How to Create Your Own Pension

The pension, as we know it, has pretty much gone the way of the dinosaur. The ongoing exception is the public employment sector.  However, most private companies have found that it’s too expensive and cumbersome to offer a traditional pension. Instead, they offer 401(k) plans in which they match their employees’ contributions.

Even if you’re diligent and have saved an adequate amount of money in your 401(k) at retirement, you are still faced with some challenging questions.  For instance,

  • Is my money at risk in the stock market?
  • Should I be ultra-conservative with my money?
  • Will I outlive my money?

After more than 25 years in the financial planning industry, I know that most people fear outliving their money more than anything. One way to address that fear is to create your own pension by using an income annuity. An annuity, in its purest form, is a stream of income guaranteed for a period of time. For instance, Social Security is an annuity guaranteed for one’s life.

Annuities are purchased from an insurance company. An immediate fixed life annuity (fixed meaning that the amount doesn’t change) is when you give an insurance company a lump sum of money. In turn, the insurance company pays you a monthly sum for the rest of your life. This creates an additional cash flow, similar to Social Security, that isn’t subject to stock market fluctuations.  As a retirement income specialist, it’s my job to make sure that my clients have enough monthly income from Social Security and an income annuity to cover their fixed monthly expenses.

Because a fixed annuity payment doesn’t increase, I’ll often recommend to my clients that the rest of their money should be invested in a diversified portfolio of stocks and bonds. Even though stocks are volatile and not guaranteed, they tend to outpace inflation. A downside to the life annuity is that if both husband and wife die shortly after purchasing the annuity, the insurance company can keep the rest of their money. But you can avoid this by purchasing a cash refund immediate annuity wherein the insurance company will refund any unused portion of the principle to your estate.

A fixed immediate annuity should not be viewed as an investment. Rather, it is retirement insurance to protect you from outliving your money. As pension plans disappear and Social Security benefits may be decreased, creating your own pension through an income annuity can be an attractive option to funding your retirement.

To learn more about Jeffrey Bogart, view his Paladin Registry research report.

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