type of investment that provides guaranteed income for life.
Last week, mutual fund firm and index investing pioneer Vanguard announced a new line of target-date mutual funds, which will allow shareholders to use some of their retirement savings to buy an annuity, an instrument sold by insurance companies that guarantees the policy holder a certain amount of regular income over a set period of time.
The mutual funds are expected to be available in 2026, the Wall Street Journal reports, and will only be available within defined-contribution plans, such as 401(k)s.
Vanguard joins other financial and insurance firms, including mutual and exchange-traded fund giant BlackRock, in offering funds with a built-in annuity option.
“Retirement isn’t one-size-fits-all, and for those who want more predictability, guaranteed income can provide added peace of mind alongside their savings,” Lauren Valente, managing director and head of Vanguard Workplace Solutions, said in a statement.
That may sound tempting, but you’d be wise to do some homework before choosing any kind of annuity investment, says David Rosenstrock, a certified financial planner at Wharton Wealth Planning in New York City.
“Annuities are a popular way to guarantee an income stream,” he says. “However, ensuring an annuity is the right option before you purchase it is critical.”
Whether an annuity strategy makes sense for you depends on your personal financial situation. Talk with a trusted financial professional before making any major investment decisions.
In the meantime, here are some basic questions about annuities, answered.
Target-date funds are mutual funds that hold a mix of assets — usually other stock and bond mutual funds — that grow more conservative (i.e. more heavily weighted toward bonds) as you approach the year you plan to retire.
These are often the default choice in workplace retirement accounts. As of last year, more than 30% of 401(k) assets were invested in target-date funds, according to the Plan Sponsor Council of America.
These are meant to be all-in-one retirement portfolios that take asset allocation decisions off your plate, says Jason Kephart, a senior principal at Morningstar.
“These are designed with the idea that you’ll have all of your retirement savings in there,” he says.
An annuity is a contract issued by an insurance company that guarantees the person who buys it income for specific amount of time or over the course of the rest of their life. You can buy an annuity with a lump-sum payment or by paying monthly installments.
Different types of annuities have different payout and fee structures, but generally, the amount of monthly income you receive depends on how much money you put in, how long you defer collecting payments and your life expectancy.
How do target-date funds with annuities work?
Target-date funds follow what’s called a “glide path,” starting with a stock-heavy allocation and shifting the portfolio toward bonds over time. The annuity versions of these funds start shifting some of your money from your bond portfolio into an insurance contract starting at a certain age — 55 in the case of both the Vanguard and BlackRock funds.
Between then and the date you retire, money accumulates in the contract, eventually arriving at a certain percentage of your assets in the fund — 25% for Vanguard, 30% for BlackRock, for example.
You then have the option to leave those funds in your bond portfolio or convert them into an annuity that provides you a guaranteed lifetime income stream, the amount of which corresponds to how much money you have in the fund.
What’s the appeal of these funds?
Some forms of annuities — particularly those which pay out variable rates and hold underlying investments that can fluctuate in value — can be difficult for average investors to understand, says Kephart. But the model of annuities offered within target-date funds is relatively simple, he says.
“You give us this lump sum, 25% or 30% of your portfolio, and this is the amount of money we’re going to give you each month for the rest of your life,” he says.
For some investors, having a guaranteed stream of income for life alongside Social Security can provide peace of mind and flexibility, Kephart says.
“If you have a good sense of what your monthly expenses are going to be [in retirement], and between Social Security and an annuity you can cover those, then you have flexibility with the rest of your portfolio,” he says.
You could use the remainder of your assets to bolster your retirement income or earmark it to leave behind or donate when you die, Kephart says.
And even if your retirement isn’t completely covered by the annuity payments, having at least some of your income guaranteed can help alleviate the pressure of funding your lifestyle predominantly from withdrawals from your investments, says Rosenstrock.
“An annuity might make sense for very conservative and risk-averse individuals nearing retirement seeking a guaranteed income stream to cover expenses during their later years,” he says.
What annuity risks should I be aware of?
The prospect of guaranteed income comes with some tradeoffs, experts say.
With any annuity, price is a major concern, says Kephart — though less so if you buy them through a mutual fund, since there’s no commission paid to a salesperson.
Nevertheless, all annuities come with fees and risks that the insurance company bakes into the payout you’re offered, which you’d be wise to discuss with a financial professional.
Another consideration for potential annuity investors is liquidity. Should you opt into an annuity, the chunk of money you commit to the contract no longer belongs to you. If you die any time during the period you’re collecting income — whether it’s six months or 30 years — your heirs won’t continue to collect monthly payouts on your behalf.
“You’re getting a stream of cash flow that will last a lifetime, but you’re ceding a portion of your portfolio,” says Christine Benz, director of personal finance and retirement planning at Morningstar. “That’s not the case when you put your money in stocks and bonds.”
Relying on withdrawals from a stock and bond portfolio to fund your retirement comes with its own challenges. Earn poorer than expected returns or spend more than you expected, and you may find yourself running out of money toward the end of your life.
But a stock and bond portfolio has the potential to grow in value over time and provide a return that helps offset rising prices, Rosenstrock says. “The annuity isn’t going to give you any protection against inflation,” he says.
You might be able to do better sticking entirely with your own investments rather than committing part of them to an annuity, Rosenstrock says. “The safety provided by annuities may come at the cost of lower long-term returns than other investment options.”
Still, he and other experts say that the tradeoff might be worth it if the level and consistency of an annuity’s payments make sense for your retirement plan.
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