Employer Doesn't Offer a Pension? You Could Build Your Own

Senior couple lying in a hammock, woman listening to music, man reading a book
Pensions from private employers are increasingly uncommon. Among Fortune 1000 companies, a 2014 report from Towers Watson reveals, 35 percent offer a pension, compared to 59 percent a decade ago.

If your employer won't help you out with a pension, the financial industry lets you to create your own. Using an insurance product known as a deferred-income annuity contract, you can set up a future stream of income for yourself. Let's take a look at how these annuities work.

The Do-It-Yourself Pension

The idea of the deferred-income annuity is simple. In exchange for an upfront premium payment, the insurance company agrees to pay you monthly income. Yet unlike an immediate annuity, a deferred-income annuity involves waiting -- typically 10 to 20 years -- before the insurance company starts making monthly payments.

Historically, customers buying annuities have tended to be older, and so most of the attention for deferred-income annuities was to give those already at retirement age an opportunity to guarantee ample income if they lived beyond their life expectancy. According to a recent Barron's survey, a $200,000 upfront payment from a 60-year-old man could ensure annual income of more than $72,000 beginning at age 80.

More recently, life insurance companies have realized that potential buyers in mid-career could use deferred-income annuities to set up predictable retirement income. Now, customers in their 50s or even their 40s have the opportunity to buy deferred income annuities that will start paying out at age 65. Again using the $200,000 example, a deferred income annuity bought by a 55-year-old man could provide $21,000 in annual income. The same premium for an annuity bought at age 45 would create annual income of $32,000.

Of course, most people don't have $200,000 to spend on an annuity in the middle of their careers. But insurance companies have reduced their minimum investments on such annuities, selling them for as little as a $5,000 premium payment and inviting regular repeat purchases as part of a longer-term retirement plan.

What to Watch Out for

In general, if you die before you reach the target age, your survivors won't be entitled to any of your initial premium payment. Some annuities have add-ons that allow for heirs to receive something from the insurance company if that happens, but those options will reduce your monthly income if you live long enough for the annuity to pay out.

Like many annuity products, deferred-income annuities don't automatically adjust payouts for inflation. If your insurer offers inflation-adjusted payouts, you'll typically start out with a much lower initial monthly payment.

Nevertheless, investing a portion of your retirement savings in such an annuity takes away some of the uncertainties involved in retirement planning. Rather than hoping that the stock market will cooperate with the timing of your retirement, you can lock in a guaranteed monthly income in advance. For many, that peace of mind will be worth the potential downsides of this strategy.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google Plus.

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The endless endorsement, on this website, for the purchase of annuities is annoying.

Why don't they just say: "How much money do you have?? Write a check for the full amount and mail it to a big insurance company."

July 08 2014 at 6:32 PM Report abuse +2 rate up rate down Reply

Yes there was a Carter in my ancestor's tree:
CSA Brigadier General Williams Carter Wickham

Only that Carter became a Republican after the Civil War and voted for Grant for President of the United States.

July 08 2014 at 3:23 PM Report abuse rate up rate down Reply

The 401K plans has been crushed by this Great recession. Your lucky if you even have a job.

July 08 2014 at 3:03 PM Report abuse +2 rate up rate down Reply

There are less than 100 different people answering these articles. This dude will anything just to keep from unloading trucks at the big box store. It's only a matter of time before your boss cuts your job.

July 08 2014 at 2:51 PM Report abuse rate up rate down Reply

Tjhe "3 legged stool (pensions, savings and social security) has become a one and a half legged stool. Pensions have also become obsolete and have been replaced by savings plans, ESOP's or 401(k) plans. The problem with 401(k) plans is that people are using them to pay expenses as opposed to preserving them for retirement. As such, as more and more people have to rely on social security as their primary retirement fund they are in deep trouble.

July 08 2014 at 12:51 PM Report abuse rate up rate down Reply
1 reply to Ron's comment

I dropped a 3 legged stool many, many years ago. I named it mac2jr.

