Private Pensions to Supplement Your 401(k)

Published November 22, 2017
The Personal Pension provides guarantees and protection that the 401(k) does not, namely from longevity and market risks. Use a Personal Pension to supplement your 401(k), making sure to always take advantage of the 401(k) employer match.
  • We often get the question of “Should I invest in the Personal Pension instead of investing in my 401(k)?”
  • You should always take advantage of your employer match and use the Personal Pension to supplement your 401(k).
  • A typical 401(k) is invested fully in the market and doesn’t protect you from two of the three biggest risks you’ll face to having what you need in retirement — market risk and longevity risk.
  • Supplement your 401(k) with a Personal Pension to protect against those two risks and get a guaranteed source of income.

Keep these two simple rules when saving for retirement. First, always invest in 401(k) at least up to the point where you are maximizing your employer’s match. Second, supplement your 401(k) so that your retirement portfolio is well-diversified to protect you against the three biggest risks you’ll face — market risk, longevity risk, and inflation risk.

Supplement Your 401(k): What Does a 401(k) Do Well and Not so Well?

A 401(k) provides you with some valuable stuff. First, it provides a portable and flexible retirement account that can go from company to company. Second, it gives you exposure to stocks, which are often your best way to protect against inflation risk or the chance that money will buy in less in the future than it does today. Generally speaking, the value of equity securities will increase in line with inflation.

But a 401(k) that’s invested all in the market has some clear shortcomings as well. Unlike a pension (whether it be the Personal Pension or a traditional employer pension), a 401(k) that’s entirely invested in the market does not protect you from market risk or longevity risk. Because of this, the 401(k) was always meant to supplement your pension, not replace it.

  • What’s market risk? It’s the idea that when your money’s in the market, there’s no guarantee you won’t lose some (and maybe a significant portion) of your account balance.
  • What’s longevity risk? It’s the idea that you don’t know how long you’ll live and you could live longer than you expect.

The traditional employer pension protected you against all three risks, but a 401(k) only protects you from one of them. That’s where the Personal Pension comes into play.

Your Personal Pension is an important part of a well-diversified portfolio because it does what your market-based 401(k) does not. The Personal Pension is a guaranteed, lifetime annuity income stream that keeps coming each month. Guaranteed, meaning no market risk. Lifetime, meaning no longevity risk.

supplement-your-401k-monthly-benefit

So, to summarize, if you want protection from all three of retirement’s big risks and don’t have a traditional pension, consider the Personal Pension to supplement your 401(k).

Next Steps

If you’re interested in starting you own Personal Pension, you can do so here on our website. Click below to see what annual contributions into a Personal Pension will guarantee you in annuity retirement income. 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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Lauren Minches

Lauren Minches

Financial Planning Professional

Lauren is an actuary by training with expertise in retirement, finance, and risk. She writes about annuities to make them easier to understand and evaluate. Her goal is to help people create retirements with more time for living and less time thinking about money.