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

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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.

%VIRTUAL-WSSCourseInline-792%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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