Americans used to retire with a monthly pension from their employer. All they had to do was cash the check every month, and a sizable chunk of their retirement income was guaranteed.
Nowadays, pensions are most common for government workers. Most people instead finance retirement from some combination of Social Security and tax-advantaged accounts like 401(k)s and Roth IRAs. The result is that when the market declines sharply, so do the finances of many seniors.
Yet seniors without pensions can still create steady income in retirement, and all it takes are three simple steps. If you follow them, most of your income will come in monthly checks, almost like a pension.
1. Wait as long as possible, optimally to age 70 when benefits max out, before claiming Social Security to get the most from your monthly check.
2. If you’ve maxed out Social Security and need more safe income, buy a simple, unadorned income annuity that will deliver a monthly check for the rest of your life.
3. Invest remaining money in your portfolio in a balanced mutual fund that contains both stocks and bonds. Each year after turning 72, you can spend the minimum distribution required by the government.
Becky Panko has taken similar steps to create a synthetic pension. And now, as the 70-year-old from Fords, N.J., starts drawing Social Security, she has built a regular stream of income of more than $6,500 a month, a little less than half coming from Social Security and the rest from two lifetime income annuities that she funded with a combination of savings and a buyout package from Verizon, her longtime employer.
She will be receiving more money in retirement than she received before she retired last year as the office manager for a law firm. And she has a $275,000 individual retirement account to draw on if she needs more money.
“I’m an eternal optimist,” she says. “I think I’m going to live a long, healthy life, and I want to enjoy it. I’ll be able to do the things I want to do—travel and visit friends.”
The approach of building a synthetic pension makes sense, says Wade Pfau, a professor of retirement income at the American College of Financial Services: “You build a floor of your income, and you spend a percentage of what is left.”
Suppose you and your spouse retire at age 70 with a combined $50,000 a year in Social Security income and $1 million in savings. Here’s how the math would work:
You take $500,000, or half your investment portfolio, and buy an annuity with joint survivorship rights for you and your spouse. Right now, such an annuity for a 70-year-old couple would kick off around $27,000 a year. Between that and your Social Security check, you’d have $77,000 in stable income.