No Pension? Learn How You Can Create One For Yourself

create-your-own-pension

In the past, after retirement, people could rely on two sources of income; their social security and their pensions. This helped people feel confident that they would make it through retirement without having to rely on outside savings. 

Nowadays, companies don’t offer pensions. That means it’s more important than ever to save for retirement. 

Although it is unfortunate that companies no longer offer pensions, there are ways to create your own pension so you will have enough money to last through retirement.

Read on to find out more about your options. 

What are Pensions and Why Are They Going Away?

(Or the real question may be, what were pensions?)

Pensions are contributions made by the employer, employee or often both, which are managed by an investment professional. The sponsor of the pension promises to provide a certain income to the employee for life, after they are retired. The amount the employee can expect varies according to the amount contributed and the years the employee worked for the company. 

However, due to the current economy, pensions are no longer sustainable and many companies are doing away with them. 

By late 2019, the average pension fund had 85% of the funds necessary to meet obligations over time mostly due to low interest rates. The risk involved, the costs, the declining union power and the rise of 401(k) style defined contribution plans that require workers to kick in their own funds, often with a company match, have also contributed to the demise of the pension. 

As a result, financial experts are advising individuals come up with their own alternatives. Below, we’ll review each of the common ones. 

Immediate Annuities

I tend to shy away from annuities and while some financial advisors will tell you the same, immediate annuities are recommended because they are very similar to pensions.

To invest in an annuity, you provide an insurance company with an upfront premium payment. In exchange, the company agrees to pay you a set amount each month for the rest of your life. You can also add on features so your spouse can continue getting income if you die. 

Annuities are great for making up for that income you won’t be getting through a pension. However, if you die shortly after purchasing the contract, you will end up getting a lot less back than what you paid. On the other hand, if you outlive your life expectancy, the annuity will pay off in spades. 

Also, today’s low interest rate environment means your annuity may not produce high yields. The amount you make will also vary according to your age, when you buy the annuity and how big of a premium you pay. 

 To get an idea of what you can expect, a 65-year-old man who invested $100,000 in an annuity can expect about $545 a month in income for the rest of his life. A 70-year-old man will get approximately $625 a month while a 70-year-old woman will get $585. This is because women have longer life expectancies than men. 

Despite low interest rates, annuities will still provide guaranteed income to investors. 

Build a Portfolio Based on Dividends and Interest Payments

A portfolio based on dividends and interest payments is ideal for those who have a considerable amount saved up in their retirement funds. If so, you can build a portfolio of income paying stocks, exchange traded funds and bonds.  Although these investments will not get you a high return immediately, they may pay off in the long run, especially if the portfolio includes a majority of equities. 

Get a Reverse Mortgage

A reverse mortgage allows you to take a loan against your home that doesn’t need to be repaid unless you sell the house or move.

While, this is not an option I recommend, it might be someone’s only option so if your home is paid off and you are over the age of 62, you can use a reverse mortgage to get a monthly check for the rest of your life.

If you die young, the loan balance will be small, and your home will go to your heirs along with a low mortgage balance. If you live for a long time, the reverse mortgage will keep a monthly check coming in for as long as you live in your home.

Build a Diversified Portfolio with Monthly Withdrawal

This strategy involves creating a diversified portfolio that includes stocks, bonds and other investments. It allows you to set up a monthly withdrawal to collect ongoing income.

Some months your investments will gain more than you withdraw. Other months it will lose more than you withdraw, but overall, it should provide a worthwhile and sustainable income. 

However, there are instances when you may not generate enough of a return which can get in the way of you continuing to receive income in your senior years. This is especially likely to happen if you take out too high of a withdrawal. 

Maximize Your Social Security

You can maximize your social security by waiting to receive payments. 

If you opt to start receiving payments when you are 62, you will only get 75% of your benefits for life. If you wait until you are full retirement age (66) you will get 100% of your benefits. If you wait until you are 70, you will get 132%.

Cost of living adjustments are also awarded during the years you wait, and they are added into your payment amounts when you file.

Of course, larger social security payments can not replace a pension, but they will make up for some of the income that is lost.

Final Thoughts

Many workers will be disappointed to find out that pension plans are becoming a thing of the past. However, it is fortunate that there are alternatives out there. Which of these investments will you be making to help you through retirement?

Below, I’ve linked some sources which were used in researching this article.

Recent Content