Is It Time to Buy Your Own Pension?

Nov. 11, 2008 — -- Now might be the right time to buy yourself a pension.

In a difficult investing environment, one of the best protections you can have against market uncertainty is a guaranteed stream of income from something like a traditional pension plan.

The problem is, of course, fewer U.S. employers today offer a defined-benefit pension plan that provides a guaranteed monthly payment to retirees. Instead, many of us are responsible for securing our own retirement income through a 401(k) plan or similar retirement savings vehicle.

A 401(k) plan offers the potential for greater rewards, but it also carries a much higher degree of risk, as has been quite evident this year.

One way to mitigate that risk is to buy your own pension through the purchase of an immediate annuity. With an immediate annuity -– also referred to as an income annuity -- you turn over a lump sum of money to an insurance company, which in return, provides you with a guaranteed monthly payment, regardless of how long you (or a spouse) live.

That's exactly how a traditional pension plan works: guaranteed monthly payments for life. But instead of your employer arranging the monthly payment, you're doing it on your own with savings accumulated during your working life.

This advice is intended mainly for folks at or near retirement age, not those with a number of years left in their working lives.

Also, I'm talking strictly about immediate annuities, not their more complicated and often quite expensive cousins, variable annuities. Variable annuities are a topic for a whole other column, but let's just say I have less enthusiasm for them than I do for immediate annuities.

The immediate annuity protects retirees in two ways. First, it provides a guaranteed payment regardless of market conditions. Even when the stock and bond markets tank, the immediate annuity provides a fixed payment that you need not worry about.

This is important for retirees in the current market environment, according to Julia Lennox, a vice president of retirement strategies for MetLife, which offers a variety of annuity products.