People often speak nostalgically of the prosperous retirement era that our parents once had and how those days are long gone. But, what made our parents so lucky compared to today?
The major difference between then and now was that many of our parents had employer-sponsored “defined benefit” pension plans.
- Defined benefit pensions offer employees a “defined” or specified benefit in the form of lifetime income upon retirement, say 70% of a worker’s final salary payable for life.
- 401(k) plans, by contrast, are merely deferred savings accounts. They guarantee no future income and there is no second party promising any future benefits.
- Defined benefit plans function using “pooled income.” Pooled income is a centuries old concept and one the most cost-effective ways to provide lifetime income to retired populations (learn more).
- 401(k) plans make no use of pooled income. Instead, they presume people will amass enough wealth, generally through stock market investing, to live indefinitely off the earnings and appreciated value of their savings.
In comparison to what our parents had, the new retirement reality is a much more complicated and risky proposition – with more dependence on volatile markets, higher costs for management, greater personal uncertainty, and fewer guarantees.
But, it doesn’t have to be this way.
Get back what’s missing from your 401(k)
People can improve the outlook for their retirements by replacing what’s missing from the 401(k) retirement model. The key is gaining more access to pooled income.
There are many types of pooled income products available today that allow individuals to essentially create their own “private pensions.” In general, these products provide,
- More retirement income per dollar allocated than other comparable options.
- Guaranteed income for life and options for survivor benefits.
- Protection against the risk of living too long and outliving retirement funds.
- Insulation from the ups and downs in the market.
- Simplified means of translating retirement savings into steady, reliable income.
Though the times have changed from the era of our parents, with greater access to pooled income options, the promise of a secure and enjoyable retirement remains within reach.
What do you think?
- Did you ever wonder what happened to employer pension plans and why?
- Does it surprise you to learn that pooled income can actually be less costly and more secure as a means of generating retirement income?
- Did your parents or grandparents have pension plans that they benefitted from?
If you would like to discuss the suitability of income alternatives for your situation, you are welcome to contact me by email or through my Cincinnati, OH insurance agency, McCarthy Stevenot Agency, Inc.