40 years ago, retiring with a guaranteed income pension was the norm. Now you’re on your own largely. See, there’s been a gigantic shift in the retirement industry from employee funded pensions to self-directed 401k plans. So what are you going to do about it? That’s what we’re going to talk about today.

First of all, today, let’s talk about the landscape. 40, 50, 60 years ago when pensions were prominent, most everybody had a pension. It was an annuity that was backed up by an insurance company. People didn’t hate annuities back then because they loved their pensions and they were going to get as long as they lived or potentially as long as their spouse lived if they were married, a guaranteed flow of income. Why did companies do that? Well, the life expectancy wasn’t as long as it was now, so funding a pension just flat out didn’t cost as much money back then, so they were able to pour that money into the pensions.

Also, there was pretty much a battle between straight up employers and unionized employers, and the unions had pensions, so the private companies had, in order to compete with the unions for talent and abilities, they had to provide something like those pensions for their workers. One of the nicest things about these pensions from the past is it was completely funded by the employer. It was based on a person’s salary and their longevity, but it was given to that employee once they reached the retirement age. Usually 65 at that time was a magic button. I’ve said this many times before, that’s back when they gave you a party, a pension, and a gold watch, and they let you go off into the sunset because really back then you didn’t have that many years. So the pension or the annuity that backed up” the pension didn’t have to pay out that long.

Those thrilling days of yesteryear, as they used to say on the lone ranger, pretty much aren’t here anymore. The second big thing is why did they go away? I mean, if that was the pension era, then number two, why did that end? Well, people started living longer. It started costing more. We’ve already alluded to that, but the second thing that came along was ERISA came along and it required pensions to have financial background and financial books and financial stability ratings, and so a lot of pensions were told, “Hey, you don’t measure up. You got to put more money into the pensions.” That was one thing, but then in 1978, they came out with this beautiful plan and instead of the defined benefit of the pension plan, that’s what they were called, they came out with an employer supported, but with employee contributions plan. And so they call that the defined contribution plan.

You now know it as a 401k or a 403B. Those started and began the momentum in the late seventies, early eighties. So all these people now had the pension and they could support it with contributions from themselves to go into the four plans, the 401k, the 403B, the 457. All of those plans started in 1978, and the little magic twists there, the shift was subtle to begin with, but it was employees contributing many times to those plans. So what began to happen during that shift, the employers begin to say, wow, we’re giving pensions for lifetime income and we’re giving and supporting, and many times matching as high as 10% to the employee 401k. Oh, yeah, they were putting some money in, but the company was still doing a match. So a lot of people in that generation had both, and it wasn’t either/or it was both.

And so it was happy land because people not only had the guaranteed income, but they also had the employer supported employee donations into the 401k. So it was great, and we had social security, so there was constant streams of income. It was almost in most cases, like a three-legged stool between the pensions and the 401Ks and social security. So we’ve gone from this pension Shangri-la where everything was great. We’ve talked about the shift beginning to take place where people were moving over from the defined benefit pension annuities. They were moving over to the defined contribution plan where the employee now had to contribute some to participate. Now, we’re pretty much in that landscape unless you’re one of the very few with companies that still offer a pension or you’re in a government job as a school teacher, or you work for a city or a county or the state, and you have the employee retirement systems, the ERS, the OCERs, and the LACERS and the STRS and the PERS.

Those are all things, those are not just names I’m making up, but those are government pensions that are left, but only 16% of the people in America now are covered by pensions, and most of the other people, if you do have a retirement, it’s completely made the shift over to the 401k.

Now, how did they make that shift? It was a little subtle. They were giving the pensions and they were offering the 401k, and so eventually most companies came to a point where they said, well, the pension stops, and they made a decision. You can either leave it there and take the payout from the pension, but we won’t add anymore and you can’t add anymore, and now we are going to support the 401k and we’re going to give you 10%. We’re going to give a big match. And that helped people get over not having a pension for a while, and over a few years, the match just began to shrink and get smaller and smaller and smaller.

Now, the second largest match is nothing. They just give you the opportunity to have a 401k and the first largest match is 2% right now. So wow, things have changed in the landscape. So when I said to start with, you went from an employer sponsored pension income annuity to you’re on your own, I really did mean what I was saying to the very words, you’re on your own for your retirement because what you grow in that 401k is now just pretty much what you contribute.

So, we’re in this third level where the shift has taken place and there’s some problems here, and yeah, they’re problems. We’re living too long. That’s a problem. Yeah, we’re living too long. We are now on our own for what we have in the 401k, the lump sum, and people are not living to 70, 72, 73 anymore, and they’re not even living in many cases to 82, 83 and 84 anymore. People are many times living to 88, 91, 95, and you’re living on that lump sum. So there’s been a shift from the guaranteed income to just a lump sum, and the withdrawal rate is really important because it’s not a guaranteed lifetime income.

So gone is the guaranteed lifetime income and the lifetimes were extended. It’s a double whammy that’s come to you, and then add into that another third problem. The third problem is market volatility. About every five years in your lump sum, you’re going to have to be prepared to suffer a 20%, a 30%, maybe even like twice since the year 2000, a 50% downturn in your lump sum. So when I say often on TV, radio, on this podcast, I say, when you get to retirement, now it’s your guaranteed income. That’s important and not so much your lump sum because your lump sums got to last a long time, but guaranteed lifetime income will last as long as you do.

