Retirement Mistake No.12: Not Managing Your Retirement Nest Egg Like a Pension Plan
Posted In: Retirement Planning for Entrepreneurs

Can Anyone–Even You–Buy a Pension Plan?

Buying a pension plan sounds like a great plan for your retirement, but what does a pension plan do with your money? How do they invest it? What will you get when you retire?

Without going into a long article on how pension plans work, the one thing people are after is retirement income for that fateful day when they can say goodbye to work and hello to retirement, as long as they have enough income.

But what if you’re already retired? How can you invest and generate income like a pension plan? The definition of the word “pension” in the dictionary is an allowance, annuity, or benefit. So how can you benefit? Here are a few ideas.

  1. First, a pension plan invests money like a balanced mutual fund. You invest roughly half into stocks and the other half into fixed-income investments such as bonds, mortgages, etc. If you want to invest like a pension plan, find a consistent conservative balanced fund and you instantly have an investment similar to a pension plan.
  2. Second, if you’re already retired, invest into a balanced fund and take out income on a regular basis. Some balanced funds are called “growth and income” and some are called “income.” They are similar to pension plans; in fact, some of the managers are pension plan managers as well. They understand pension plans, so they manage the fund like a pension plan.
  3. A third way to benefit is to invest into an annuity. An annuity gives you monthly income for life. There are also ways to set up annuities so there is money or income for your spouse and estate. To ease your retirement planning worries, consider the merits of buying your own pension plan.
What you could do with your pension plan
Photo by StockSnap–894430

Look Beyond Mutual Funds

One day Ed from Qualicum dropped by to ask about wrap accounts.

“Grant,” he said in a loud voice, “what’s all this noise about wealth management and these programs? It seems to be the hot topic in investing today. Is it?”

“Well Ed, knowing that you’re from Alberta originally, people such as yourself don’t usually go around saying they’re wealthy, but some have been able to accumulate savings of more than $500,000 in their working years and want to invest their hard-earned money in a manner that is in alignment with their goals.”

Ed fired back saying, “Do you mean to tell me that if I have a bunch of money, investment companies will treat me differently?”

My reply was that pooled funds, also known as managed accounts or wrap accounts, differ from traditional mutual funds.

“How so?” he asked.

“First of all, pooled funds have higher minimums; so the larger investors can customize their accounts to their specific investment goals, risk tolerances, and time horizons. These funds include daily portfolio monitoring and rebalancing, strategic tax planning, and the flexibility to offset capital gains and losses. An individual mutual fund is not as complex.”

Ed leaned forward and asked the key question, “Why isn’t everyone doing this?

My reply was simple. “They are doing it, Ed. Most companies in Canada have programs, several programs in fact; and minimums can be as low as $25,000 or as high as more than $1 million. In the United States over $400 billion is invested this way. Most mutual fund companies today have a wide array of offerings, including pooled funds. Heck, Ed, you may be able to switch some of your existing funds into a customized program without any switching cost, but doing so may trigger income tax.”

Ed now understands pooled funds versus mutual funds. This is a great way to build a pension plan in retirement. It is called a multi-manager approach.

Ask your financial professional if this is the way for you to go. Think differently in retirement.

Opportunity is missed by most people because it is dressed in overalls and looks like work. – Thomas Edison

Go confidently in the direction of your dreams. Live the life you’ve imagined. – Henry David Thoreau


Published with permission from Grant Hicks