The 401(k) Strategy That Makes a Difference

Half of Americans (51%) fear they’ll outlive their savings, according to a 2025 Northwestern Mutual study. However, there’s a 401(k) strategy that can go a long way toward eliminating this risk—converting a portion of your balance into a payout annuity.

While new research from the National Bureau of Economic Research (NBER) shows this works best when it’s automatic—converting 20% of assets above a threshold—many 401(k) plans already offer annuity options you can choose today. For example, BlackRock Inc. (BLK) offers its LifePath Paycheck funds, automatically allocating 30% of assets to annuities by retirement. While you keep control over most of your nest egg for flexibility and continued growth, the annuity portion acts like a personal pension, delivering steady paychecks no matter how long you live or what the market does.

Differences Between a 401(k) and an Annuity

When you contribute to a 401(k), you are on a savings journey, watching your contributions grow or shrink with the market, often boosted by employer matches. It’s like planting a garden. You nurture it over time, and in retirement, you reap the rewards of what you’ve grown. Additionally, it’s flexible. You choose investments, and while early withdrawals usually come with penalties, you’ll have access to your funds if an occasional life emergency pops up.

In contrast, an annuity is more akin to securing a reliable income for life. It’s not flashy, but it’s comforting to know you won’t run out of money even if you live much longer than expected. You may sacrifice the ability to access your funds, and annuities often carry higher fees, but participants gain peace of mind from knowing their living expenses are covered.

How the 401(k) Annuity Strategy Works

Here’s what happens when you combine these two financial instruments: When you reach retirement age or your 401(k) balance hits a specific threshold, your plan automatically converts a percentage of your assets above that threshold into an annuity—unless you opt out.

BlackRock’s LifePath Paycheck funds, launched in April 2024, automatically allocate a portion of your target-date fund to annuities as you approach retirement. Here’s how it works in practice:

• Starting at age 55: The fund begins putting money toward annuity contracts.
• By age 65: About 30% of your portfolio is earmarked for guaranteed income.
• Your choice: Between ages 59½ and 72, you decide whether to convert that allocation into lifetime payments.
• Flexibility maintained: The other 70% stays in stocks and bonds for growth and liquidity.

The June 2025 NBER study found this approach improves retirement security for most participants. Even better, the study found that if you can choose a deferred annuity that starts payments at age 80, your monthly checks could be significantly higher—helpful for covering the typical increase in healthcare costs in your later years.

The Bottom Line

Retirement shouldn’t feel like a gamble. You’ve worked too hard to leave your future up to market luck or guesswork. Combining your 401(k) with an annuity may offer the best elements of both: Growth during your working years and a steady, predictable income when it matters most.