Protect Your Retirement Savings With a Private Pension

Published September 27, 2017
You can protect your retirement savings by starting a Personal Pension with as little as $5,000 (the just Get Started Approach). Or, you can design one using the Income Gap or Asset Allocation approaches.
  • It’s great to have the potential for investment growth, but, first and foremost, be sure to protect your retirement savings from market volatility and longevity risk.
  • The Personal Pension is a great way to protect at least a portion of your savings, and there are many ways to get started.
  • The Just Get Started approach is best for those looking to begin their Personal Pension now.

The Personal Pension is a powerful way to protect your retirement savings from the risks of the market and the risk of outliving your money. The Personal Pension turns some of the money you’ve saved for retirement into a guaranteed annuity paycheck of a set amount that continues for as long as you’re alive. The paycheck is guaranteed by a highly-rated insurance company (or companies), and the amount you get each month in retirement is locked in as soon as contributions are made.

The end result looks just like an annuity, but unlike an annuity you can get started with a small amount and contribute little-by-little each month. You don’t have the obligation to add to the Personal Pension; just the option!

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There are a few different ways to approach the decision of protecting your retirement savings. Below I’ve laid out three of the most common approaches, Just Get Started, Income Gap, and Asset Allocation.

Protect Your Retirement Savings: The Just Get Started Approach

You know you’ll retire and you know you don’t want to have all of your money in the market or be worrying about running out of money later in life. You know that Social Security alone won’t be enough. And you know you can’t reasonably expect a pension from your employer. So you start small and resolve to contribute a small percentage of your total savings to the Personal Pension.

Potential Next Step: Do the diagnostic here. And remember, it only takes $5,000 to get started.

Protect Your Retirement Savings: The Income Gap Approach

Take a look at your expected spending in retirement. That might be hard to do if you’re far away from retirement, but here are a couple steps.

  1. Determine Overall Retirement Spending: First, income needs in retirement are on average only about 80%-90% of what they were pre-retirement to maintain the same standard of living. That’s due in large part to (1) not being subject to payroll tax and (2) not having to save for retirement. If you plan to travel a lot or see some reason why your healthcare expenses will be higher than normal, you might be higher than the average. Otherwise, you might be lower.
  2. Separate Mandatory and Discretionary Spending: Try grouping your expected expenses in retirement as essential vs. discretionary. If your essential expenses aren’t already covered by Social Security or other guaranteed sources, then you’re likely a good fit for the Personal Pension.

Potential Next Step: Contact us and we’ll help you come up with your own Retirement Spending Plan.

Protect your Retirement Savings: The Asset Allocation Approach

The general rule of thumb used to be that your allocation to fixed income should be the same as your age. For example, if you’re 40, then you should be 60% equities/40% fixed income. Recently, and largely due to longer life expectancies, some now believe allocation to fixed income should be slightly lower for a given age. Either way, it’s a general rule of thumb. People will argue about the specifics, but the rule of thumb reflects the widely accepted belief that the risk in your retirement portfolio should go down the closer you get to retirement.

If you’re taking the Asset Allocation approach to retirement planning, think about the Personal Pension as part of the Fixed Income portfolio. The Personal Pension is more powerful than a traditional bond though because it provides a monthly income (like a traditional pension) that continues no matter how you live. Live to 122 like Jeanne Calment and the monthly checks keep coming! It’s also an income stream that isn’t correlated to market movements. For all the money you’ve already put in, the income you’ll get is set. The product, however, is illiquid, meaning you can’t access the money you put in, even in the case of an emergency.

Potential Next Step: Your situation likely warrants additional consideration beyond what a general rule of thumb can provide. Contact us and one of our actuaries or CFAs can provide you with additional insight on your specific situation.

What We Believe

Neither stocks or bonds protect your retirement savings against market volatility or the risk of outliving your money. If you’re like most people and concerned about these risks, don’t have a pension and are willing to forgo liquidity with a small portion of your portfolio to protect against them, then click below to see what a Personal Pension could look like for you. After just a few years in retirement, you’ll have recouped your initial investment, and the rest will be profit. A $5,000 contribution is necessary to start an account.

From there, you can fill out the information to have one of our specialists follow up with you, or continue with the enrollment process on your own. To do that, start with the Personal Pension Builder, where you’ll be able to set a goal for how to grow your pension over time. Note that all future contributions are optional, but it’s always great to have a goal.

 

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Matt Carey

Matt Carey

Financial Planning Professional

Matt Carey is the co-founder and CEO of Blueprint Income. He believes in the power of technology to make retirement simpler. Matt is a regular contributor to Forbes.com and has been quoted in both the New York Times and Morningstar.