Many Americans never noticed it happening, but over the past few decades "defined benefit" retirement plans -- typically, pensions -- have become much less common. They've been replaced by "defined contribution" retirement plans -- typically, 401(k) plans. A defined benefit plan is one that offers retirees a specified benefit in their later years, such as a certain sum per month or year.
A defined contribution plan, however, takes in specified contributions, with future benefits left unclear. In a 401(k) plan, for example, you may be contributing 5% or 10% of your salary every year, building up an account balance that's invested for you. How much you'll be able to withdraw in retirement will depend on how your investments perform.
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Many, if not most, people would prefer the former kind of retirement plan, such as a pension. It often requires no work and eventually simply delivers regular, reliable income in retirement. It's much harder to get a pension through your job than it has ever been, though.
Fortunately, you may be able to set up regular income streams via the next best thing: annuities.
Defined benefit vs. defined contribution plans -- over time
First, take a look at the table below, which shows how pension prevalence has shrunk while defined contribution plans have proliferated.
|
Year |
Total No. of Plans |
Defined Benefit (portion of total) |
Defined Contribution (portion of total) |
|---|---|---|---|
|
1975 |
311,094 |
33% |
67% |
|
1985 |
632,135 |
27% |
73% |
|
1995 |
693,404 |
10% |
90% |
|
2005 |
679,095 |
7% |
93% |
|
2015 |
693,925 |
7% |
93% |
|
2020 |
746,610 |
6% |
94% |
Source: U.S. Department of Labor.
These days, it's mostly public-sector jobs such as those at the federal, state, or local level that offer defined benefit plans. Teachers, military folks, police officers, firefighters, and those in heavily unionized jobs often have pensions or pension-like income awaiting them.
A few major corporations also still offer pensions to new workers -- though most don't. Specifically, only 15% of private-sector workers had access to one, per the March 2021 National Compensation Survey from the Bureau of Labor Statistics.
Consider annuities
Since regular, reliable income is so desirable in retirement, those without pensions might want to consider annuities. With an annuity, you typically fork over a hefty lump sum (or a series of premiums) to an insurance company, and in exchange, it provides income to you.
There are many kinds of annuities, though, and if you're interested in this kind of financial product, you'd do well to read a lot more about them, beyond this article. Here are some of the main kinds of annuities you'll likely run across:
- Immediate vs. deferred: Some annuities will start paying you immediately, while others will pay you starting at some point in the future. Deferred annuities generally cost less, and they can help you not run out of money later in life. You might, for example, buy one that starts paying you at age 80 or 85.
- Fixed vs. variable vs. indexed: Fixed annuities are generally simplest, offering a specified payment for a specified period (possibly the rest of your life) based on prevailing interest rates. Variable annuities offer payments determined in large part by how money that you have invested performs. Indexed annuities tie payments to one or more indexes, such as the S&P 500. Each of these kinds of annuities has its own pros and cons and different levels of fees and risks, too. Some might serve you very well, while others could be poor choices, with hefty fees and many restrictions. (It's smart to research annuities well before buying.)
Here are a few more things to know about annuities. It's smart to buy them from companies with very strong credit ratings and reputations lest any disaster strike. You may be able to buy a desired annuity with money from a tax-advantaged retirement account or from your savings. You can also have an annuity only pay for a specified number of years instead of the rest of your life.
You can often pay more for an annuity (or accept less from it) in exchange for extras such as having it pay through a spouse's lifetime, too, and/or increasing future payments regularly in order to try to keep up with inflation.
The world of annuities even includes some annuities that can work as long-term care insurance, too -- paying more than the usual benefit if and when you need long-term care. (There are also hybrid life insurance policies that address long-term care.)
At a minimum, expect this inflation-protected income stream
As you consider annuities and perhaps learn more about them, know this: You probably already have an inflation-protected, dependable income stream coming to you in the future -- one that will pay for the rest of your life. I'm talking about Social Security benefits. It's worth learning more about Social Security, too, as it will likely provide a meaningful chunk of your income in retirement.
