Over the next several weeks I plan to roll out a sequence of emails that, when finished, will represent a new section of the website meant to help individuals design a retirement income strategy from the privacy of home. We’re going to call it the AST Private Pension Center. The goal is to show the value of using various types of product allocation to achieve maximum financial output through retirement.
Plenty of academic studies have been done that can be pieced together to provide mathematic, scientific and economic facts to support the conclusions of the process. It’s my job to bring all the relevant information to one place for your benefit.
For starters, let’s talk about the value of pensions. As time passes, fewer people receive the benefit of an employer pension and those that do still exist are rarely able to meet the needs of retirees. True defined benefit pension plans have slowly been phased out over the last few decades in favor of defined contribution pensions, which are mostly comprised of 401K and IRA accounts. This shouldn’t be news to anyone.
Where retirees of yesteryear could rely on a former employer to issue a guaranteed income for life, the tables have turned and now put the responsibility of retirement funding squarely on the shoulders of the individual. In the new age of trimming expenses to maximize share values, pension liabilities were simply too expensive to keep on the balance sheet.
The expense to corporations of carrying pension liabilities denotes a direct indication of the underlying value of a guaranteed income stream. Honestly, without a pension, how do you know whether you’ll have enough money?
Guaranteed lifetime income from a pension ensures stable cash flow across all years of retirement. Now there are several challenges to contend with that will decrease the power of that cash flow but that’s precisely the overriding benefit. A stable base of income will allow more flexibility with other assets so you can focus more on growth to provide adequate funds for any financial obstacle you meet in the future.
Without guaranteed income you may well be relegated to constant worry over appropriate spending levels. Negative investment performance could potentially cause a major lifestyle change and the use of bonds or similar vehicles to preserve assets may not achieve the growth targets necessary for optimal performance or future cash flow.
The absence of pension-like income leaves far too many unanswered questions. And the biggest question is without a doubt how long you’ll live, also known as the risk of longevity. Since no one knows for sure how long each of us will live, it’s impossible to determine a sustainable spending rate without a portion of assets being dedicated to a lifetime stream of income.
Let’s recap this brief introduction to the value pensions…
The majority of current and future retirees are personally responsible for income in retirement. Because of the various challenges including longevity risk, inflation and market volatility, a guaranteed base of lifetime retirement income is essential to creating an adequate plan. Pension income will give you the flexibility with remaining assets to pursue the market growth needed to provide future funding sources to take care of any challenges that arise.
Next week I’ll continue with the next email in this sequence that is intended to name the threats to your retirement portfolio and how pensions will provide the benefits needed to financially rise above any future challenge you’ll face.
Stay tuned for the next email in this series and thanks again for your continued loyalty.
Have a great week!
Bryan J. Anderson
800.438.5121 bryan@annuitystraighttalk.com
Great intro Bryan- I look forward to the next installment. My Dad had a pension and in all my working life i never had a job that offered one. Times change! Got to take care of yourself!
Precisely what I'm agonizing over now. I'm 61 retiring soon and trying to decide whether to take the total lump sum from my employer or 50% lump 50% annuity guaranteed @ 7.25% per year. Although the annuity represents fixed income the value of that income reduces over time due to inflation. But are you saying that knowing I've got the consistent income from the annuity and SS, it allows me to be more aggressive with the balance of my lump sum and my 401K?
Rich, that is exactly what I'm saying but it really depends on how the numbers look and your appetite for risk.
Aggressively investing assets while you are working is fine because your lifestyle is not affected by market fluctuations so long as you still get your paycheck regularly.
In the same sense, payments from a pension or annuity protect your lifestyle while additional assets grow for future use. If income is dependent on market performance you won't be insulated from market corrections as a bear market will decrease the amount of income you could safely withdraw.
Take the guaranteed income and use the balance to provide income increases in the future when current retirement payments don't buy as much.
There are a few other minor things to consider but it's nothing more than a mathematical calculation at this point.
Let's run some numbers and figure it out!