Buy Yourself a Pension!

I'm sure this isn't news to you: Fewer and fewer companies are offering pensions to their employees. Existing traditional pensions are being frozen or eliminated all over the place, at companies such as Motorola, 3M, and elsewhere.

That can sure seem like a raw deal (and it often is!), after we've seen our parents and grandparents living off of pensions that supplemented Social Security (which is often not enough to live off of). But I'm here with some good news: You can duplicate the security of a pension -- at a cost, of course. You can buy yourself income for life.

I'm talking about immediate lifetime annuities, which are offered by many insurance companies. You pay a big lump sum upfront, and then you receive a set sum for the rest of your life. There are some variations to this, of course. You may, for example, elect to receive payments for just a certain number of years. You may elect to include payments for a surviving spouse. You may opt for inflation-adjusted payments, too. These variations can add to or subtract from the cost of your annuity, and they may be worth it.

Lifetime annuities may not be perfect for everyone, but they can be very useful for many. A Wharton School/New York Life study concluded that "lifetime income annuities are the most cost-effective and secure asset class for generating guaranteed retirement income for life."

Running the numbers
Here are a few examples of what you might expect to receive, derived from an online annuity calculator:

  • A single 65-year-old man in Colorado paying $200,000 can expect to receive around $1,294 monthly in retirement -- which comes to $15,528 per year.
  • A married 60-year-old couple in New Jersey paying $200,000 can expect to receive around $1,197 monthly in retirement -- which comes to $14,346 per year.
  • A married 55-year-old couple in California paying $200,000 can expect to receive around $1,098 monthly -- which comes to $13,176 per year.

Note that, of course, plunking down $400,000 will offer you twice as much income, and you'll pay more or less depending on your age, gender, location, and so on. You might also get a good deal by buying an annuity now that begins payments in 10 or 15 years.

Hold on ...
Of course, things are rarely as simple as they seem, right? For one thing, know that these purchases aren't generally FDIC insured, like your bank account is. So if you buy one, be sure to buy it from an insurance company that you expect to be around for a long time. You might even split your purchase between several companies -- perhaps buying a $100,000 policy from this company and a $200,000 policy from that one.

Also note that you might get a better deal when interest rates are higher, as they're likely to be, eventually. So if you don't need to buy right now, it might make sense to wait a bit, or to space out several purchases.

Regardless, be sure to learn more before you sign anything. You don't get your money back in these deals, except perhaps if you pay a penalty. You'll have money to live off of, but your heirs won't benefit from it.

Another option
If you can handle a little more risk, you might aim to build an alternative source of income, via a bundle of dividend-paying stocks. The main benefit there is that if you can live off the dividends, you can still leave the stocks to your loved ones.

Below are a handful of stocks that have earned four or five stars (out of five) from our CAPS investment community and that sport dividend yields of more than 3%. Imagine a $200,000 portfolio with $25,000 invested in each. The table below shows you what you can expect to receive in dividends from them this year:


CAPS stars

Dividend yield

Annual payout





ConocoPhillips (NYSE: COP  )




Campbell Soup




Duke Energy (NYSE: DUK  )




Intel (Nasdaq: INTC  )




McDonald's (NYSE: MCD  )




Altria (NYSE: MO  )




NYSE Euronext (NYSE: NYX  )







Data from Motley Fool CAPS.

See? That's a significant income right there. Better still, companies tend to increase their dividends over time. If these payouts grow by a very reasonable 7% per year over 25 years, you'll end up receiving more than $50,000 annually at the end of the period. Of course, some of your companies may fall on hard times and reduce their dividends, but others will likely increase their payouts at an even faster clip.

Learn more
Don't despair that a regular income is beyond your grasp in retirement. One way or another, you can make a pension-like income happen. Let us help you.

For detailed guidance on retirement planning, I invite you to test-drive -- for free -- our Rule Your Retirement newsletter service. A free trial will give you full access to asset allocation models, calculators, and all past issues. It regularly offers promising stock and mutual fund ideas, too.

