June 5, 2014

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Build Your Pension

Create Your Own Retirement Income Stream

By Sean P. Lee

June 5, 2014

Pensions across the country are in rough shape. More than 3,400 state and local pension systems in the United States are responsible for the current and future retirement income of more than 27 million employees and beneficiaries. According to the Pew Center on the States, these systems are more than a trillion dollars underfunded.

The pension crisis isn’t just limited to public plans. Private companies have seen their share of pension shortfalls, too. Of the private-sector defined-benefit plans insured by the federal Pension Benefit Guaranty Corporation (PBGC), the average funding level is 81 percent, with more than $400 billion in unfunded liabilities (based on 2010 data).

Public pension funds used to be off limits to state budget cuts and alterations, but the Great Recession changed that in many states, including here in Utah. The 2008 crash caused the state pension fund to lose 22 percent of its assets, going from 100 percent funded in 2007 to just 70 percent funded in 2009. In 2010, Utah had a pension liability of more than $25 billion. Then in 2010, the state legislature passed reform that replaced pensions with a 401(k) plan for all new hires, significantly improving the state’s pension outlook by cutting long-term liabilities in half. The 401(k) plan not only helped the state’s solvency issue, but Utah contributes 10 percent of each worker’s salary to their account, and workers can roll the account over when they transition to another job.

But the state’s pension system may not be completely out of the woods yet, according to an audit performed in the spring of 2013. John Dougall, state auditor, stated that the assumed rate of return, 7.5 percent, was overly optimistic, adding that there was less than a 50 percent chance that the pension fund could generate that return consistently, thus hurting the pension’s long-term solvency.

Pension funds are invested on behalf of a state or locality with the hopes of earning a strong rate of return. The average rate of return assumed by most state and local government plans is 8 percent, but recent research shows that those assumed returns may not factor in risk. Based on a 2011 report by Northwestern University’s Kellogg School of Business, there is only a one-third probability that a portfolio with an expected return of 8 percent will actually achieve that return.

A DIY Pension Plan

It’s clear from the mountains of data that pensions are not the reliable sources of retirement income that they once were. In order to ensure a secure retirement for yourself, it is more and more important for you to take matters into your own hands and build a reliable income source for yourself in retirement: a personal pension. To build your own pension, there are three important steps to take to get you on your way.

Make a serious commitment to saving. In order to build wealth for retirement, a portion of your annual salary should be contributed to a retirement savings plan such as an IRA or 401(k) each year, increasing incrementally as you age. Pick a percentage that you can afford to live without today and contribute regularly for your future. Remember that making sacrifices today will help you live more comfortably during your retirement future. Consider putting your savings on autopilot. If you don’t see the money each month, you may be less likely to miss it.

Continue investing. A pension counts on its return on investment in order to build enough assets to fund a retirement. In order to achieve this in your own personal pension, be sure to invest in a manner that is consistent with your timeline to retirement and risk tolerance. The closer you get to retirement, the more conservative your investment strategy should be. You cannot afford to lose what you’ve worked so hard to save. 

Structure an income stream. Financial products such as fixed annuities can be utilized to produce a secure monthly income stream in retirement. This income stream can be for a period of time, such as five years, or spread out indefinitely over the duration of retirement. There are many tax, fee and penalty charges that could harm your nest egg if done improperly, so make sure you work with a qualified professional to assist you with turning your lump sum into an income stream.


Pension programs used to be rock-solid retirement plans, but today many can hardly be counted on to provide a secure income in retirement. It’s important that you start working now to create an income source you can really count on to get you through retirement. 

Sean P. Lee is president and founder of SPL Financial, Inc.

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