RTX Lifetime Income Strategy — Is This Option Right For You?

Planning for retirement can feel like navigating a maze of financial decisions and investment options. One strategy that has garnered attention as there have been recent changes to it,  is the RTX Lifetime Income Strategy (LIS) which provides a blend of growth potential and guaranteed income. But what exactly is it, and is it the right choice for you? Let’s dive in.

What is the RTX Lifetime Income Strategy?

In the simplest terms, the RTX LIS is one of the investment options within the menu offered within the RTX 401(k) plan and is available to all employees. Many people may not even realize that a portion of their 401(k) could be allocated to this fund. For example, if you have not made investment elections in your plan, your investments will automatically default to LIS.  It is a professionally managed investment option designed to help build retirement wealth during your working years and for an added cost, it provides an option for guaranteed income upon retirement. Think of it as a target-date fund that not only automatically adjusts its investment mix over time but also incorporates an element of insurance to secure a portion of your retirement income, if you so choose.  This insurance component provides the option of a pension-like payment stream in the future and protects that portion against declines in financial markets.

Here’s how the RTX Lifetime Income Strategy works:

• Growth Emphasis: During your early working years, the LIS focuses on growth, investing heavily in equities to maximize your retirement savings. Before age 48, this fund has the same feel as a target date fund.
• Risk Reduction: As you approach retirement (about 15 years before your target retirement age), the strategy shifts toward risk reduction. A portion of your account is gradually allocated to a diversified portfolio, including an insurance component that guarantees lifetime income, at an added cost.  
• Some Control: You have the flexibility to determine how much of your account is allocated to this secure income portfolio, tailoring the strategy to your individual needs and risk tolerance. You would choose between 0% to 100% secured and you would select your retirement age (between 60 and 70).

Benefit Activation: If you decide to keep the LIS strategy, you will likely want to activate your benefit before your RMD’s begin in your 70’s, see more about this below.

The Pros and Cons of the RTX Lifetime Income Strategy

Pros:

1. Guaranteed Income: One of the standout features of the LIS is the guaranteed income it offers. This can provide peace of mind, especially during unstable market conditions. The insurance component ensures the income you’ve built up is protected, even if the financial markets take a downturn.  
2. Rebalances your Allocation Automatically: Similar totarget-date funds, the LIS offers the benefits of professional investment management and diversification, helping to optimize your retirement savings over time.
3. Simplification Now: For those who prefer a hands-off approach while continuing to work, the LIS simplifies the investment process by automatically adjusting your portfolio as you near retirement.

Cons:

1. Higher Costs: The LIS tends to have higher fees compared to standard target-date funds. These costs increase as you get closer to retirement, jumping from less than 0.2% before age 48 to  1.18% at age 65. These costs can add up.
2. Required Minimum Distributions (RMDs) and Net Unrealized Appreciation (NUA): Keeping your 401(k) open to maintain the LIS can complicate RMDs by having to contact the plan administrator when you want to take distributions.  Having the LIS also disallows the ability for you to pursue the NUA tax savings strategy.  CCMI can run an NUA analysis for you to help in making this decision.
3. Required Minimum Distributions (RMDs) impact: Withdrawals and RMDs should be considered carefully as they can reduce your income benefit.  If you have not activated your benefit, the RMD is considered an early withdrawal and it will reduce your income benefit.  If your benefit is activated, the income benefit will count toward your RMD.
4. Less Control: While some may appreciate the hands-off nature of the LIS, others might find the lack of control over their allocation decisions frustrating.
5. Activation of Income Benefit risks: Activating your benefit is an irrevocable decision that turns the account over to the insurance company to start making ongoing payments to you.  While you are not required to activate the benefit, you would want to start it before your RMD’s so your income benefit is not reduced.  
6. Beneficiary Designation Mistakes can be costly: If you die before activation, your beneficiary is eligible to receive the balance of your LIS account; however, they cannot receive an income benefit or secured income protection.  If you die after activation, you would have had to select a joint life option so your beneficiary would receive the balance of your account and/or income benefit and/or secure income level.

Is the RTX Lifetime Income Strategy Right for You?

Whether the LIS is suitable for you depends on several factors, including your age, financial situation, retirement goals, and whether you plan to manage your own investments or hire an advisor when you are no longer working.  It limits your ability to control your allocation and  perhaps less flexibility with withdrawal strategies.  

When it might make sense:

• Risk-Averse Individuals: If you value guaranteed income and are concerned about market volatility in the future, the LIS provides a level of security standard target-date or other funds do not.
• Hands-Off Investors: If you prefer not to manage your investments actively, the LIS offers a simplified, professionally managed solution; albeit at a higher cost than traditional investments if you choose the secured income option.  You can also create your own income stream from your 401(k).

When it might require more consideration:

• Workers Closer to Retirement: If you are over age 48, you’ll already start paying higher fees for the secure income portion of the LIS. Before making any changes, it’s crucial to understand what you’d be giving up in terms of guaranteed income. Check your income base — the total amount allocated to the secure income sub-fund plus any earnings — to determine the potential impact.
• Those with Company Stock in their 401(k): The LIS prohibits you from being able to pursue a tax-savings strategy called Net Unrealized Appreciation (NUA).
• Cost-Conscious Investors: If keeping costs low is a priority for you, the increasing fees associated with the LIS might be a deterrent.
• Those with Complex Tax Situations: If you plan to use NUA strategies or are concerned about managing RMDs, the LIS could complicate your tax planning efforts.
• Simplification in Retirement: If you are planning to move all of your invested assets at one institution, you are prohibited from moving the LIS portion of your 401(k) to an IRA.

Our Experience with RTX Retirement Plans

As a firm, we are positioned to help RTX executives and retirees, including former Collins Aerospace and UTC employees, navigate their retirement plans. Kim Benson has firsthand experience as a former Raytheon employee and has advised countless colleagues and clients on the myriad of options retirement plans available with RTX, including 401Ks and stock options. She would love to help you if you have specific questions and has seen every combination involving Lifetime Income Strategy.  Many of her clients have decided to move out of the fund based on the considerations above; however, we want to empower clients to make the best well-informed decision based on their unique situation.  

The RTX Lifetime Income Strategy offers a unique blend of growth potential and guaranteed income, making it an appealing option for many investors. However, it’s not a one-size-fits-all solution. Carefully consider your financial goals, risk tolerance, and potential costs before deciding if the LIS is the right strategy for your retirement planning. As we are fee-only advisors, there is a conflict of interest in that if you choose to stay in the LIS, it would be outside of our management and advisory fee vs. if you decide to move out of the fund and consider rolling your 401(k) to an IRA that we could manage and charge our advisory fee.  This is why we wanted to provide clarity around the trade offs in incorporating LIS as part of your 401(k).  Consulting with a financial advisor who is familiar with this strategy can provide personalized insights to help you make the best choice for your future. Let us know how we can help by contacting us today. 

PLEASE SEE IMPORTANT DISCLOSURE INFORMATION at https://myccmi.com/important-disclosures/