Let’s talk about the value of pensions. In times past, workers who dedicated a lifetime of service to a chosen company were rewarded with an employer pension which provided a guaranteed paycheck for life… a rich benefit indeed!
For various reasons appropriate for a separate discussion, employer sponsored pensions have been slowly phased out over the past few decades. These days, fewer and fewer people can rely on an employer pension for retirement income and the ones that do exist are rarely able to meet the incomes of retirees. Times most certainly have changed…
The tables have turned and now the responsibility for retirement funding falls squarely on the shoulders of the individual. In the new age of trimming expenses to maximize shareholder values, pension liabilities were simply too expensive to keep on the balance sheet. True defined benefit pension plans have been phased out in favor of defined contribution pensions, which are mostly comprised of 401K and IRA accounts. This shouldn’t be news to anyone.
But while pensions have severe costs for employers, they are tremendously valuable for the retiree.
Guaranteed Lifetime Pension-Like Income:
Guaranteed lifetime income from a pension ensures stable cash flow across all years of retirement. Granted, there are challenges to a fixed income stream that decrease the power of that cash flow, but the overriding benefit is stability.
A stable base of income allows more flexibility with your other assets.
With a guaranteed baseline income secured, you can focus on growth with the other assets to overcome any financial obstacle you meet in the future.
Without guaranteed lifetime income, you may well be relegated to constant worry over appropriate spending levels. Negative investment performance could potentially cause a major lifestyle change, and reliance on bonds or similar vehicles to preserve assets and supply that income may not achieve the growth targets necessary for optimal performance or future cash flow.
The absence of pension-like income leaves far too many unanswered questions. And the biggest question is without a doubt how long you’ll live, also known as longevity risk. Since no one knows for sure how long each of us will live, it’s impossible to determine a sustainable spending rate without a portion of assets being dedicated to a lifetime stream of income.
Let’s recap this brief introduction to the value of guaranteed, pension like lifetime income…
1) The majority of current and future retirees are personally responsible for their income in retirement.
2) Because of the various challenges, including longevity risk, inflation and market volatility, a guaranteed base of lifetime retirement income is essential to creating an adequate plan.
3) Guaranteed, pension-like income will give you the foundation of strength you need, and the flexibility with your remaining assets to pursue the market growth.
4) Market growth from this position of strength is needed to take care of additional challenges that arise.
Next we continue with the threats to your retirement portfolio, and cite extensive empirical and actuarial evidence to prove how pensions provide the benefits needed to financially rise above any future challenge you’ll face.