Is a Private Pension in Your Future?
With CD’s paying next to nothing, we need some creative ideas to generate more income during retirement…
Most of us have a notion on what a “pension” is, as you or someone you know may be fortunate enough to have one. A pension is a stream of payments for a specified period of time. As a retirement option it is often provided for the duration of the retired employee’s life and may include a partial or full benefit for their spouse should they survive the employee.
Behind the scenes, the employer is socking away money for the employee (in some plans the employee also contributes) in an attempt to grow sufficient assets for each employee’s future pension (income stream) payouts. The larger the promised (based on service years and income) pension payment, the larger the lump sum needed to fund it.
At the employee’s retirement, the employee will be paid out (pension) income, usually monthly. Behind the scenes, the employer contracted with an insurance company by giving the insurance company a lump sum of assets equal to what the insurance company determined to be necessary to fulfill the contractual pension income promise that the employee was promised. The insurance company tells the employer that in order to provide this monthly benefit, based on the employees age, that X amount of money is needed.
Another name for this contract is “Immediate Annuity”. An immediate annuity is a contract with an insurance company where a lump sum of money is given to an insurance company in exchange for a systematic pay out of money over a defined period of time. The payment is a combination of interest and principal. Yes, they are returning a portion of the principal in every payment. The actuaries at the insurance company create a return of principal payment that coincides with your life expectancy. When you die, (or your survivor dies if they have a contingent benefit) the contract is over.
You can create your own Private Pension by taking a lump sum of your savings and entering it into an immediate annuity contract with an insurance company. One major benefit of a Private Pension is that you get to spend and enjoy your principal (not just the meager interest) from day one of your retirement WITHOUT THE FEAR OF OUTLIVING YOUR MONEY!
There is no stock market risk with this contract as it is fixed (some annuity contracts have payments that rise with inflation). You can create a private pension with any percentage or dollar amount of your assets. One potential drawback is that you leave nothing from the money you contribute behind for your kids. If you read my article from last week, you wouldn’t care about this because you would leave your kids life insurance instead of investment assets. This is the best of both worlds, you get to spend your principal in retirement and still leave what you want for your kids.
The alternative is to maintain control of your principal and self-manage your retirement withdrawals. There is nothing wrong with this common strategy either. If you choose to self-manage your principal, it is VERY UNLIKELY that you will spend all the money you’ve saved. I will go even further and suggest you will probably spend a very small percentage of your retirement savings because of either the fear of outliving your money or you wanting to leave those assets to your children.
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