A pension is a regular payment received during a person’s retirement from an investment fund to which that person or their employer has contributed during their working life. This is a retirement benefit that you cannot outlive and used to be quite popular. More than likely your parents and/or grandparents worked for a company for 30-40 years and retired with a pension; guaranteed income for life or maybe even for two lives if they chose a spousal benefit. Those pensions were often solely funded by the company. Then a little thing called ERISA came along in 1974.
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans. It wasn’t long until the 401(k) plan was born; a plan where an employee can contribute, and the employer can offer a match but is not required to do so. Employers saw this as a way to shift the burden of saving for retirement onto the employee and bolster corporate profits. Slowly but surely pension benefits began to dry up. As I write this post, the Federal Government offers a FERS annuity (pension) based upon years of service and earnings and I can think of one other company in my local area who has a pension benefit for employees that were hired before a certain date. Those who came after only have access to the 401(k) plan.
With the number one question on the minds of Retirees today being “Will I run out of money during retirement?” a stream of guaranteed income you can’t outlive like that provided by a pension should be very attractive to you. But why talk about it if employers aren’t offering them? Simple. You can create your own! Much like the employer who transferred a lump-sum of money to an insurance company to purchase an annuity for your father or grandfather, you can transfer a lump-sum of money to an insurance company and shift the risk of running out of money during retirement to an A-rated insurance company who has never missed a claim. That should make you sit up straighter!
It’s true. Annuities get such a bad rap, but they are specifically designed to provide supplemental income during retirement. When used properly, they will guarantee your retirement income for your life and if your married they will guarantee it over both lives. Tell me what else can do that? Nothing! Absolutely nothing. So, why are you so confidant in your company’s pension check but refuse to purchase an annuity of your own? Seems silly to me.
I’ll let you in on a little secret. Annuities are regulated by nonprofit insurance guaranty associations at the state level. These state guaranty associations will pay claimants in the unlikely event that an insurance company becomes insolvent and cannot pay. Coverage is limited and varies by state. The typical statutory coverage limit is $250,000. For more information, go to https://www.annuity.org/annuities/regulations/state-guaranty-associations/.
I firmly believe that at least 75% of your retirement income should be protected and guaranteed for life. This would include Social Security Benefits, any Pension benefits and guaranteed income from a personal annuity. If you’d like to know more about how an annuity with guaranteed income for life can bridge your income gap during retirement, give us a call at 304.840.0706.