So we’ve talked about three things. We’ve talked about the pension era, we’ve talked about the shift and where we are now, whereas pretty much you build a lump sum and many people continue in retirement with that lump sum with a hope strategy, hope it lasts. Well, I would advocate a fourth area you need to move into, and that is a lot of people are great at do it yourself as long as they’ve got a 401k or they’ve got some of the company plans or they’ve got good discipline and they can accumulate. Because really, basically the philosophy of the big investment companies is just get your people to stay in the market because the market goes up and down. I’ll grant you that, but look at it over a period of time, the market generally goes up. So if you’re stable and you aren’t really jumping in and jumping out of the market, you’re going to grow that lump sum over the 30 or 40 years that you are in the accumulation phase.

But that approach and that philosophy many, many times, and I stumble for the right word there because sometimes it works, but the do it yourself, just leave it alone and leave it in the market like espoused by great radio talk show host and things, people like that doesn’t always work. It doesn’t always work if you hit the timing of that market volatility the wrong way. So what are people doing? What are people doing? Number one, they’re usually moving from just building a lumberyard or just a big pile of lump sum. They’re moving to building an income flow plan, to building a blueprint where you tell different parts of your money to do different things You need to from your lump sum to make sure that it’s going to last. You need to tell part of that money and direct part of that money to go to a paycheck.

You say, “What do you mean by a paycheck?” Well, we don’t have pensions anymore, And we’re not sure about social security.  But one thing we do have that according to the Wall Street Journal is the most important thing people are missing now from the pension era, and that is the guaranteed income.

In fact, a Wall Street Journal article from December, 2024 said people are loving guaranteed income now and so much so that more money and assets from that 401k from the lumber yard is being directed toward fixed indexed annuities fixed. You’re not going to lose any money. You’re not going to go backwards, and it’s going to guarantee you income for a life if you’re married, it’s going to guarantee income for as long as your spouse survives you. And if you haven’t used all your money, it’s going to give the rest of that money to your heirs.

And if you have used all your money and you get down to zero, it’s going to keep paying you or your spouse if you’re married for as long as either one of you’re on the planet. So building that paycheck through your own private pension, you might want to call it a private pension income annuity, is making a lot of sense to a lot more people. You say, how much? Well, in 2019, 125 billion went into that in the United States. In 2023, $386 billion went into fixed income annuities because people are saying, I don’t have that pension from the company, but I can bill my own paycheck for life and what’s left? All of the money that it doesn’t take to give your guaranteed income paycheck for life, and that fixed indexed annuity, private pension, all of the money that’s left over is not your paycheck, but it’s your play check.

It allows you, when you’re in your sixties to have the peace of mind and the comfort and just the attitude that I don’t have to worry about my income for the rest of my life. My paycheck is taken care of. I’ve told part of my lump sum to go do that, and now my paycheck is there and I can take the trip to the islands. I can take the trip to the country where my ancestors lived and just had a client in the office, and they were saying they were going to Lithuania because one of their children married somebody from Lithuania and a bunch of ’em from that family we’re going to go over and see where this person grew up and what they did. You’ve got the freedom to do that in your sixties because your paycheck’s taken care of and your paycheck is there for you to use.

Now, I want to address one more thing. You say, well, I’m not retiring yet. I’m still 10 years from retirement, 5 years from retirement, 15 years from retirement. The problem with a lot of 401Ks, those things that you’re building, the lump sum, there aren’t any guidelines. There’s not a lot of help. There’s not a lot of support that’s within that 401k. One of the things we do at my company is we offer people the opportunity, and you got to listen to this. It’s free of charge, it’s complimentary. We’ll move along beside them. We don’t make any money for this either, but we’ll help coach you on your 401k. Now, here’s what I mean. Everybody out there has a risk tolerance, and I point here because that’s what on the inside you’re tolerant to when it comes to the fluctuations of the market and the ups and downs of the market.

But you never know what the different investments within your 401k, you never know what risk you’re taking within those different investments. And a lot of people just push the easy button and they put ’em in a target fund. Well look at some articles about target funds because it’s built on a philosophy that hasn’t worked since 2000, and that is if stocks go up, bonds go down, and if bonds go up, stocks go down. They pretty much roll hand in hand. For instance, 2022, both of ’em were down over 20% stocks or bonds. So if you were in a target fund, you just stunk over the whole place. Nothing really helped you. Okay? What we offer is our fiduciary professional advisors, all of them with series 65 licensed fiduciaries, sit down with people every single week and coach them on their 401k. What’s the charge?

I said it, nothing. You say, what do you guys make off of it? Nothing. That’s your favorite fee to pay, okay? But we will help coach you so that your risk level is matching up with the risk that you’re taking within your 401k so that when you do retire, you want that lump sum to be as big as it possibly can so that you can build the correct kind of retirement blueprint. And that’s what we offer. So let me put a wrap on these 401Ks. Number one, if you’re still 5, 10, 15 years from retirement, take advantage of the match. Number two, every time you get a raise, give your 401K a part of the raise and you take part of the raise. That way it’ll make it easy on you to build what you’re putting into your 401k, your 403B, your 457, whatever it is.

Number three, know your risk tolerance and make sure that your 401k risk tolerance is matched up to where you are from a risk perspective. And number four, make sure you know what you’re investing in within those 401Ks. And then when you get to the end and you get ready for retirement and you want to take part of that lump sum and you want to designate that to that paycheck so that you have guaranteed income for life, you need to make sure that you look and investigate into a private pension. If you want to call it an annuity, if you can stand the word we get over it, because that is the only thing that will pay you a guaranteed income for the rest of your life, even after you run out of money within it.

If you want more information on this private pension fixed indexed annuity, give us a call. If fact, we have a whole show that we’ve done in the past on it.

Hey, I promise you every week, if you’ll give me a few minutes, I’ll do my best to increase your financial knowledge. And if we can help you, particularly about a situation, a question, anything you’ve got, go to the website, get an appointment, give us a call. We’ll see you next time.