My Opinion

Make your own “pension”

I was having lunch the other day and began a conversation with the fellow next to me. Turns out he recently retired. “Are you lucky enough to have a pension?” I asked. “Sure,” he said, “My employer paid half and I paid half.”  Ahh, that doesn’t sound like a pension plan.

Turns out he was talking about a 401k plan which sadly, while often referred to as a pension plan, is a far cry from the traditional defined benefit pension (which provides a steady stream of income for life). 

“Now it’s up to you to make sure it lasts for life,” I, perhaps insensitively, observed. “Yeah,” he quietly agreed. 

Somehow, some way everyone needs a steady stream of income in retirement. How to accomplish that is the question. Social Security is big part of that income for most people, but it’s not enough. Buying an annuity with accumulated assets is scary for most people. But the good news is that annuities are starting to appear as an investment within 401k plans so keep an eye out for  that option. 

Here’s another possible option and one that I use as part of my retirement income strategy. 

Buy shares in good quality dividend paying stocks that also offer dividend reinvestment. Do so outside of a qualified retirement vehicle such as an IRA. This gives you more flexibility using the funds in retirement. 

Allow the reinvested dividends to compound until retirement thus building up the number of shares owned and the amount of dividends paid. Yes, you will pay taxes on the dividends as they are paid. 

At the same time also invest in low cost municipal bond mutual funds and reinvest those interest payments (which will be federal and perhaps state income tax free). Low interest, yes, but that tax free income will come in handy in the years after you retire. 

Over a working life you will have accumulated shares of stock and mutual funds. At retirement you have several options with one of those being to stop reinvesting dividends and interest and instead have them create a regular stream of income throughout the year. The bond mutual fund typically pays interest monthly. 

I am not a financial advisor or claim to be an expert so you might want to check with the real deal, but I find it comforting to know I can supplement my retirement income when I need to without selling assets and that my wife as a survivor can do the same. 

Oh yes, if you consider this strategy, start early and with as much money as you can. And add to the number of shares you own when possible. 

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7 replies »

  1. Waiting until 70 just does not add up for me. From age 62 to 70 my wife (spousal benefit) and I will collect $110,000 in SS benefits. We would not get that money back until age 78. We are going to invest my wife’s SS benefit and an equal amount of my SS benefit in dividend yielding stocks. My military pension will continue to grow, so I think we will be ok. Also, if I die before her she gets my SS benefit, investments and life insurance ($10,000 per year for 10 years) that should supply more for her than a $400 increase in my SS benefit at age 70.

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  2. people who have sufficient financial capability to invest outside their 401k are not the issue – it is people who perceive they are unable to save anything. So, savingin a 401k ensures you pay yourself first.
    Why not pursue your strategy within an IRA?

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  3. Your advice is very sound. I wish that I had done that when I was in my twenties. So much has changed since then for the better. Online brokerages where you can make trades for under $10 and low minimums a without the pressure of a broker is a world of difference today and it is so much easier than back then. And if you are afraid of picking the wrong stock, listen to Warren Buffett and buy shares in a growth index fund. When you build up your nest egg, then go find a financial advisor or a broker and get the right stock for your needs. Just start saving.

    Here is another tip. If your car is not paid off for a length of time equal to the length of your car loan, you are either buying too many cars, the wrong car, or just plain wasting money on vehicles and probably gas too, that you could be saving. I had a friend who drove the cheapest used car he could find to work. If he got two or three years out of it, he was happy because his monthly expenses for buy a clunker was only about $100 month versus the mortgage payments that car loans have become. He still had a very dependable family car, but his commuter car was junk, but he saved a ton of money. I was not in the same position to do the same thing until about 10 years ago, and what a difference it made in extra monthly income.

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    • Dwayne, I have not had a car payment since 1986 and have purchased 12 cars with cash since then. I just purchased a 2006 VW Jetta GLI with 134,000 miles for $1,500.
      I cannot believe how many people enter retirement with house, car and credit card payments. How stupid? I will be starting my Social Security benefits in Feb 2018 at age 62.
      No debt, SS and a USAF pension and I will have 30 percent more monthly income than my highest income year in 1995. My monthly living expense is $1,200,included insurance and $400 for food. So, I will have $1,650 in the bank every month. No cable TV = savings of $725 per year. I did not even purchase a new HDTV until OCT 2014 ($269, 43* screen) until then I watched a 27′ CRT that I paid $50 for at a pawn shop in 2002. Of course my moving to MT in 1995 was my best decision. $348 lot rent per month, water and trash removal included. 1983 mobile home paid for 10 years ago. Average utilities cost Elect & Nat gas $80 per month. I have not had a job since 2006, my choice. I have been gone from home since July of 2016 and will not be back home until May 1st. My wife and I have been visiting family in TX, OK and NY, we have been at my daughters place with our 2 grandsons since Dec 27th, 2016.
      Life in retirement can be great if you budget what income you have coming in each month.
      I just laugh when I read or hear that you need $1,000,000 or more to afford retirement. Kind of hard to do when you have only made $600,000 your entire life. Too many people living 3 stages above their means, sending all that money to the banks and taxman each month.

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      • Sounds like you are a candidate to delay SS beyond 62 and increase the payment so it’s higher when you will need it to offset inflation in your 70s.

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