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What’s An Easy Way To Set Up Your Own Personal Pension?

Carl Ostenson

There are typically two phases to receiving a personal pension.

Phase 1 is the “Waiting & Growing” phase. This is when you are still working and the longer you work and the longer you wait, the more income you get when you finally retire.

Phase 2 is the “Getting or Collecting” phase. This is when you actually retire and start getting the income that you waited for.

There are a few really nice benefits with a personal pension:

  • You get steady income every month
  • It will last as long as you live
  • You don’t really have to worry about it too much

It would be nice to have those benefits for all your retirement income, wouldn’t it?

So if you will need additional income for retirement, how do you set up your 401k or IRA now, so it works like your own “Personal Pension” when you retire.

Many people continue to use mutual funds, bond funds, and other Wall Street securities. They continue to use the same investments that attempted to grow their money when they were younger, to now plan for safe and steady retirement income.

In my opinion, that’s like using a gas chainsaw to put frosting on a birthday cake. It’s the wrong tool for the job and can get real messy. But what do I know.

You are at Annuity123 and reading this right now, so maybe you are thinking that an annuity might be a good fit for some of your money. Especially, if you will need income that you don’t want to worry about.

Let’s look at a simple case study:

  • You are 60 right now and want to retire at 65
  • Your combined IRA/401k and other savings are $400,000
  • You will get $2,000 a month from Social Security when you retire in 5 years
  • You anticipate your expenses to be $3,000 a month

Given the information above, you will be short $1,000 a month. This is your Income Gap.

So let’s set up a “Personal Pension” with a portion of your money now, so when you retire in 5 years, you know for certain that you will solve your Income Gap with contractual guarantees.

For this example we are going see if an Index Annuity with an Income Rider can solve your problem.

PART ONE: The “Waiting and Growing” phase.

KEEP IT SIMPLE ANSWER: With annuities, this is called your Roll Up period. There is a Roll Up Percentage, which is the amount that your Income Account grows at.

Let’s say your Roll Up is 7%, just for an example. That means if you put in $100,000, after one year, your income account will be $107,000. After two years it’s at $114,490 and so on.

This Income Account is what your lifetime income is going to be based on. Think of Social Security. The longer you wait the more income you get when you take it. The Roll Up works the same way.

The younger you are when putting money into one of these and the longer time it has to grow, the more income you will get when you finally need it.

PART TWO: The “Getting or Collecting” phase

KEEP IT SIMPLE ANSWER: At some point in the future, you decide to start your guaranteed lifetime income. This is where The Withdrawal Percentage comes into play.

The Withdrawal Percentage is a withdrawal rate that the insurance company contractual guarantees you for the rest of your life.

It varies from company to company. It is also age based. So the older you are when you start your income, the higher percentage withdrawal you get.

Just for example let’s say the withdrawal rate table is: (This is just an example. Rates vary from company to company):

  • 4.5% at age 60
  • 5.0% at age 65
  • 5.5% at age 70

PART THREE: Do the math

So back to our example. You are 60 now and you need $1,000 a month starting in 5 years when you retire at 65.

You have $400,000 to work with.

If you put $170,000 into our example annuity right now, in 5 years your income account value will grow to $240,000 (Using 7% growth rate)

At age 65 your withdrawal percentage is 5.0%

So $240,000 X 5.0% = $12,000 per year.

Congratulations. You just solved your future income needs with contractual guarantees. (And it only took a portion of your overall nest egg)

Starting in 5 years, you will get $12,000 a year for the rest of your life. Guaranteed.

Also, we didn’t use all of your money to create your “Personal Pension”

$400,000 – $170,000 = $230,000 left over.

Feel free to invest that however you want, because you have the piece of mind that you will get the income you need when you retire in 5 years, and that income won’t be affected by ups and downs in the market.


Ok. I tried to keep it really simple, but of course there are details and fine print you need to know about before you open an account.

Here’s a few of them. You can always get the full disclosure and statement of understanding from a licensed agent.

Don’t ever let an agent pressure you into anything. These accounts are suitable for some people, and not suitable for others.

Good agents will listen to you, find out what your problem is, go about trying to solve it for you, and then let you decide, without putting any pressure on you.

  • These Income Riders have a cost. It’s usually between 0.5 and 0.95%.
  • These types of annuities are long term contracts. Typically 10 years or longer.
  • These types of annuities have limits on your liquidity. You can usually withdraw 10% of your account value every year.
  • The 7% Roll Up Rate does not apply to your actual annuity account value. It is only a growth rate that applies to your Income Account value
  • There is no lump sum of your Income Account Value. It is just used to determine your income.
  • Roll Up Rates and Withdrawal Rates vary depending on the insurance company and the specific contract. So work with an agent that will help you compare a couple different annuities to find the best solution for you.

Summary: The easiest way to understand these types of accounts is to actually get an illustration based on your situation and then go through it with an annuity specialist over the phone.

If you would like me to help you with that, click here to request your own customized personal pension illustration.

About the Author:

Carl Ostenson specializes in helping his clients use their IRA or 401k to set up their Retirement Income Plan for when they retire. He works with clients in the Chicagoland area and surrounding suburbs.

If you live in Chicagoland and want to talk about annuities with a local guy, give Carl a call at 847-376-8400… there’s never any pressure. To get more about Carl, visit:

Be sure to check out his Free IRA Guide titled “How to Get Secure and Predictable Income From Your IRA/401k When You Retire.”


Annuity123 does not offer insurance, investment, or tax advice.  You should always seek the guidance of qualified and licensed professionals concerning your personal insurance, investment, or tax matters.  Annuity123 is simply a platform allowing retirement planning professionals to help educate the community on various retirement planning topics.  Annuity123 does not directly support or take responsibility for ensuring the accuracy of the content displayed in the articles themselves or any feedback that may get added in the Comments section from the community.


  • Jon Cole says:

    Thank you! Very well written for us non-agents trying to understand the rules of engagement for income riders. I am doing exactly what you have described, except I am employing a different strategy. I will continue to let my income account roll up until I am 70 years old, and then turn on the income rider. In the period from age 68 to 70 (I am 69 right now) I have been taking penalty free withdrawals from the accumulation account to supplement my social security. These withdrawals come out of the income account on a pro-rata basis. In my case, by not turning on the income rider until I am 70, my age determined withdrawal rate is pushed up a whole percentage point. And, since the pro-rata withdrawal percentage is lower than the roll-up rate, the income account will continue to grow. Using this deferment strategy to achieve the higher payout percentage will result in higher lifetime income payments for me.

    Again, note that I am NOT an agent. I am a consumer who really examined the pros and cons of the annuities that I purchased and I focused primarily on the features of the offered income riders because I wanted to set up my own pension plan.

  • Gail Sickman Peterson says:

    Don't forget to have Fun along the way…….don't just count it.

  • That’s a great strategy Jon. Smart. You definitely did your homework. And Gail is right. We all need to have some fun along the way. I’m also a high school varsity softball coach and our season is just getting going here in Illinois. That’s my fun little hobby. Take care guys and thanks for reading.

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