Is It Time to Buy Your Own Pension?

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.

"With the market volatility, they're unnerved that they won't know how much income can be generated if they leave their money in the stock market," Lennox said.

An immediate annuity, she said, "gives them peace of mind in terms of how much money they have."

And often an immediate annuity can provide a higher level of income than a safe withdrawal rate from an investment portfolio. An immediate annuity might generate annual income equal to 6 percent to 8 percent of a lump sum amount, Lennox said, while many financial advisers suggest withdrawing about 4 percent a year from a portfolio in the early stages of retirement.

A second protection provided by an immediate annuity is that it protects you against the possibility that you will outlive your money. This is called longevity risk, and it's something many of us underestimate. Six in 10 pre-retirees believe their chances of living beyond age 85 are 25 percent or less, according to a recent study by the MetLife Mature Market Institute. The truth, however, is that an individual who reaches age 65 has at least a 50 percent of living past age 85.

And with a married couple each at age 65, there's more than a 50 percent chance one of the two will live into their 90s. That's why you need to protect yourself against the risk of longevity.

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