Need a Pension? Build Your Own


There are many people who are either near or at retirement age who have very little or no pension funds set aside that is sufficient to live comfortably during retirement. Rather than being faced with the option of working past retirement age, there are some things you could do now to create a better future for yourself.

Brief History

Since the 1980’s, the concept of working at one job for 20 to 30 plus years which would earn you a traditional pension (aka defined benefit plan) paid out monthly by your employer for life in retirement has been phased out and replaced with 401(k) (aka defined contribution) plans. In traditional plans, the employer contributes 100 percent of the funds into an investment pool for its employees. The amount given to each retiring employee is determined by a formula based on years worked, earnings and age. Traditional pensions basically guarantee a retired employee a lifetime of income regardless of how the investment vehicle where the money is put in performs.

401(k) plans differ from traditional pension plans in that the employee has to contribute to the plan through a pretax payroll deduction; the employer has the option to match whatever funds the employee contributes up to a certain point. The main distinction with 401(k)’s is that the employee is responsible for how much and where the money deducted from each paycheck is invested. Therefore the employer does not guarantee the employee a lifetime of retirement income; the amount of income an employee receives depends upon how well the investment choices the employee made in his/her 401(k) have performed.

The Problem           

The problem facing many people nearing retirement is that most employers are no longer offering traditional pension plans; only 401(k)’s. This means that people will be retiring without any guaranteed income from their previous employers. People are living much longer–20 to 30 years in retirement, the 401(k) money could simply run out. Therefore, it is important to find a way to bridge the gap–create another source of income so that you do not outlive your retirement money. Creating alternative sources of income after retirement is even more important for young people as Social Security will probably be nonexistent or insufficient to live on.

The  to the Problem

Most financial planners and advisers stress that people should start preparing themselves for retirement by creating an income plan by building their own pensions. Although it is not likely that by building your own pension you will be able to duplicate a traditional pension, it will at least give you a source of income that you can live on if done correctly. According to B. Kelly Graves, a financial planner at Carroll Financial in Charlotte, NC, “Most people will have to accept an income stream that varies”.

The absolute first thing you should do is determine what your fixed expenses are, such as  housing, utility bills, taxes, and insurance. Once you have that value, then determine what your discretionary expenses are, such as travel, entertainment, donation to charities, and spending on grandchildren. Ideally, you should have enough guaranteed income to cover your fixed costs.

  1. Social Security– If at all possible, delay filing for benefits until age 70 so that you will be eligible to receive the biggest monthly paycheck. However, it is highly likely that the biggest paycheck will still not be enough to cover all expenses.
  2. Bucket Plan–  If possible, try to keep some spending money in a money-market account (about 3 years worth) and the rest in funds with a mixture of  60% stocks and 40% bonds. Make sure to refill the money-market account annually by selling from the bucket containing the mixture of stocks and bonds.
  3. Using your home– Do you own your home? If so, consider opening a reverse mortgage line of credit. By using the equity in your home, you can refill your spending bucket without selling your assets especially if stock prices are down.
  4. Retirement funds from previous employers— If you have retirement funds in a 401(k) plan from a previous employer, you can rollover this money to a traditional IRA or self-directed IRA. It will not benefit you to keep your money in a 401(k) with your previous employer because that money will not be growing since you can no longer contribute to it. Remember, the money in your 401(k) is YOUR money. Once you leave your employer, you can legally take your money with you. As always, consult your tax professional or accountant to determine what is best for you.    Click here for more information regarding how you can legally protect your money and have it work better for you.

The suggestions listed above are not the only ideas of how you can create a pension for yourself. There is nothing stopping you from brainstorming and coming up with new ways that may work. With  traditional pensions going by way of the dinosaur, it is even more important to get started now rather than later generating enough money and assets to have a comfortable retirement. If you are interested in earning some passive income either now or in your later years, click here to find out how.

Please feel free to share your questions or comments in the field below.


1. “Everybody Needs a Pension. Here’s How to Build Your Own”, by Dan Kadlec,Time Magazine, April 11, 2016, p.24
2.   Protective–The Learning Center Blog, ” What’s the Difference between a Pension and a Retirement Plan?”

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