How to Create Your Own Pension Plan
Once upon a time, in a business land far, far away, there were things called pensions. You worked hard for a company, racked up the years, and when you retired you received a check every month for the rest of your life--the more years you put in, the bigger the check.
My generation is probably the last to think of pensions as a common employee benefit. I worked for a big company for 17 years and I'm vested in its pension plan; knowing I can count on getting a check every month is pretty cool.
Now relatively few companies offer pension plans. (My kids don't even know what the word means.) The average company seeking to help employees prepare for retirement is much more likely to contribute to their employees' 401(k) plans.
And if you own your own business, why even think about a pension, right?
"Business owners have a unique opportunity to coordinate business planning and personal planning," says Marc Scudillo, managing officer of EisnerAmper Wealth Management. "Most entrepreneurs focus on business planning, but when you coordinate both, you have the ability to create a number of benefits that can funnel back to the entrepreneur."
You're familiar with the concept. Maybe you write off a car. Maybe you find creative ways to fold a personal vacation into a business trip. But those are short-term planning vehicles.
Why not think long term and create what Marc calls a "portable pension"?
How It Works
If you aren't familiar, a pension is like an annuity: You contribute a specific amount and at a specified time in the future start receiving a predefined income stream. A pension differs from, say, a 401(k) in that the company underwriting the annuity is obligated to pay that income stream regardless of how the investments within the account performed. They're also obligated to pay that income stream regardless of how long you live. That's the risk they take.
For an investor, the downside of an annuity is that the upside is limited; normally, if the investments do extremely well you don't participate in the upside beyond the predefined income stream.
Like most things it's a trade-off: You give up some upside possibility in return for the guarantee of a set return.
But the loss of upside has lessened. "Now there are programs where the provider takes on the obligation of providing a future income stream while also providing some degree of upside opportunity if the market outperforms expectations," Scudillo says. "Variable annuities with income guarantees provide income certainty and upside potential. That lets a business owner shift the downside risk of the markets to a third party while retaining the opportunity to participate in higher returns."
Because you get to offset risk, "portable pensions" do come with higher costs than traditional investments, though.
"Many entrepreneurs decide that a slightly higher cost is definitely worth the benefits of a guaranteed income for themselves and their family," Scudillo says. "If your spouse is a lot younger, the survivor benefits can dramatically increase the value of the plan--again, without the risk of traditional investments."
You can invest existing retirement funds (including Roth IRAs) or non-retirement assets, or make monthly contributions to a plan--the combinations are nearly endless. So talk to a financial professional to ensure your plan makes sense from both a personal and a business perspective.
"Successful entrepreneurs who have the right assets, the right cash flow, and the right operations can use a variable annuity to create a wonderful pension plan," Scudillo says. "And since it's portable you can take it wherever you go, whether you start another business or go back to corporate life.
"Taxes may increase, inflation may rise, markets may fall... who knows what will happen. When you're retired, one thing you will be able to count on is your portable pension."
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