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

Senior couple lying in a hammock, woman listening to music, man reading a book
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.

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.

7 Simple Strategies for a Frugal, Prosperous Life
See Gallery
Employer Doesn't Offer a Pension? You Could Build Your Own

Securing a favorable interest rate is a prime way to maximize savings. On a major loan repayment like a mortgage, a little upfront effort can save you considerable amounts for years to come. To cash in on this frugal hack, you need to get your credit in shape. That means checking your credit history, making payments on time (and in full), and reducing your debt to available credit ratio as much as possible. It means paying down your balances on all your credit card accounts. The higher your credit score, the lower your interest payments and the higher your savings.

Adjust your withholding exemptions so that your payments to Uncle Sam match your actual tax liability, and you won't wind up with a big refund come April. As exciting as it is to get that big check in the mail, that's money you've been loaning to the government for free rather than having it grow in your own savings and investment accounts. As of the start of April this year, the average tax refund was $2,831. That's $235 a months' worth of money that could be working for you.

Just 10 to 20 minutes on the phone with your cable company, cell phone rep, or any other service provider can result in recurring monthly savings through old-fashioned negotiation. If you're not getting anywhere after asking for a lower rate, ask for the cancellation (or retention) department and see what offers start to come in. If you're unable to haggle down to get the savings you want, you can always shop providers to get your service elsewhere -- probably with a new-customer discount rate, too.

While bulk buying can sometimes lead to unnecessary purchases and overspending, it's a great strategy for savings on nonperishable items like paper products, cleaning supplies and alcohol. When you stock up, you save on the unit price and the trips to the store to restock.

Other than the obvious benefits of reduced health care costs over time, exercising and living a healthy, smoke-free lifestyle can provide some more immediate savings on your insurance premiums.

More stuff equals more to maintain, clean and devote time and energy to. From the size of your home to the size of your clothing collection, more "stuff" generates more expenses. Downsize and watch your savings soar.

For each year after full retirement age that you delay taking Social Security benefits, you accumulate a permanent increase in your benefits of 5 to 8 percent until age 70. This one strategy can increase your Social Security retirement income by more than 25 percent. It would take a lot of penny-pinching to add up to that kind of income boost.
Read Full Story