Your 401(k) and Personal Pension will play complementary roles. Your Personal Pension is meant to cover all of your fixed expenses once you’re retired; think shelter, food, transportation and – let’s be honest – your cell phone. These expenses are life’s basics. In a small number of instances, the money you’ll receive from Social Security is enough to cover these fixed expenses, but in most cases it’s not. Assets in your 401(k) can then be used for discretionary expenses; think vacations, grandkids, or hobbies. Admittedly, this is the fun stuff. We want to be fun. But when it comes to retirement, we also want to be certain.
401(k) and IRA accounts are ways to invest in the market and accumulate wealth for retirement. The amount you’ll have at retirement depends on what you put in and how the market performs (i.e. its cumulative gains and losses). At retirement, you’ll start spending the money you saved, hopefully with the right budgeting so you don’t run out.
A Personal Pension, on the other hand, generates an infinite amount of guaranteed monthly income that lasts as long as you do. Instead of being invested in the market, the Personal Pension is a portfolio of income annuities guaranteed by life insurance companies. It’s a way to prepare for retirement without worrying about market risk or how long you’ll live.
An employer pension is a defined workplace benefit that allows you to continue receiving a steady salary throughout retirement. It is funded by your employer, you, or both. Your employer takes on all the risk, associated managerial needs, and ensures that you receive a guaranteed amount of income that lasts as long as you do. They used to be the foundation of Americans’ retirement, but employers have stopped offering them.
Without employer pensions, the Personal Pension is the next best thing. It provides the same guaranteed lifelong income in retirement, but is funded by the individual and is available to anyone regardless of employer or employment status. Like many pensions today, the guarantee is provided by insurance companies.
A 401(k) is a tax-advantaged retirement savings account provided by your employer, who typically matches a percentage of the contributions you make directly from your paycheck. 401(k)s are typically available with both Traditional IRA (tax-free in; taxed out) and Roth IRA (after-tax in; no taxes out) statuses. The money you and your employer contribute to your 401(k) can be invested in the stock and bond markets.