Create your Own Private Pension
Depending on your age you might not even know what an actual pension is or anyone who actually has one anymore, but it is important you know the brief history of pensions and why most of them have gone the way of Family Video Stores.
Decades ago, big companies wanted to incentivize workers to stay loyal to them and work at the company for decades. One of the costliest things companies deal with is turnover of their workforce. So they offered pensions to many of their
employees which was an incentive for workers to stay put for many years.
An old traditional pension basically said to the worker, stay on with us for most of your working life and at the end we will still pay you a check every month in your retirement. This would create loyalty for the company and also a solid retirement income stream for the worker. To achieve this, employers took money every month and put it into their pension funds for the workers (actually a lot of the money was put in by the actual worker in the form of agreeing to less take-home pay so funds could be deposited into the pension fund on their behalf as well as
The pension fund would give a guarantee minimum income for life to the worker. As a quick example if you worked for company for a long time and retired, they might agree to send you $3,000 per month for the rest of you and your spouses
life which would provide stable income without the need to work in your older years.
For the company to achieve this guarantee the pension funds would have to be managed and invested and grow over a long period of time. Most funds were put into the stock market, but many other investments were utilized for pension funds as well. The employers and employees hoped the funds would grow enough so the company could honor their income commitments years later to the employees.
However, what happened in reality was almost none of the pension funds generated enough growth to be able to maintain that guaranteed income to the retiree so the companies themselves would have to make up the shortfall every year to keep the fund on pace to meet those commitments. This is called a defined benefit plan. After many years of companies having to make up shortfalls they quickly realized they could not afford to guarantee an employee a certain result of income and make themselves liable for the performance and paying out of the income from the pension account.
So over time the 401k has become the most popular vehicle to save for retirement because now companies aren’t on the hook for the growth or income from the account. The company might agree to contribute a certain amount of money to your 401k account every year but they won’t guarantee its principal, growth, or certainly a specific income amount for the rest of two lives.
Pensions also had certain downsides and the main one was the worker would get the income generated by the asset but not control the actual asset (pile of money) that was generating the income to the retiree. So if you needed a quick
$20,000 you couldn’t get it from your pension fund even though your portion of that account might be $500,000. So, if the retiree and spouse both died the income stopped whether or not that $500,000 was actually paid out or not.
That long winded explanation was needed because now you should take the time to find out how to create your own private pension that will provide the old style pension guarantees of no loss of principal and a certain lifetime income later on
but still give you access to the actual asset of funds that is generating the private pension income.
Enjoy the video and if you would like to have a FREE call to discuss more in depth afterwards just give us an email at [email protected] and we will set up a call to talk with you.
All the Best,
The Perpetual Wealth Academy