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Retiring Well without a Pension

Smart Investment Strategies to Sustain You Later in Life

Pensions, once commonplace, are becoming more and more scarce in this day and age.  These retirement accounts, meant to support you with guaranteed income after the age of retirement, are rarely a benefit offered by companies any more.  As of 2018, only about 17% of employees in the private sector were offered traditional pension plans, according to the Bureau of Labor Statistics.

While civil servants like law enforcement officers, teachers, and government workers are the most likely to enjoy a pension, even these fields carry no certainty.  In cities across the country, local governments facing economic shortcomings have attempted to reform expensive pension and benefits plans for police and firefighters, notably during the Great Recession.

This leaves many adults looking for new ways to ensure that they can retire with enough money coming in to support them for another 20 years or more.  The good news is, there are numerous ways to save for retirement, with several different types of plans featuring a variety of financial advantages.  With smart investment strategies, retiring without a pension doesn’t have to be cause for fear and anxiety.

Defined Contribution (DC) Plans

While you might not recognize the name of this retirement plan, you’re likely familiar with the 401(k) plan, which falls into this category.  In fact, DC plans of one type or another are frequently offered as benefits in addition to salary, with 84% of Fortune 500 companies choosing DC plans over traditional pensions these days.  403(b) and 457(b) plans are other types of DC plans, but they are typically offered to public school employees and tax-exempt organizations, or state and local government employees, respectively.

What benefits will you enjoy when you choose a DC plan?  If your employer offers the option to contribute to a 401(k) plan, you can dedicate a percentage of your pre-tax income to the plan, up to annual limits, with the option to increase contributions over the age of 50.  Often, the major benefit is that your employer will match your contributions, up to a certain percentage of your salary, say 3-6%.

Your 401(k) provides a great way to save for retirement because your money is automatically withdrawn from your paycheck, making contributions incredibly easy to maintain.  In addition, you get more out of every paycheck because your contributions come from pre-tax dollars.  That said, you will have to pay taxes on 401(k) funds as you withdraw them.  Many, but not all, 401(k) plans offer provisions for loans for qualifying reasons, but if you simply withdraw money early, or fail to pay back a loan, you will face financial penalties for early withdrawal.

 

IRAs

There are many types of individual retirement plans (IRAs) that could help you to save for retirement, and like DC plans, there are limits to how much you can contribute annually.  A traditional IRA allows you to contribute pre-tax dollars, stretching the value of your pay check, with tax due when you withdraw funds.  Like a 401(k), you will pay penalties for early withdrawal.

A Roth IRA is a very different take on this type of retirement account.  You only contribute money that has already been taxed, with the benefit being that you won’t pay any taxes when you withdraw the money after the age of retirement.  This applies not only to contributions made to the account, but earnings.  In addition, you can typically take out contributions (not earnings) at any time prior to retirement without penalty, offering incredible flexibility.

The biggest drawback for many people is that IRAs are self-directed, which means you have to choose how to invest your money (stocks, bonds, CDs, etc.), and this can be daunting.  However, financial advisors and wealth management services may manage this (and other investments) on your behalf, for a fee.

Annuities

An annuity is different than other types of savings plans in that it typically starts with a large sum of money.  While DC plans and IRAs set limits on how much you can contribute annually, an annuity plan allows you to contribute a single, large sum, after which the money will be doled out incrementally.

There are many different types of annuity plans with a variety of features and benefits, but for the purposes of retirement, a Single Premium Deferred Annuity (SPDA) plan is common.  Immediate annuities start doling out money immediately, which may be ideal if you’ve received a settlement for an accident and you have medical expenses now.

However, for the purposes of retirement, you need to have your money invested, so that it grows before you retire.  An SPDA includes an accumulation period (starting with your lump payment followed by a distribution period (after the age of retirement).  Typically, you will hand over money to an insurance or financial company that invests the money on your behalf and then manages payments at the time of retirement.

This is one option if you find yourself with an unexpected windfall or you’ve been saving money that you want to put toward retirement, especially if you’re worried about investing it on your own.  Often, such annuities feature guaranteed interest rates or options to minimize potential downsides by relinquishing the opportunity for certain upsides.  This makes SPDAs an attractive option for risk-averse investors, especially those trying to figure out what to do with a surplus of cash.

Once the distribution phase commences, you’ll receive metered payments, and as this is a tax deferred plan, you’ll pay taxes only as money is distributed.  You can choose to receive payments for a set amount of time (say, 20 years) or for the remainder of your life (until you pass away or funds run out).

What if you pass away before your annuity has fully paid out?  With a “life only” plan, payments will cease when you die.  Remaining funds will go to the insurance provider.  A “life with refund” policy guarantees the amount you paid in, so if you die, the remainder will go to a named beneficiary.

In some cases, you can select a “joint-life” option to ensure that unused payments at the time of your death go to your spouse.  Remember, this is essentially an insurance policy, which typically means you use it or lose it.  However, you’re getting your money back with interest, so if you plan it right, you’re likely to come out ahead.

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