Pension vs. 401(k)

Given a choice, which would you choose: a guaranteed fixed income for the rest of your life, or a lump sum that you could invest? As it turns out, lots of people prefer a sure thing.

 

This is what a recent survey showed about public sector employees posed with the option to select a defined benefit pension plan or a 401(k)-type defined contribution individual account. In fact, even when the defined contribution plan was the default option and workers had to proactively choose the defined benefit pension plan, they made the effort. In the eight states studied that offered a choice between the two options, all had employees choosing pensions at rates of 75 percent or higher in 2015.

 

If there’s one thing this survey can tell us, it’s that people are paying attention. Most people don’t have unrealistic expectations about stock market outperformance, “getting rich” and retiring early. Many people remember what the recession was like and want to be better prepared should it happen again – particularly during retirement.

 

A MetLife survey recently revealed that 21 percent of retirement plan participants who opted to receive their pension or 401(k) assets as a lump sum depleted that money, on average, in less than six years. Among those given only the option of a 401(k), who took a lump sum, their money ran out in an average of four years.

 

Employer-sponsored pensions aren’t that common anymore, but you don’t necessarily need one. It’s possible to reposition a portion of the assets from a retirement plan and create your own guaranteed income stream with an annuity; the guarantee is backed by the financial strength of the issuing insurance company. We can help you determine if an annuity is right for you. Please contact us to schedule a consultation.

 

Even employees who have a pension plan may not get the retirement income promised because many pensions are now underfunded. This is particularly true of private, multi-employer pension funds. These are funds typically created by labor unions and cover industries where people often work for multiple employers in a year, such as trucking or construction.

 

Many of these funds have had difficulty recovering losses since the recession because the employees also work in declining industries such as manufacturing. When pension plans don’t have enough money to pay out the income they’ve promised, sometimes they go bankrupt or pay reduced amounts. To give you an idea of how many private multi-employer pension plans are currently underfunded, according to one report, it would take $76 billion to shore up the ones on the brink of insolvency.

 

Single-employer pension plans appear to be in better shape. Their maximum pension guarantee from the government’s Pension Benefit Guaranty Corporation, should their plan fail, is $65,045 a year versus a multi-employer plan guarantee of $12,870 a year for union plan workers with 30 years of service.

 

Though many employees may still prefer a pension over a self-directed 401(k) investment plan, today’s pensions are not as generous as they were in the past. Many involve higher retirement and benefit-vesting ages, longer work periods to qualify, lower payout percentages and smaller inflation adjustments once payouts begin.



Ray Lantz

Raymond C. Lantz, Jr. is the president and founder of USA Wealth Group, Inc. Ray has many years of experience advising clients in retirement and sophisticated tax planning strategies, multi-family and commercial real estate projects, and legacy planning. Ray is a graduate of Clark University, holds a law degree from Boston College, and a master of laws in taxation from Boston University. You can hear him every Sunday on Money Wise with Ray Lantz on WBSM 1420AM or on the Radio Pup app. 


Interested in reading more?  Here are some articles that may be of interest to you:  

Public Employees Choose Pensions

The Retirement Choice Causing Some To Run Out Of Money

What happens when your pension fund runs out of money

Some Union Retirees Could See Pension Benefits Cut 90%, PBGC Chief Warns

Pension cuts getting steeper for state and local governments

 

Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by company. Annuities are not a deposit of nor are they insured by any bank, the FDIC, NCUA, or by any federal government agency. Annuities are designed for retirement or other long-term needs.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

 

                                                         

Annuity Strategies

In a 2017 Nationwide Retirement Institute survey, financial advisors revealed some of the primary concerns of today’s pre-retirees, including maintaining their current lifestyle during retirement. These people also are less concerned with growing their assets; instead, they are focusing on drawing them down in a disciplined strategy without taking out too much too early -- and potentially running out of money. This often means transferring assets out of high-risk investments and putting them into more income-oriented vehicles.

With this in mind, annuities have become a popular go-to strategy for a portion of a retiree’s nest egg. With an annuity, you can determine how much money to use to purchase an annuity contract based on how much income you’ll want to receive from that source during retirement. Annuities can also provide a steady and reliable income stream, which is very helpful in retirement planning. It’s important to remember that annuities are designed for long-term needs and that they may be subject to fees, surrender charges and holding periods, which vary by company.

Because annuities are insurance products that require understanding, it’s a good idea to work with an experienced financial advisor to determine which type of contract best suits your particular needs. It can become your personal income stream, wherein you decide how much money to commit now for a guaranteed income in the future. Also, be aware that an annuity income stream is guaranteed by the financial strength of the issuing insurer, not the government. As always, we’re here to help you evaluate whether an annuity is appropriate for your situation.

The good news is that today’s annuities offer a wide spectrum of features and benefits to help customize your income stream. For example, some offer riders that provide payout options for a terminal illness, chronic care, disability and even unexpected unemployment. Some annuities guarantee a return of your premium. These riders are generally optional and may require an additional fee, and they may not be available on all products.

Another way to benefit from an annuity is to use it as a wealth-transfer vehicle. For example, fixed annuity income isn’t taxed until it is distributed. If you preselect a payment stream for a loved one, he or she can receive the income throughout a period of time to avoid a large tax liability as the result of a one-time, lump-sum death benefit.

Because they offer options for reliable lifetime income, annuities remain a popular option when creating an income plan for retirement assets. The following are some recent insights discovered by LIMRA Secure Retirement Institute’s 2017 Annuity Buyers Metrics study.

  • Annuities appeal to pre-retirees and retirees by addressing three major retirement income goals: asset accumulation, preservation of principal and predictable retirement income.

  • Individuals typically buy a guaranteed income annuity at or in retirement when they are at the peak of their income years or accumulated assets.

  • 80 percent of retiree households (with an annual income of at least $35,000) that own an annuity have more than $100,000 in investable assets.

Interested in reading more?  Here are some articles that may be of interest to you:

CLICK HERE TO READ THE ARTICLE “Using Annuities To Prep Clients For The Next Recession.”

CLICK HERE TO READ THE ARTICLE “Annuities Can Help Boomers Consider Wealth Transfer Plans.”

CLICK HERE TO READ THE ARTICLE “Buyers Look Past Marketing and Buy the Annuity’s Purpose.”

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Raymond C. Lantz, Jr. is the president and founder of USA Wealth Group, Inc. Ray has many years of experience advising clients in retirement and sophisticated tax planning strategies, multi-family and commercial real estate projects, and legacy planning. Ray is a graduate of Clark University, holds a law degree from Boston College, and a master of laws in taxation from Boston University. You can hear him every Sunday on Money Wise with Ray Lantz on WBSM 1420AM or on the Radio Pup app. 

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