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Photo: Fizkes, YFS Magazine, Adobe Stock

Three Ways to Create Your Own Pension Fund

Time may seem like it is moving slowly now, but the age of 65+ will creep up faster than you think. Get your retirement plans in order.


In the last thirty years or so, the percentage of Fortune 500 companies offering pension plans has greatly dropped. Traditional benefits are being replaced by defined contribution accounts, if by anything at all.

Defined contribution accounts relinquish businesses from having to give workers retirement benefits. Hence, why so many employers are now choosing defined contribution plans like a 401 (k) instead.

Some employees are not as lucky as previous generations. Some of today’s companies offer no pension plan at all. Yet, it does not mean modern-day workers have to go without retirement benefits. Today, it is up to the employee to create their own retirement plan. Employees must be forward-thinkers, ready to invest in creating a pension-like income.

 

The Difference Between a Defined Benefit Plan and Contribution Account

Before deciding on a pension plan, look at how a defined benefit plan and a contribution account differ.

 

Defined Benefit Plan

A defined benefit plan is an employer-based program. Through using factors like length of employment, salary history, and others, the company pays a set of retirement benefits. All the risks and responsibilities are on employers. It is why so many companies no longer want to offer benefit pension plans.

 

Defined Contribution Account

A defined contribution plan lets employers and employees add to individual investment accounts. Usually, a deduction of a fixed percentage or set dollar amount comes from the employee’s pay. Many employers will create an agreement to add some of their money to the employee account. Thus, accounts receive benefits based on the amounts credited, plus any investment earnings. As responsibility shifts to workers, more companies are willing to offer this type of pension plan.

Although pension plans are what some employers offer new hires, they do not have to accept them. Instead, employees can create their own pension funds. Workers have several options to help build their own.

Create Your Own Pension Fund

 

1. Immediate annuity

Start preparing for tomorrow, today, by considering an immediate annuity. The steps to creating a pension-like plan are simple. Give an insurance company a lump sum of your money, and expect to receive monthly payments for life. The amount you get each month depends on the amount you provide, your age, and interest rates.

The downside of these annuities is that the money can quickly dry up, especially with easy access. Many also fear that if they die, the investment disappears. Yet, if you mindfully plan for an immediate annuity, it can work. Make sure to consider factors like your monthly lifestyle amount and other items. Before you put down a reasonable and large sum of money, think it through.

Also, if you pass away before receiving an amount equal to the amount of money you contributed, the rest can go to beneficiaries. Yet, if you select this option, it will lower the amount you receive each month.

Thus, thoroughly explore and examine whether an immediate annuity is right for you before making any plans.

 

2. Keep stocks

Avoid believing in the preconceived notion that investing in stock happens only pre-retirement. Instead, keep some stock after retiring to continue growing your money. Otherwise, you may quickly find yourself penniless.

Stocks are a great way to invest and divide money in various places. Look at the stocks you have and have more than one or two reasons for keeping them. Choose only the best ones, the stocks you know will be worth continuing to invest in going forward. Explore other stock investments, see how well they are doing and if you can benefit from them in the long run. As there is no guarantee with stocks, choose to hold on or let go of them with great caution.

Once comfortable with the stocks you are keeping, connect with a financial advisor. Start developing a reliable future income and monthly withdrawal plan. Work it out so that it feels like you are receiving a paycheck each month, to less likely pull more than you need.

 

3. Home Equity

Homeowners can take advantage of the equity they built by choosing to use a reverse mortgage. Although banking on your home comes with pros and cons, it is ultimately up to you what works best.

The pros of a reverse mortgage include allowing you to continue living in the home while making the equity a flow of monthly payments. This option is best for homeowners who love their homes and do not plan on moving. As long as you live in the house, you do not have to pay back the loan.

Yet, if you move, sell, or pass away, the repayment of the loan usually comes from the estate or the proceeds of the sale. The possible high costs and variable interest rates are among the cons of a reverse mortgage.

Like an immediate annuity or any other option for that matter, fully consider each of them. Before committing to a pension-like plan, make sure you feel comfortable with your decision.

 

Conclusion

Time may seem like it is moving slowly now, but the age of 65+ will creep up faster than you think. Get your retirement plans in order (and the sooner, the better). Ensure that a regular income is waiting for you when you are ready to retire.

Look over options, and be smart about the decisions you make. Double-check each method to secure your future. Consider and plan for the amount of income you will need to fit your lifestyle. Factor in any activities you may want to explore later in life that can cause extra expenses.

Think about whether you want to stay home or travel, buy a boat or a new car? Maybe you want to help your grown kids buy their first home? Or have some money to give the grandkids when they turn a certain age?

Whatever you choose to do with your retirement money is entirely up to you. But to make sure there is money readily available, then you must start by taking action now.

Austin Andrukaitis is the CEO of ChamberofCommerce.com. He’s an experienced digital marketing strategist with many years of experience in creating successful online campaigns. Austin’s approach to developing, optimizing, and delivering web-based technologies has help businesses achieve higher profit, enhance productivity, and position organizations for accelerated sustained growth.

 

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Photo: Fizkes, YFS Magazine, Adobe Stock
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