July 08 2014 at 8:00 PM Report abuse rate up rate down Reply
1 reply to mac2sr's comment


July 08 2014 at 8:22 PM Report abuse -2 rate up rate down

What a joke! another shill for the corporations. When this country had unions and deferred pensions it grew. Now we are told to fund our own 'pensions'. The whole phony 401K debacle has left people with nothing but the phony stock market to plan for. this is a cruel hoax and articles like this promote inequality and policies for the one percent

July 08 2014 at 12:44 PM Report abuse +1 rate up rate down Reply
3 replies to weilunion's comment

The more pertinent question is: WHY isn't your employer offering a pension? Profits are high and so is cash-on-hand along with deductions which allow employers to pay lower(no) taxes. Employers are using fewer fulltime workers and forcing those workers to work more hours. They are adding parttime workers to save on benefits. They are cutting benefit packages(except to the upper echelon). They expect new employees to already be trained(employee paid or gov. paid training has ended any company 'apprenticeship programs') thus saving money on in-house training. They use every deduction/tax shelter under the sun to cut their tax. Many pay little to no taxes much less their fair share to society. It's as if we have gone back to the late 19th century where Robber Barons controlled the game. But this time there are 10s of thousands of robber barons and not just a handful. Companies are treated as individual entities and they should have to pay their fair share of taxes to support the society(as individuals do).....ie especially the shrinking middle class. What we are seeing here is a dangerous expansion of a rich class oligarchy. This is NOT the free market or even democracy at work here. How many of us have the resources to buy votes/influence?

July 08 2014 at 12:29 PM Report abuse rate up rate down Reply
1 reply to .kowalski440mag's comment

Companies going to to 401ks are usually putting money into employees retirement accounts ... often at levels equal to what their contributions to "defined pension" plans would have been. The difference is, YOU own your 401k (and it can inherited) but you don't "own" any of a managed defined benefit pension plan. BOTH are invested in essentially the same things -- so if IRAs are losing value, so are most pension funds and if the company is unwilling or unable to increase contributions (or goes out of business) to make up the losses ... your defined pension fund could be worth zero when it's your time to retire, at least with an IRA you'll have something left.

July 08 2014 at 1:59 PM Report abuse rate up rate down Reply

Having read the comments-I suggest people who have a functioning brain go and do their own homework. What they'll find is that the Republican party has not done anything to help the middle and lower class. Their energies have been directed at the rich--Don't believe me? Do your homework and quit listening to Fox News and others like them whose only purpose is to distort, deceive and and lie for the betterment of the rich. The Democratic Party is not trying to destroy people's 401ks or their social security---You have a brain--USE IT!

July 08 2014 at 10:37 AM Report abuse rate up rate down Reply
2 replies to John's comment
Leroy Gd

Stong words spewed from john who we can all thank for voting in our fund raiser in chief into office. john must not have a brain or he would not have voted in someone who has experience as a socialist community agitator and apparently at being a liar, but sure does not know how to run a country.
Thanks for sharing your totally incorrect comment with us john and proving just how stupid you numb nut lefty liberals are.

July 08 2014 at 1:01 PM Report abuse rate up rate down Reply

what is the democratic party doing to SAVE people's 401ks and or social security?

July 08 2014 at 8:04 PM Report abuse -1 rate up rate down Reply
Leroy Gd

Why start a 401k type plan when the democrats are already pushing for a bill that will give the government full control of your 401k plan. Yes the democrats want to take your savings plan to be used more wisely by the government than by you low brow plebs. Their belief is that they, the government, can "Redistribute" your money where needed, for the better good of course, after all you did not save that money on your own. No without the government you would not have been able to work, save money and plan on your future.
Think like the numb nut lefty liberals think, that the government should and will take care of you, there is no need to plan for the future.

July 08 2014 at 7:47 AM Report abuse -1 rate up rate down Reply
1 reply to Leroy Gd's comment

Might want to fact check before you post . . . This goes back as early as 2010 and has been kept alive by re-posters who, like you, simply repeat what they hear rather than seek the truth. The story you reference above is bogus.

July 08 2014 at 10:27 AM Report abuse +2 rate up rate down Reply
2 replies to drbobdez's comment
Leroy Gd

And this moron still believes he can keep his doctor if he wants to. The truth hits you in the face and you would still vote for our liar in chief numb nuts.

July 08 2014 at 1:04 PM Report abuse -1 rate up rate down
Leroy Gd

The dems are working on taking your 401k's folks, they know where the money is and they want it and will do all that they can to steal it from you. Don't be like numb nuts drbob who thinks the government is there to take care of him.

July 08 2014 at 1:09 PM Report abuse -1 rate up rate down