Building Your Own Pension

The year is 1977 and the average sixty-five year old corporate employee is set to retire, receive Social Security and collect payments from their company’s pension plan. With a set fixed monthly income for life, there was not much to worry about (other than the solvency of their employer). Fast forward a year and the retirement landscape was upended. In 1978, Congress passed the legislation that would lead to the establishment of the 401k plan.

According to U.S. Department of Labor and Bureau of Labor Statistics, at their peak in 1983, there were 175,000 defined-benefit plans in the private sector. By 2020, that number had declined to about 46,000. Additionally, the percentage of private employers that offered traditional pensions fell from 35% in the early 1990s to 18% in 2011 and to 15% in 2022. This is a trend that is not likely to reverse anytime soon. 

While corporate pension plans remain relevant, they used to reign supreme as the primary source of retirement income for retirees. The onus was on the employer to make sure that their employees were taken care of in retirement. The establishment of the 401k plan flipped this on its head. Companies big and small were provided the opportunity to transfer the burden of retirement planning to their employees, leaving many questions to be answered. So what does it mean to “build your own pension”?

From a behavioral finance standpoint, pensions offer a less stressful means of thinking about income in retirement. Because there is little control as to the management of your monthly payments, there are fewer considerations leading up to retirement such as adequate savings rate, proper asset allocation and tax planning strategy. Most of the workforce today will rely on a combination of qualified and nonqualified retirement accounts, taxable investment portfolios and Social Security to supplement their income in retirement. The temptation to “tap into” your portfolio to make a big purchase can be just as strong as the reluctance to even consider using the nest egg that you spent your entire career accumulating. 

Creating an income goal for retirement and having the discipline to stick to it will be key to ensuring your portfolio meets your lifestyle needs. With a pension, you cannot call the company and ask for more money and as such, your retirement portfolio should be viewed in a similar lens. However, unlike traditional pensions that cease after the recipients or their beneficiaries are gone, your heirs may be left with a legacy that can be carried on.

This is not a one-size-fits-all methodology. What does the right balance look like for you and your family? Engaging in a thorough financial planning process to determine an adequate savings strategy, asset allocation and tax-efficient drawdown structure will be paramount in ensuring that the “golden years” are everything you hoped they would be.

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