After World War II, the middle class of the Silent Generation enjoyed a great economy and often also benefited from the company pension, which promised to guarantee secure income in the after-work years. That security blanket started to unravel in the 1970s as Baby Boomers began to lose pensions as an employer benefit. Instead, they gained the IRA and 401(k), which required them to save on their own (along with an employer-matching contribution, in some cases).
Now there are tens of millions of Boomers with trillions of dollars in these qualified savings accounts invested in stocks, bonds and cash, and several trillions of dollars of equity in their homes. Unlike the pension era, these Boomers have to decide how to convert those savings into a lifetime of retirement income.
A recent article in Employee Benefit News (opens in new tab) points out that “traditional retirement plans aren’t enough to secure a worker’s financial future anymore.” Instead, everyday employees need help not only with savings, but often with unexpected health care costs and other emergency expenses.
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How to Make that Conversion
The days are past when you can touch base with your financial adviser once a year to review your rollover IRA holdings and have confidence that everything will work out through your retirement years. Your adviser will eagerly help you roll over your 401(k) savings into a new IRA or another product, but many do not have the tools or skills to manage plans for those already in retirement, particularly with your multiple needs and objectives.
So, how do Boomers make the transition from saving for retirement to creating a plan for retirement income — without a pension?
The answer is that, with some work, you can make the conversion and end with a plan that is “better than a pension.” To do that you have to become your own pension manager, requiring a new toolkit that will (1) show you how to pool longevity risk by integrating lifetime annuity payments, (2) manage your stock and bond investments for both current income and long-term growth, and (3) find investment platforms that provide robo-adviser services or direct indexing portfolios to keep fees as low as possible.
Better than a Pension
Go2Income (opens in new tab) has planning tools that can design such a plan and incorporate features that provide advantages over a pension.
- Liquidity. Because your Income Allocation Plan (“Plan”) has access to most of your savings (unlike a pension) a good-size chunk of your retirement money will be liquid, so you can access it for unexpected health costs and other emergencies.
- Legacy. Your Plan will also provide income while allowing you to preserve (or build) a legacy. A pension is for income only.
- Tax Benefits. Unlike a pension, annuity payments purchased with after-tax savings receive a tax break.
- Select Your Portfolios. You are able to direct the investment portion of your plan. And to keep fees as low as possible, you can use robo-adviser services or direct indexing portfolios.
- Shopping for Annuity Payments. You can visit our Go2Income annuity shopping service (opens in new tab) to select the best features and find income annuities at the best prices.
- Increasing Income. You can build income growth into your Plan. Not all pensions provide for increasing income.
- Match Personal Objectives. You can adjust your Plan to create the best situation for your survivor and other heirs, a striking difference from a pension.
- Adjustable Over Time. And, while a pension is reliable, it can’t be customized. You can change your personalized Plan if the economy or your circumstances change.
I realize this list raises the question of whether the historical pension would have supplied more income than a specific Income Allocation Plan. It is probably impossible to compare dollar for dollar. Not only are there differences in Plan design at retirement, but how much an individual contributes to a defined contribution plan vs. pension contributions before retirement also has a huge impact.
Most of us don’t have the choice anyway, so I believe it is better to look at the qualitative aspects of an Income Allocation Plan and to celebrate the many ways you can benefit economically: Lifetime income (just as with a pension) along with the control of your Plan, the ability to replan, and to manage your investments at low fees.
Prepare the Second Half of Your Retirement Plan
Saving for a retirement is important but that is only half of your plan. The second half involves making the savings work for you and your family to produce the most money over the rest of your life.
An Income Allocation Plan allows you to customize all aspects to your personal circumstances: You provide plan data, then we analyze the millions of possibilities to find the handful that fit your needs. Plan management is available, so your entire plan is re-evaluated periodically. With more secure income, you may find that even with market changes, significant changes in your income may not be required.
To discuss building a retirement plan that contains these “better-than-a-pension” elements, visit Go2Income (opens in new tab) and schedule an appointment to talk about how we can help you make it happen.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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