Personal Pension Plans

Is a "Personal Pension Plan" right for me?

With American’s living 25, 30, 40 or more years in retirement and employer-sponsored pension plans going the way of the hula hoop, the responsibility for financing retirement has shifted to the individual. For many of us, that means we will have to be more deliberate in how we utilize retirement savings to support our preferred lifestyle, potentially for a much longer period of time. And rising costs for food, energy, prescription drugs, and medical and long-term care will only serve to exacerbate the problem, particularly in a low interest rate environment.

One approach to help maintain financial independence is to create a Personal Pension Plan. The primary goal of a personal pension plan is to provide additional income when your lifestyle expenses begin to exceed your income. Though setting up a personal pension plan, in itself, isn’t overly complex, being able to project your age when these shortfalls may occur, the amount of additional income that will be needed, and for what period of time are crucial to your plan’s viability. And this is where we can help.

Our retirement income analysis software projects social security, pension and other known sources of income, less your expenses indexed for inflation, through your age 100. The results are summarized in an easy to understand cash flow table and clearly reflect the extent of any shortfalls you may need to plan for. It also allows us to illustrate the difference a personal pension plan would make for comparison.    

How do you create a plan?

The two most common approaches to creating your personal pension plan are to use a portion of your retirement savings to either purchase an annuity or build an income-producing bond portfolio. There are several factors to consider in deciding which strategy is right for you. How much income will you need and when? What level of return will be required to keep your plan viable? And depending on your current savings and asset allocation, how much additional liquidity would you require in case of an emergency? 

Annuity-based plans

Annuities may be an ideal vehicle to create a personal pension plan. An annuity is an insurance product which, in exchange for a sum of money, guarantees the issuer will make a series of payments for either a lifetime or two lives, or for fixed term of years, whichever occurs last. An annuity may be IMMEDIATE (payments start immediately) or DEFERRED (accumulate savings now and defer payments until a later date). A second key distinction is whether the annuity is FIXED (the insurance company assumes all investment risk) or VARIABLE (you assume the investment risk). Regardless of the type of annuity, growth of the underlying principal is normally tax-deferred.

Many annuities offer enhanced features, known as riders (some for an additional charge), affording you greater flexibility in tailoring your plan benefits to your specific needs. Though specific riders vary from one annuity to another, some of the more popular features include:

• Guarantees against loss of principal during market downturns, helping to preserve your financial capital (fixed annuities).
• Penalty-free withdrawals to provide partial liquidity (within contract limits).
• Special withdrawal provisions during periods of a qualified nursing home stay or upon diagnosis of a terminal illness.
• A choice of standard or enhanced death benefit payout options for your heirs.

The primary advantages of an annuity-based personal pension plan are the guaranteed stream of lifetime or period certain income, and the flexibility to tailor your plan benefits to meet your specific needs. But as with any investment, you should first determine the specific objectives you want the annuity to fulfill. You also need to consider how earnings and interest are credited, how the benefit riders work, and how all contract fees and charges are assessed.

Alpha Financial Advocacy is contracted with several of the highest-rated insurance companies offering annuities. Because we are an independent agent, you have access to a wider selection of ‘best-in-class’ products. And together, we can help you discover the right annuity and benefit rider combination to fulfill your personal pension plan requirements.    

Bond portfolio plans

Allocating a portion of your retirement assets to a dedicated bond portfolio for the purpose of generating income is another strategy commonly used in personal pension plans. And as with any equity portfolio, diversification across different bond sectors, durations and interest rates is critical to increase the stability and average yield of your plan’s portfolio.

However, like stocks, bonds are subject to market declines, and though considered less risky, they can still lose value. In addition, bond portfolios may be subject to credit risk (the risk of an issuer defaulting), interest rate risk (the risk that the market value of the bonds owned will fluctuate as interest rates go up or down), repayment risk (the risk the issuer will repay them when interest rates have declined) and inflation risk (the risk of losing purchasing power should inflation rise above the bond’s coupon rate).

So how do you protect your bond portfolio from these various risks? Another of the Registered Investment Advisors we work with to manage our clients’ bond-only portfolios offers two very unique models. Both are tactically managed, and help you achieve potentially above average returns while protecting from market declines and the aforementioned risks.

If you would like to schedule a complimentary appointment to discuss financial planning, ask us a question or learn more about personal pension plans, please select the corresponding link below.

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