A generation ago, if you worked for a large employer, you retired after 30 or 40 years with a nice pension that paid you every month until your dying day. That isn’t the reality for most of us today.
See Also: Kiplinger's Investing for Income
Our generation and those following us have no traditional pension (unless you work for the government or an old-line company that hasn’t yet shed its defined benefit pension plan). The fact is, the vast majority of us will move into retirement without the security of a guaranteed monthly income.
So how do you create your own pension when no one else will provide you with one? Here are four ways to create a monthly income similar to what a company pension would provide.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
1. Purchase an immediate annuity.
If you’ve read many of my articles or listened to my radio show, Hanson McClain’s Money Matters, over the past two decades, you’ll know I’m no fan of annuities. It’s not that I don’t like the protections that the insurance provides, it’s that the majority of annuities contain high costs and are sold by salespeople who have little or no training in securities or financial planning. I believe most annuities are simply bad investments.
But an immediate annuity is different in that it acts much like a pension. You hand over to an insurance company a chunk of cash in exchange for a monthly payment that you cannot outlive. Even if you live 102 years, the insurance company continues to pay you a check each month.
The problem with this sort of annuity in today’s low interest rate environment is the low yields. Insurance companies have to live in the same investment market as the rest of us, and their returns aren’t what they were in the past, so the yields paid on their annuities are much lower than several years ago. Still, for those requiring guaranteed income, they can do the trick.
2. Build a portfolio based on dividends and interest payments.
This requires quite a bit of retirement savings, but if you have a large nest egg, and you don’t need a high return, building a portfolio of income-paying stocks, exchange-traded funds and bonds isn’t a bad way to go. You’ll get a lower monthly return in the short run, but over time, this strategy could produce the most amount of wealth, particularly if the majority of the portfolio is in equities.
3. Get a reverse mortgage on your home.
This may not be a conventional method of replacing a monthly pension, but, for the right situation, it can be a perfect solution.
With a reverse mortgage, you don’t give up control of your home, but rather, you take a loan against it that doesn’t need to be repaid until you either sell the home or move.
If your home is currently paid off, and you are over age 62, you can use a reverse mortgage to pay you a monthly check until your dying day, similar to an immediate annuity. If you die young, your loan balance will be relatively small, and your heirs will inherit your home with a modest mortgage balance. And if you live past the century mark, the reverse mortgage will continue to provide you a monthly income, provided you are still living in your home.
4. Build a diversified portfolio, and set up a monthly withdrawal.
This approach doesn’t provide the same sort of guarantees that a government pension provides, but it’s a strategy employed by many that is similar to how company pension plans manage their own portfolios.
With this strategy, you simply put together a broadly diversified portfolio of stocks, bonds and perhaps some alternatives, and set up a systematic withdrawal each month. Some months your portfolio will gain much more than you withdraw, and other months it will decline, but the idea here is to have a withdrawal amount that will be sustainable over the long-term. The danger here is that if you take out too high of a withdrawal, or your portfolio doesn’t generate enough of a return, you could have trouble maintaining your monthly income into your golden years.
The simple reality is that it’s tougher to retire without the help of a monthly pension. Most of us qualify for Social Security, which will provide a monthly income, but it certainly won’t replace our paychecks the way some government pensions do.
In today’s world, there is no perfect strategy to replacing a monthly pension. But with the right kind of retirement planning, and perhaps taking into consideration some options that were unthinkable in the past, it’s still possible to retire with the confidence that your finances will last at least as long as you will.
-
The Most Tax-Friendly State for Retirement in 2025: Here It IsRetirement Tax How do you retire ‘tax-free’? This state doesn’t tax retirement income, has a low median property tax bill, and even offers savings on gas. Are you ready for a move?
-
Plan for Higher Health Care Costs in 2026: Projected Medicare Part B and Part D PremiumsIn 2026, Medicare participants will pay more for their health care. Part B costs are expected to rise more than 10%. Here's what you can do.
-
Avoid Medicare's 'Shadow Tax' With This Financial Expert's IRMAA-Busting TipsYou're cruising along in retirement, and then bam: Your Medicare premiums soar because your income crossed the limit. Take a breath. There could be a solution.
-
Grilling Season and ETFs: There's More Than One Way to Cook Up a PortfolioExchange-traded funds come in a multitude of 'flavors' these days, from passive to active to factor-based. Their flexibility is what makes them so delicious.
-
You Don't Want It, But You Should Plan for It Anyway: An Expert Guide to Long-Term CarePlanning for long-term care is crucial to protect your independence, family and financial stability against unexpected health events and rising care costs not covered by standard insurance.
-
Five Questions to Help Ensure a Happy, Secure RetirementYou need to drill down to what you really want out of retirement. Then you can get down to the business of crafting a financial plan to make it happen.
-
I'm a Financial Adviser: This Is How You Can Save for Big Goals Even if You Feel Like You're Barely Getting ByLearning good financial habits — building an emergency fund, paying down debt, saving consistently — gives you flexibility, options and a path to security.
-
How to Buy an Annuity Online (Without Regret)You should never be rushed into buying an annuity. But now that they can be sold quickly and easily online, you need to be more alert than ever to pushy salesmanship. Here are four signs you're working online with a professional.
-
How Much Income Will an Indexed Annuity Get You? An Annuities Expert Lays Out the NumbersGuaranteed lifetime income sounds great, but how much will it be? Several factors determine your future payout on indexed annuities with an income rider.
-
Financial Fact vs Fiction: Why Inflation Is Lower, But Prices Are NotDo you think bonds protect you from stock losses? Are you confident your assets will go to your intended heirs if all you have is a will? Think again — and read on for other myths that could be leading you astray.
