As you probably are already aware, the idea or concept behind saving for retirement has changed quite a bit over the last 40-60 years. The industry used to utilize a great deal of defined benefit pensions and nowadays this isn’t nearly as common. It is much more common in our environment today to see more defined contribution retirement plans. We are going to use this video today to discuss the idea of “old school” pension (defined benefit) plans today to some degree. These are really nothing like what we have in existence and are commonplace today, however, we can base our planning today around similar themes if clients have the desire to do so. The idea behind this would simply be using financial products that exist today to create a stream of income that is “consistent” (or stable). This is something that we can strategize with clients on how to create using a wide array of current investment and insurance oriented contracts in the marketplace.* It is a simple concept of trying to be sure that you baseline expenses (needs) are covered or met so that a client doesn’t have to worry as much about income during retirement.
As you probably already know, many employers today still do offer defined contribution plans (401k or something similar of that nature) to their employees, but not defined benefit plans. What this means to you, as the consumer, is that rather than the employer contributing money to a plan on your behalf; nowadays, most plans require that you contribute to a retirement plan and then they (as the employer) may match your contribution in some way they control. The attractive part to the old defined benefit plans, to some degree, was the fact that often times those are “locked” in place from the offset of the selection made at the date of retirement. Employers present several pension income options and once the employee chooses one, it is stuck in stone. This is good because your income should never change but could be viewed as a negative as well because it is an irrevocable decision once made. It is actually a positive aspect of old school planning though to have a set floor of income that was often generated by combining these pensions, social security and any other fixed income sources. That is actually one of the main reasons we created this video; we cannot accomplish this in the same exact way that it was accomplished 40-60 years ago but using fixed income sources and other “safer” streams of income we can try to accomplish a similar goal today.
We actually kind of like seeing clients (if they so desire) create on their own a scenario that functions like a pension use to function. This can be done by combining (at least for planning purposes) some of the perceived fixed income streams together in order to provide a stable floor or baseline level of income that you really do not have to think about per se. Many people that work for a paycheck during their working years like the idea of a consistent paycheck and this can attempt to create that same or similar type environment during retirement to some degree.
After we have this floor or baseline of income established, we also like the idea of taking the leftover money that an investor has accumulated during their working years and securing the other items that a consumer might want “covered” during their retirement years. This obviously changes from person to person in how it is defined. Sometimes that can be passing money on to family, covering potential long term care, planning for inflation or future purchases. Whatever the need may be, we simply think that mentally accounting for things from a “bucket” perspective where certain buckets of money are used for certain future wants or needs can make a lot of sense for someone.
*Guarantees are based on the claims paying ability of the issuing company.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
There is no assurance that these techniques are suitable for all investors or will yield positive outcomes.