Remember the good old days, when workers retired with a gold watch and a pension? They’re long gone, of course.
Only 15% of private sector workers now participate in a traditional defined-benefit pension plan (three out of every four government workers do), according to the Pension Rights Center. And yet nearly two out of every three Americans[1] polled earlier this year think a traditional pension plan does a better job of ensuring retirement security than do defined-contribution plans like 401(k) plans or IRAs.
I mean who would rather try to pick winning stocks, outguess Wall Street and the Federal Reserve, and keep up with changing tax laws for the “freedom” of managing their own retirement? Only actors in TV ads for brokerage firms, that’s who. The rest of us would rather get that nice monthly retirement check in our bank accounts and let the professionals handle everything else.
Unfortunately, that train left the station a long time ago. But even in the jerry-built U.S. retirement system, there are some simple ways to set up that steady stream of income pensions used to provide.
“What people have to understand is that if a company isn’t providing a retirement plan for them, they can create their own through their investments,” says Gary B. Garland, a New York- and New Jersey-based attorney who specializes in retirement and estate planning.
The first place to look is the only part of the retirement system that still provides pension-like income for almost all Americans: Social Security. Financed by a payroll tax on workers and employers, Social Security is the ultimate annuity. Its average monthly benefit per person in 2019 is $1,461, or just over $17,500 annually.
Read: Looking for the best place to retire? Use MarketWatch’s personalized tool[2]
Most Americans rely on Social Security to cover at least half their income, though it was designed to replace only 40%[3] of what people previously earned. The best way to maximize your benefits is to work longer. Fewer than 4% of Americans wait until they’re 70 to start collecting, and most claim early, although each year you delay adds 8% to the payout you’ll get. Even by waiting for your full retirement age (66 or 67, depending on when you were born), you can raise benefits nicely while continuing to stash away money in your workplace or personal retirement savings plan.
Beyond Social Security, there are several ways to create a pension-like income stream for yourself.
Again, the first one the federal government does for you, albeit indirectly. Yes, you can use that big (or not so big) pot of money in your IRA or company 401(k) any way you want once you turn 59½ (although you will pay income taxes on any money you withdraw). But you should think of it not as a big lump sum to tap into when you need cash, but as...