Yes, you can create your own pension in retirement. Even if you do not have an employer pension, you can use a portion of your savings to purchase an annuity that provides guaranteed lifetime income.
The question is which option fits your needs. I want to walk you through the examples from my video below so you can see how income timing, access to your money, and beneficiary protection affect that decision.
Need help choosing the best annuity for your unique situation? Have questions about getting an annuity? If so, it’s best to speak with an annuity specialist. Watch this short video to see how I can help you do this (at no cost to you!)
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1. How Can You Create Your Own Retirement Pension?
You can generate retirement income from mutual funds, dividend stocks, municipal bonds, or rental properties. But those approaches do not provide the same contractual lifetime income guarantee as an annuity.
When I talk about creating your own pension, I mean using some of your assets to establish a dependable paycheck. An annuity can serve that purpose by paying income for your lifetime, or for both your lifetime and your spouse’s lifetime.
This can be especially relevant if you are self-employed. If you do not have an employer pension and expect a smaller Social Security benefit, you may need to create more of your retirement income yourself.
In the video above, I discuss using cash savings or retirement assets, such as a solo 401(k) or SEP IRA, to fund that income. The goal is to determine how much income you need and then compare the options available for your situation.
I also believe in transparency: I sell annuities, and insurance companies pay me commissions. My focus is helping you compare the income and features available so you can choose an option you are comfortable with.
2. How Much Income Could a Personal Pension Provide?
In my video above, I use an example of a couple living in Arizona. One spouse is 60, the other is 58, and they have $1 million in assets.
They are considering putting $600,000 into an annuity and keeping the remaining $400,000 outside it. That allocation is part of the example, not a recommendation that everyone put 60% of their savings into an annuity.
First, I compare annuities with income riders, which I also refer to as hybrid pensions. The illustrated joint lifetime income changes depending on when the couple starts receiving payments:
- Starting now: Approximately $39,000 per year.
- Starting when the older spouse is 62: Approximately $47,000 per year.
- Starting when the older spouse is 65: Approximately $62,000 per year.
These figures come from the comparisons shown in the video. Your results may differ based on your age, your spouse’s age, your state, the amount you contribute, and the contract selected.
The highest-paying carrier can also change depending on when you start income. In this example, an option that was not the highest at age 62 moved to the top at age 65.
That is why I encourage you to compare more than one starting date, particularly if you are still deciding when to retire.
👉 Want to compare income options for your situation? Visit my website to use my calculators or schedule a call with me.
3. How Does an Annuity Income Rider Work?
An income rider adds contractual income benefits to an annuity. In the illustration I review, the rider has a fee that comes out of the contract value and goes to the insurance company.
The illustrated rider provides an 8% compounded annual increase to the income benefit base during the five-year waiting period. That benefit base is used to calculate future income; it is not the same as the account value available to withdraw.
In this example, the calculation works like this:
- The couple contributes $600,000.
- The income benefit base grows to approximately $881,597 after five years.
- A 7.1% payout factor produces approximately $62,593 in annual joint lifetime income.
The account value follows a separate path based on index credits, fees, and withdrawals. The 8% income-base increase should not be confused with an 8% investment return on accessible cash.
The reason to consider this arrangement is the lifetime paycheck. Under the illustrated rider’s terms, income continues even if the contract value is eventually depleted.
With the joint payout illustrated, the surviving spouse continues receiving income. If both spouses die while a death benefit remains, that remaining benefit goes to their beneficiaries under the contract’s terms.
The video above also discusses cumulative payments approaching $2 million over a long retirement. That represents income paid over decades, not a $2 million cash balance you can withdraw.
💡 Pro Tip: When reviewing an illustration, ask which number represents your accessible account value and which number is used only to calculate income.
You could also keep your money invested and purchase an annuity later. However, a market decline shortly before your planned purchase could leave you with less money available to fund that paycheck.
4. Should You Choose an Immediate or Deferred Income Annuity?
An income rider is not the only way to create your own pension. I also compare a Single Premium Immediate Annuity, or SPIA, and a Deferred Income Annuity, or DIA.
A SPIA is designed to begin income soon after purchase. A DIA schedules income to begin further in the future.
For the same couple and $600,000 contribution, the immediate-income comparison in the video shows approximately:
- Income rider: $3,290 per month.
- SPIA with joint income and a cash-refund feature: $3,500 per month.
In that comparison, the SPIA provides more immediate income. But the trade-off is access to the money.
The SPIA shown is fully annuitized, meaning the premium has been committed to the payment arrangement. It does not provide the same access to a remaining account balance as the income-rider option.
With the income-rider contract, remaining account value may still be accessible, although surrender charges and the effect of withdrawals on future income must be considered.
When I push the income start date out five years, the comparison changes. The income rider provides approximately $5,200 per month, while the DIA provides roughly $400 less per month.
That does not make one type universally better. In this example, the SPIA offers higher immediate income, while the income rider offers higher income after the five-year wait.
What If You Want Payments to Continue to Beneficiaries?
A period-certain feature can be another reason to consider an annuitized income period annuity. In the video above, I illustrate a deferred option combining joint lifetime income with a 30-year guaranteed payment period.
Adding that feature reduces the illustrated income to approximately $4,600 per month. If both spouses die after receiving payments for 20 years, their beneficiaries would receive payments for the remaining 10 years.
If a covered spouse lives beyond the 30-year period, lifetime payments continue. The period-certain feature establishes a minimum payment period; it does not cap the lifetime income.
This may appeal to someone who wants continued payments available for a child or another beneficiary. It is a different arrangement from leaving only the remaining contract value through an income rider.
👉 If you want help comparing income, access to your money, and beneficiary features, schedule a call with me through my website.
5. How Much Should You Use to Create Your Pension?
My approach is to use only the amount needed to create the income you want, and no more. You do not need to put all your assets into an annuity to establish a dependable retirement paycheck.
Start by identifying the income you need and comparing it with what you expect from Social Security, existing pensions, and other sources. Then explore how much of your savings it would take to cover the remaining income need.
Using less money to establish that paycheck leaves more available for investing, saving, and maintaining flexibility.
The purpose is to create a reliable income floor. Having that paycheck in place can make it easier to manage a down market without immediately changing your lifestyle or selling investments to cover everyday expenses.
Whether you have $250,000 available or substantially more, compare options using your own numbers. The amount contributed and the time before payments begin can make a meaningful difference.
Need help with finding the best annuity for your retirement?
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On the call, I can help you:
- Determine what type of annuity is best for you
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