One of the biggest challenges for retirees is figuring out how to pay themselves.
For years, it's save, save, save, but when it comes time to pull money out of retirement accounts even people who have saved adequately for retirement tend to freeze.
Learn more: Retirement planning -- a step-by-step guide
Starting next year, Vanguard has a solution: Through a collaboration with TIAA, it will offer a new retirement savings option for participants in its 401(k) plans. In simple terms, it's an investment product modeled on target-date funds that comes with an annuity embedded into it.
"Vanguard is aiming to make generating income from your target-date fund in retirement easier," Jason Kephart, a senior principal at Morningstar, told me. "Including an annuity in a target-date fund will give people an easier opportunity to annuitize a part of their portfolio at retirement if that works with their retirement plan. They won't have to deal with commissions or overly complex annuities."
To annuitize essentially means to convert a lump sum portion of your employer retirement plan account into a guaranteed paycheck for a specified period or for the rest of your life.
The new offering could be a salve for a deep-seated retirement worry: running out of money if we live a long life, having high healthcare bills as we age, or seeing the markets drop and not bounce back quickly.
Participants will initially be enrolled into a Target Retirement Lifetime Income Trust, based on an expected retirement age of 65. While not technically called an account, the product is available in your employer's 401(k) lineup of selections and will initially operate like a typical target-date fund.
With those funds, you choose the year you'd like to retire and buy a mutual fund with that year in its name (like Target 2044). The fund manager then divides your investment between stocks and bonds, typically made up of index funds, adjusting to a more conservative mix as the target date nears.
In Vanguard's new product, at age 55, a portion of your fixed-income savings will be shifted to a TIAA secure income account, which is a type of fixed annuity (an insurance contract that provides a pension-like guarantee for growth and a lifetime income stream).
Learn more: Fixed annuities vs. CDs: Which is better for your retirement savings?
By age 65, the annuity portion will reach 25% of your account, and you can decide when to convert that portion into a paycheck. If you wait until you are 72, your account would consist of about 40% equities.
Much like other defined-contribution plans, if you leave an employer and change jobs or are laid off and hold the Target Retirement Lifetime Income Trust, you typically will be able to leave your funds in the plan, roll them over to an IRA, or cash out, according to a Vanguard spokesperson. "Specific options for what participants can do will be defined by the plan sponsor," he said.