In the good old days, pensions ensured American workers had a comfortable retirement. If you put in 20 or 30 years at a company, it would reward you with a pension. But these days, pensions are disappearing fast. In fact, according to the Bureau of Labor Statistics, the percentage of private-sector workers whose employers offer a pension plan decreased to 15% in 2022.*
Pensions have largely been replaced by 401(k)s and individual IRAs. The burden of paying for retirement is on you, in other words.
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Request a Free QuoteThe Problem with Pensions
The problem with pensions is that they're very expensive for employers to provide. Whenever a big company (or even an entire city) goes bankrupt, one of the first expenses to go is the pension plan. If they aren't cut entirely, they're often dramatically reduced. It's not just a problem for private-sector employees, either. Northwestern University's Professor John Rauh estimates the dollar value of pension and health care obligations for state and local governments across the country is $4.4 trillion. With a fragile economy and an uncertain future, it's easy to see why depending on an employer to finance your retirement isn't a smart decision.
So what's the alternative? A 401(k), traditional IRA, Roth IRA, or personal investment in the stock market, bond market, or a combination of all of the above. But there are two big problems with these types of investments:
- Market volatility. Financial planners will often tell you that the average stock market return is 10% per year. But that's a misleading statement. Between the years 1926 and 2022, there were only seven times when "average" returns reached 8%-12%.** Setting averages aside, there also periods of incredibly high loss that can destroy years of saving and hard work in an instant: the dot-bomb (2001+), the Great Recession (2008+), and the coronavirus (2020+). Let's look at just one of these in detail. The 2008 financial crisis lowered the value of the S&P 500 index by 37%. On average, those with more than $200,000 invested in a 401(k) in 2008 lost over 20% of their account value.^ What if 2008 was the year you were slated to retire? What if something similar happens in the exact year you want to retire? You can't predict these dramatic shifts in the market. That also means you can never be sure exactly how much money will be in your retirement account when you need it most.
- Taxes. The idea behind funding your retirement account with pre-tax dollars is that you avoid paying taxes while you're busy earning money. You have bills to pay, a family to provide for, an education to pay for, a house to buy...and to inspire you to save on top of all those expenses, the government gives you a tax break as a reward. Instead, you pay tax on those dollars only when you withdraw funds from your retirement account. But what happens if the tax rate is higher in 20 years, when you retire? You're getting less for your money than you would if you just paid the tax now.
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Request a Free QuoteThe Solution Is an Annuity
An annuity functions exactly the same as a pension. It provides a monthly check from the day you retire until the day you die. That amount never changes, so you know exactly what to expect and how to budget for your living expenses. Instead of being funded by an employer, however, it's funded by you. You can pay into it slowly over time, or fund it all at once with a lump-sum payout from a 401(k), IRA, or a payout from your existing pension.
Annuities are sold by life insurance companies. The insurer estimates your life expectancy, so they know how much to pay you each month. Remember, it's now their job to make sure your money lasts as long as you do! If you pass away before all the money is paid out, your beneficiary will inherit the annuity. There's no risk, no worries about an employer going bankrupt or slashing pensions, and no chance that a market downturn or recession will evaporate your hard-earned savings.
If you're looking for a worry-free way to make your money last, an annuity is a great choice.
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Request a Free Quote*"What Is a Pension?", Forbes.com, accessed 10/25/23
**"What Is the Average Stock Market Return?," NerdWallet.com, accessed 10/25/23
^ "These 401(k) funds took a beating in 2008 — and it could happen again," CNBC.com, accessed 10/25/23