In 2016, Liz Davidson began an article with the words, “Our retirement is not our parent’s retirement.” What an illustration of understatement as literary device! Fifty plus years ago, I remember discussions my parents had with coworkers, family, church friends, and others about retirement. They normally centered around 1) the pension provided by a company, 2) Social Security, and 3) (when only immediate family was present) personal savings.
Throughout the Industrial Revolution and post World War period, individuals and families often spent most of their working years with one company. Many companies offered their employees a “Defined Benefit Pension Plan” that would provide an income for life during the years of a growingly popular term called retirement. By the mid 1920’s, more than 200 companies had created private pensions for employees’ senior years. That number continued to grow as labor unions negotiated greater benefit packages. The memory of the stock market crash of 1929 made a predictable lifetime income something to be cherished.
Until the 1980’s the employer sponsored defined benefit pension plan was the most popular retirement plan across the US. Today, these plans are rare, with less than 2 in 10 private sector workers having access to them according to the Bureau of Labor Statistics National Compensation Survey. The Revenue Act of 1978 created a new plan, popularly called the 401(k). Pension plans had become burdensome with regulation, expensive to maintain because of “bells and whistles” added by labor negotiation, and difficult to manage, so companies seized upon the opportunity to reduce costs. Employees embraced the new plans because they were suddenly in control of the investments and saw their net value increase over time.
These shifting events caused many people to reject the once popular concept of a lifetime income that could not be out lived. Popular investment writers over the last part of the 20th Century rejected the pension plan concept and went “all in” on asset accumulation and growth.
Many pension plans are in the news for being greatly underfunded, and their assets are distressfully underperforming target valuations. The apparent question would be, “Why would anyone ever want a pension plan included in their financial plan?” Annuities are private contracts whereby insurance companies promise to pay a lifetime income in exchange for either a lump sum or annual premiums. With investment advisors and financial reporters alleging many of these contracts are overloaded with commissions and fees, why would anyone trust a lifetime income promise to be in their best interest?
Is there a place for a pension plan or annuity contract paying a lifetime income in the 21st century?
The answer is a resounding, “Yes!” Think of it this way. When you and your spouse find the home of your dreams, with just the right number of bedrooms, in just the right location, you will want to know that the home has the proper foundation. No one brags on the foundation, but if it is weak, the beauty of the home will become a disappointment. In the same way, a simple, well structured, affordable, portable plan that reliably pays an income for life can provide a solid foundation upon which we can build the retirement of our dreams.
The bear markets of 2000, 2008 and 2020 remind us that markets do not always go up. Sometimes, the move downward can be swift and painful. In October of 1987, the US markets lost 20% in one week and 40% over only two months. If our only plan for retirement income is to sell shares each month, such sudden drops and extended bear markets can become very frightening. However, if we have a plan in place that we know provides income each month, no matter what happens in the markets, we can face the dips more calmly. We may be able to see them as opportunities for potential profit rather than times of fear.
No one wants to live with only a foundation of their home, and no one should plan for retirement with only a pension plan. Just as we need sufficient bedrooms, solid walls, beautiful windows, and a roof to keep us dry, our financial plan should include accounts that provide for emergencies, investments offering growth of personal assets, and more. But build the solid foundation first!
Here is to living financially free and pursuing our passions!