Become Your Own Pension Manager

People who approach me for advice on how to manage their retirement finances often wish out loud that they could rely on an old-fashioned pension like their parents had when they retired. These individuals knew Mom and Dad appreciated the checks that appeared in the mailbox every month without regard to what the stock market was doing or how old they were.

As many people nearing retirement age lament, traditional pensions are just about gone, having been replaced by 401(k) and other defined contribution plans. With little or no help from their HR departments at work and not able to afford a pension consultant, workers are on their own to create retirement income security. They have had to become their own pension managers.

Become a ‘Pension Manager of One’ with Income Allocation Planning

There is good news, however! That’s because there’s a way for investors to become their own pension managers. You will continue to rely on your own savings, but you will find this solution can create for you much the same feeling that your parents enjoyed: Fewer worries about the stock market, and confidence in a steady stream of income that arrives in your bank account without fail every month.

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How do you do that? I’m an actuary by training, but I started my career in life insurance product development, later moving to retirement planning and pension consulting. With this experience, I was able to develop what I call the Income Allocation planning method (opens in new tab), which integrates annuity payments into a plan for retirement income.

The Corporate Pension Manager’s Toolkit

Using this planning method, you take the tools that traditional pension managers in large corporations have at their disposal and adapt them for your own personal use. Besides the resources of a large company, these “pension managers of many” have a number of built-in advantages:

1. Corporations and governmental units create pensions for large groups of people, which creates an automatic advantage in the pooling of longevity risk. The risk is spread over these many individuals in order to make sure pensions are paid as long as retirees live, just like an insurance company does.
2. Even if the stock market implodes for several years, pension fund managers don’t worry too much, because active employees have not retired yet. And the company can increase its pension funding, giving the manager plenty of time to rebuild the fund as the markets recover.
3. Of course, the managers are not working alone. They have a team of actuaries who compute expected life spans and market returns. Money management companies bid for the pension fund’s business and task their professional investors with choosing products for stability and the most favorable returns.

Your Personal Pension Management Toolkit

You can design a pension for one or two yourself, if you take advantage of those same tools that a pension manager uses.

1. Pooling of longevity risk. You can achieve this by integrating lifetime annuity payments from one or more highly rated annuity carriers. Annuity payments continue for the rest of your life, or the life of a spouse who survives you. These annuities provide guaranteed lifetime income that starts immediately or at a future date, and they can be purchased singly or in combination. Whether you purchase with IRA funds, personal savings or both can be driven by tax considerations.
2. A portion of your savings will remain in the market, but not so much that your income dries up when the market crashes. The allocation between investments and income annuities is driven by the sources of income. If dividends represent a larger portion of your income, then you probably have a higher percentage of equities. Intensive plan management will keep your plan on track to survive the markets’ ups and downs. By plan management, we mean that at least quarterly — or as needed — your entire plan is re-evaluated. With more secure income, you may find that even with market changes, significant changes in your income may not be required.
3. Professional resources. Ideally, you will find on your own or through a financial adviser a low-cost investment platform so you can pay retain more of that income you planned on. Consider platforms that provide robo-adviser services or direct indexing portfolios to keep fees as low as possible. Fees can represent a much larger portion of income than you may imagine.

Reducing worries

Corporate pension managers know how to manage the retirement plans for current and future retirees, and they have the resources to succeed. Are you ready to become your own pension manager?

Go2Income (opens in new tab) has a ready-to-implement program. I promise it will be almost as easy as handing over your money to a corporate pension manager.