Rollover IRA From Principal Targets Boomers Income Needs
Principal Financial Group, Des Moines, Iowa, is bringing a new type of rollover individual retirement account into the retirement income arena.
Called Principal Income IRA, it is geared to retiring baby boomers who want to transition into living on a guaranteed lifetime paycheck, says Ronald Danilson, vice president, retirement and investor services at Principal.
The program accomplishes this in a two-step process. First, retirees roll savings from their 401(k)s and IRAs into mutual funds inside the IRAs brokerage account. Second, over several years, portions of the brokerage account buy portions–or, as Danilson puts it, “slices”–of an immediate annuity at then-current rates. The annuity is also held inside the IRA.
Danilson calls this buying process “benefit cost averaging” because it has similarities to dollar cost averaging.
In the early years, the program pays a monthly income that can be flexed but later on the income stream becomes fixed monthly payments for life. (See below for details.)
The program resembles traditional rollover IRAs in that it targets people who are at the point of retirement and who have retirement savings they want to invest in a tax deferred product and use for income. It resembles immediate variable annuities, too, in that it offers investment opportunities as well as an income plan.
But it is neither of those products, says Drew Denning, director, income management solutions for Principal. Instead, “it brings mutual funds and an immediate annuity together into a single retirement plan that has more flexibility and options than the other two products,” he says.
Here are the basics: The client deposits $50,000 or more into the IRA. This money is invested into the brokerage account, which has 40 mutual funds handled by different managers (AIM, Putnam, Fidelity and Principal Investor Funds). The client chooses one of five asset allocation models and selects from several funds in the portfolio to fit the asset classes.
In the early years, the client receives a monthly “target income.” Set annually, the income amount is subject to market risk. Thats because the money is paid partly from the immediate annuity and partly from the brokerage account, explains Denning. Hence, the payouts vary by performance of the brokerage account, interest rates and other market factors.