Disappearing Pensions and What You Can Do About It
Not that long ago, many corporate and government employees had the safety of a defined benefit pension plan which was funded by the employer and would provide a steady stream of “guaranteed” retirement income for the rest of their life.
Sadly, this type of pension plan is a disappearing commodity and, with them, goes the security of an income stream to support one throughout retirement. So, given the inevitability of the current trend to alternative vehicles, what can a retiree or future retiree do to ensure a guaranteed income that they cannot outlive? Bear in mind that having an income one cannot outlive is the single biggest concern amongst retirees today.
Remember that 401(k)s were never intended as a retirement vehicle to be used as an alternative to a defined benefit pension plan. They were intended as a vehicle for working folk to make additional (tax deferred) contributions to supplement their social security and other retirement income. Somewhere along the way, this intention got skewed and they are being largely used as a primary resource for retirement income – a purpose for which they were not designed.
Fortunately there are alternatives, one of which we like to call your “Private Pension Plan”. We use a combination of annuities including Fixed Index Annuities (FIA’s), which, when coupled with Income Riders provide arguably the best alternative to the old style pension plans. They will grow with the market (although you will not get all the market gains) and you will never lose money should the market go down. Also, with an Income Rider you can with certainty predict what your guaranteed income in retirement will be, with no fear of outliving your income. The Insurance Company takes on that risk which is what insurance companies are there for.
It makes sense then to have that income that you cannot do without in retirement secured in FIAs, and any additional funds can then be at risk in other investments where there is the potential for a greater upside. Remember also that Social Security was never intended to provide for all your retirement income – in fact it will only provide about 40% of the income that you will need in retirement.
With a FIA you know what your income will be in advance and, even if the number is not what you would like, at least you know what it is and can plan accordingly without any risk of later surprises. The older one gets, the less time one has to recover from any setbacks so it makes sense to be more invested in FIAs the older one is and the closer to retirement one gets. Retirement is not a specific number; it is different for everyone either through choice or design so, as always, the input of your advisor is essential in the planning of your retirement.
Your ‘pension’ does not have to be a thing of the past if you plan correctly and use the vehicles that are at your disposal in the correct manner. Educate yourself and plan in advance, and you can still have that retirement you worked for.
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