The Retirement Dilemma, Turning Your 401K Into A Pension Plan.
This is a story that most of us have heard before. Previously when you retired from your long-time employer, you received the “wristwatch “and your pension. Your pension plan was provided, even if the watch wasn’t! With the pension, you received a percentage of your income and were given a choice to include your spouse or not, and that was that. People who had company jobs were taken care of in their retirement by their company’s pension plan.
In 1978, a provision was added to the internal revenue code that allowed for supplemental savings for senior executives who wanted to add money for retirement. This provision was a 401K. This idea started growing in popularity to dismantle expensive defined benefit plans and put the onus of planning for retirement on the employees themselves. In the 1980s, the concept of matching contributions for lower-wage employees was created to increase participation rates, which was essential for the highly compensated executives or owners to contribute the maximum allowed. When company participation is high, senior people can contribute the maximum without violating discrimination rules. The new retirement movement was born.
Fast forward to today, the investment age. Most younger workers are not concerned with a pension plan. They have been completely absorbed into this new way of planning for retirement. The discipline to save, the investment knowledge, and how to distribute the money in retirement has fallen entirely on ordinary people’s shoulders. Today we have financial planners, retirement planners, benefits consultants, and an army of new professionals who have been trained to address the retirement issues that we will all eventually have to face. The goal now is to get as much investment return on your money with the underlying theme of more income in retirement.
The problem is that income sources for retirement planning have been tainted by the investment-dominated information platforms. While speaking with many people about retirement planning, I have noticed that there is no more teaching about how to turn what you saved in your 401k into guaranteed retirement income without feeling like you are losing out on the gains of the market. Here is an example of what I mean. When I ask people their feelings about annuities, I get responses all over the map; bad investment, low yields, tying up money that could be used for opportunities, too expensive with fees, etc. But when I ask people, “Isn’t your social security an annuity?” Some people are perplexed because they never associated social security and annuities. If you think annuities are not important in the psyche of Americans, try taking away our social security annuity and see the response.
People have forgotten, or they were not educated with the purpose of saving for retirement. And we can see why. Someone who works for 30 years, puts money into a retirement plan, watching it grow to $1 million with the ups and downs of the market might have trouble with a suggestion to take 60% of that accumulation, put it into an annuity for a guaranteed lifetime income. Their initial feeling is I am giving up $600,000, and now I am down to $400,000, but I do need $3000 of additional income per month to feel great. Even though that $3000 per month need is a cry for annuity planning, it is not recognized as such because of the financial narratives from the investment houses.
Retirement planning with guaranteed lifetime income is the goal of retirement savings for the average person. Previously the look of a corporate pension is what Social Security and Annuity income planning look like today. If you need additional guaranteed lifetime income, an annuity is the only asset to replicate that experience. We need to separate our thoughts and understand our personal need for guaranteed lifetime income in retirement. It is not about how much you make; it is about how much you keep and distribute as income when you retire.