Home > Personal Finance > Creating Your Own Pension

Comments 0 Comments

Pension plans used to be an incredibly popular retirement vehicle for countless workers.

In 1975, an impressive 88% of private sector American workers had a pension sponsored by an employer. Thirty years later that figure had dropped to 33%.

As pensions disappeared, many turned to 401K plans and savings accounts to fill the gap. However, according to a 2016 Prudential report, 67% of American workers are afraid that their savings won’t last in retirement.

Those fears appear to be well-founded. A 2017 survey by the Employee Benefit Research Institute revealed that 32% of workers age 55 and older have less than $25,000 saved for retirement.

Compounding the problem, 401K investing can often be confusing and overwhelming for the average individual.

“Nobody else puts as much burden on individuals as we do in this country,” said Matt Carey, who formerly worked at the U.S. Treasury advising the treasury secretary and other senior officials on the future of retirement. “Nobody thought 401Ks would replace pensions. Now that people are retiring without pensions and don’t have the financial security their parents had or that those in the public sector have, we’re starting to see all these problems. It’s a big problem and it’s going to get worse.”

The market risk associated with a 401K and increasing longevity expose many Americans to running out of money in retirement, says Carey.

For those who don’t have an employer-sponsored pension, there are ways to create one on your own. And doing so may be a good idea because unlike a 401K, pensions can provide a paycheck every month for the rest of your life.

What is a Self-Funded Pension?

Insurance companies have long been offering annuity programs, financial products that allow individuals to put aside money that can be used to provide themselves with monthly paychecks similar to the way a pension would.

Insurance companies typically invest the money you give them and provide you with a monthly paycheck that’s a mix of principle and earnings. These paychecks continue as long as you live.

However, traditionally annuities require handing over a large amount of cash up front – $20,000 to $100,000 or more.

To make this type of retirement option more accessible, some companies have recently begun creating what’s known as a subscription income annuity programs, meaning you simply pay into them each month while you’re still working, rather than forking over hundreds of thousands of dollars.

“Unlike an annuity, you don’t have to make that big commitment today,” explained Carey, who recently founded Blueprint Income, a digital retirement program that allows individuals to create subscription-based pensions with an investment of $5,000.

Blueprint is breaking new ground by making pensions available to the masses online via digital payments and allowing for subscription level buy-in, rather than requiring substantial sums of money up front.

Additional companies wading into this emerging space include Prudential and Nationwide. Prudential recently announced a voluntary deferred income annuity program that it’s offering to individuals through their employers.

Currently available in 43 states, GIFT allows participants to make monthly after-tax contributions that are as low as $100. While the program must be offered by an employer, GIFT is not an employer-provided benefit. Employer involvement is limited to making GIFT available to employees and collecting payroll deductions.

How Do You Know if You Need to Create a Pension?

Confirm that you need income in retirement. The answer to that question for most people is yes.

Social Security isn’t going to be enough to pay for your retirement, it typically only covers 40% of one’s retirement expenses on average, says Carey.

“So unless you have a pension, you’ll be relying on your savings or a market-based portfolio to cover the rest of your expenses,” said Carey. “And that just isn’t reliable when you don’t know what will happen in the market and you don’t know how long you’ll live, and thus how many years of retirement expenses you’ll need to cover.”

How and When to Get Started

There are many questions to ask yourself in order to establish a personal pension, such as when do you want your retirement income to start and what are your retirement income goals.

But the key is that it’s never too late to create a personal pension (even if you’re in your 40s or 50s), said Carey. And just because you already have a 401K or a savings account, doesn’t mean you should skip creating a pension.

“A 401K is optimized to help you accumulate assets and you’re exposed to the market,” said Carey. “A pension on other hand is optimized for something very different, for giving you real retirement security. It’s a monthly paycheck that comes every month for as long as you live…Pensions used to be that great blue-collar retirement product and we’re trying to bring that back.”

If you’re concerned about your credit, you can check your three credit reports for free once a year. To track your credit more regularly, Credit.com’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get two free credit scores updated every 14 days.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

Image credit iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other sponsored content on Credit.com are Partners with Credit.com. Credit.com receives compensation if our users apply for and ultimately sign up for any financial products or cards offered.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.



Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team