Click here to get started. There's no obligation to subscribe.

Longtime Fool contributor Selena Maranjian owns shares of McDonald's and 3M. Duke Energy is a Motley Fool Income Investor selection. Intel and 3M are Motley Fool Inside Value picks. The Fool sold puts on Intel. NYSE Euronext is a Motley Fool Rule Breakers recommendation. The Motley Fool is Fools writing for Fools.

Read/Post Comments (7) | Recommend This Article (41)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 20, 2009, at 4:12 PM, prginww wrote:

    Good piece. In addition preserving your capital and giving you control over it, the 8 stocks also diversify you more than an annuity. Your Wharton professor notwithstanding, insurance companies represent the class that will be hit hardest in the next big collapse. Their heavy exposure to highly leveraged commercial real estate in the U.S. will cause many to fail (the ones not "too big to fail"). The government is already offering TARP funds to some of the better known insurers that are currently in danger of going under, and the really rough going is still ahead.

  • Report this Comment On May 20, 2009, at 4:24 PM, prginww wrote:

    On a separate article, DUK is listed as one of the dividend players about to blow up. What gives ?

  • Report this Comment On May 20, 2009, at 5:04 PM, prginww wrote:

    Retirement Investments assume decades of steady income.

    With the average career now lasting 5 years, and wages either stagnant or declining for many, this is a fundamentally flawed assumption.

  • Report this Comment On May 21, 2009, at 2:47 AM, prginww wrote:

    Why not an MLP like KMP. Look at the returns since 1998. Average of 20% with the lowest year being 13 % AND a split in 2001.

    Very good piece on annuities. Caveat Emptor, insurance companies are in trouble like the banks and NO Federal insurance, You can lose ALL of the Principal.

    Regards, Prof Dan

  • Report this Comment On May 21, 2009, at 8:59 PM, prginww wrote:

    Re Prof Dan "Why not an MLP like KMP",

    the comment would be useful it were not in code. What is an MLP? What is KMP? A good teacher provides useful information, not confusion.

  • Report this Comment On May 22, 2009, at 4:14 PM, prginww wrote:

    Re jayinpa,

    MLP= Master Limited Partnership, a tax structure for a company.

    KMP= Kinder Morgan Energy Partners LP, a company that is set up as a MLP

    There are plenty of articles on that deal with MLP's. Hope this helps.

  • Report this Comment On February 28, 2011, at 11:56 AM, prginww wrote:

    This article is filled with good information, because the idea of the defined-benefit pension often comes across as some sort of magic rather than a financial equation.

    That said, it's important to understand that while you can take your defined-contribution chunk of cash and transform it into a defined-benefit payout in the form of an annuity, this magical transformation is only part of what made up the old pension model.

    First and foremost, the idea of a pension is that the employer incurs the risk. That didn't just mean that the employer had to guarantee the payouts; it also meant that the employer put up the money that formed the basis of the plan.

    It's really great to know that I can take my own savings and buy a lifetime income stream. It was better to know that my employer built me a lifetime income stream in addition to my income. But those days really are gone, whatever annuity products are offered to create the same payout.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 903880, ~/Articles/ArticleHandler.aspx, 10/21/2016 8:13:03 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
BP $36.25 Up +0.20 +0.55%
BP CAPS Rating: ****
COP $41.54 Up +0.05 +0.12%
ConocoPhillips CAPS Rating: ****
DUK $78.02 Down -0.40 -0.51%
Duke Energy CAPS Rating: ***
INTC $35.15 Down -0.28 -0.79%
Intel CAPS Rating: ****
MCD $113.93 Up +3.36 +3.04%
McDonald's CAPS Rating: ***
MO $63.70 Up +1.85 +2.99%
Altria Group CAPS Rating: ****
NYX.DL $0.00 Down +0.00 +0.00%
NYSE Euronext CAPS Rating: *****