While most of us can no longer rely on a traditional pension from our employers, there are still ways to build a reliable income stream that can support a comfortable retirement.
Our generation, and those that follow, largely won’t have employer Defined Benefits Plans (pensions)—unless you’re employed by the government or one of the few companies still offering defined benefit plans. The reality is, most of us will retire without the comfort of a guaranteed monthly income.
So, how can you create your own “pension” when no one else is offering one? Here are four strategies to generate a reliable monthly income, much like a company pension:
Purchase an immediate annuity.
There still is a stigma about annuities, most people aren’t a fan. Some people might feel this way because some annuities come with high fees and are often sold by sleezy salespeople with limited or no expertise in securities or financial planning. In my view, annuities can act as an excellent replacement in income if sold in the right situation. Immediate annuities can provide a guaranteed income stream that may resemble the security of a pension. An immediate annuity is different from other types in that it functions much like a pension. You pay a lump sum to an insurance company in exchange for monthly payments that you can’t outlive. Even if you live to age 102, you’ll continue receiving payments each month. In today’s interest rate environment presents challenges and opportunities. Just like individual investors, insurance companies are affected by the current market conditions, which means the yields on immediate annuities are lower when interest rates are low and higher when interest rates are high. Despite this, for those who need guaranteed income, immediate annuities can still be a viable option to ensure a steady cash flow throughout retirement.
Build a portfolio based on dividends and interest payments.
If you have a substantial nest egg and don’t need a high immediate return, building a portfolio of income-paying stocks, exchange-traded funds (ETFs), and bonds can be a solid strategy. While the monthly returns may be lower initially, this approach has the potential to generate significant wealth over time, especially if a large portion of your portfolio is invested in equities. This strategy balances the need for current income with the potential for long-term growth, allowing your investments to work for you throughout retirement.
Build a diversified portfolio, and set up a monthly withdrawal.
While this strategy doesn’t offer the same guarantees as a pension, it’s a strategy that many use, similar to how company pension plans manage their portfolios.
In this strategy, you create a broadly diversified portfolio of stocks, bonds, and possibly some alternative investments, and set up a systematic monthly withdrawal. Some months, your portfolio will perform better than the amount you withdraw, while other months, it may decline. The key is to establish a withdrawal rate that is sustainable over the long term. The risk is that if you withdraw too much or if your portfolio doesn’t generate enough return, you could face challenges maintaining your monthly income throughout retirement.
The reality is, retiring without a monthly pension is more challenging. While Social Security provides a monthly income, it often falls short of replacing the paycheck a government pension might offer. In today’s environment, there isn’t a perfect solution for replacing a monthly pension. However, with careful retirement planning and consideration of options that were previously less conventional, you can still achieve a retirement plan that provides confidence in your financial future.
Disclosure: Although it is possible to have guaranteed income for life with a fixed annuity, there is no assurance that this income will keep up with inflation. A diversified portfolio does not assure a profit or protect against loss in a declining market.
