Traditional Pensions and Annuities
The only defined-benefit pension (i.e. a retirement payout that is based on negotiated promises and not based on market returns) that most Americans get is Social Security. And while most of us cannot live on Social Security alone, it does provide a nice baseline of income to pay for you basic living expenses.
It won’t buy you a beach house in Florida or a retirement full of travel and adventure, but it will pay for most Americans’ grocery and utility bills and day-to-day expenses.
If you’re one of the roughly 20% of Americans who has a traditional pension, consider yourself lucky.
In most pension arrangements, a retiree is entitled to a defined benefit. What this means is that the pension provider is on the hook to maintain a guaranteed payout for the retiree’s life and often times the life of their spouse as well.
There are a few limits: For instance, pensions generally have some allowance for payout increases based on inflation, but generally no allowance for an increased payout due to better-than-expected investment returns. And when you and your spouse die, the payouts stop. Also, there usually is no provision for transferring your pension benefits to your children or other heirs. Nonetheless, the security and the company-sponsored facets of this type of retirement plan makes it an enormously cherished one.
But unless you work for the public sector or are a member of a union, chances are good that you will not be getting any sort of fixed payout in old age other than Social Security. Pensions have been in rapid decline for decades — specifically, private-sector pensions have declined from nearly 35% in the early ‘90s to 18% today. Businesses are increasingly shedding these cost-prohibitive plans for more corporate-friendly 401ks, making pensions the relative dinosaur of the retirement-planning world.
The good news, however, is that you can create your own pension via an immediate annuity.
An immediate annuity is essentially the opposite of life insurance. Rather than pay an insurance company a monthly premium in exchange for a lump-sum payout at death, you pay the insurance company a lump sum today in return for a guaranteed monthly payout for the rest of your life.
Note: Immediate annuities should not be confused with variable annuities. Variable annuities are a saving and investment vehicle and might be a good option for investors who have already maxed out their 401k/IRA options for the year. An immediate annuity is a distribution vehicle designed to convert existing savings into a secure payout.
But be careful here. You retirement income is only as safe as the insurance company making the promises. Depending on where you live, your annuity may (or may not) be guaranteed by your state. So, consider the financial health of any insurance company in which you’re considering trusting your savings.
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Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.