In the wake of the financial crisis, it has become more common for investors to see the obvious benefits of a pension that guarantees steady payments. Of course, businesses are less likely than ever to offer this to workers. Many are freezing or outright canceling pensions. A consulting firm known as Towers Watson reports that roughly a third of the Fortune 100 companies have either frozen or closed pensions since 1998.
Thankfully, investors can today set up their own pensions. There are are many tools today available that offer rewards that are very similar to pensions. The idea behind this new way of thinking is to make investments that are focused on covering expenses in the future, rather than on maximizing profits. For example, there are new bond-based packages that can be set up to pay for the cost of living for a period of about five or ten years. Several target-date mutual funds are being set up to match the costs of living in the retirement of their investors.
These new strategies are more heavily based in investments that are focused primarily on fighting off inflation such as bonds, commodities, and real-estate. Bonds do not have as a high a return as other investments, but they offer security. By investing enough in bonds to cover the cost of living in retirement, it also makes it possible to take bigger risks on high return investments with the remainder of the portfolio.
At a wealth management firm known as Lourd Capital Management, representative Joe Chrisman says that investors who take the time to invest enough of their income in low-risk markets can reduce the stress that they might have in relation to the volatility of the stock market.
At Russel Investments, Timothy Noonan said that it has become more obvious that high returns should not be the only goal of investment. The market has winners and losers, and it is important for a certain portion of investments to be focused specifically on savings, rather than profits.
Towers Watson reports that pension plans have demonstrated a 1% higher return than 401(k) plans have in the long run.
Of course, a small investor is not capable of investing exactly like a pension plan. Pension plans are focused on large groups of people, meaning that the age of each individual member of the plan is almost inconsequential. An individual investor, on the other hand, needs to accept lower and lower risks the closer they get to retirement.
Annuities are another option that investors can take a look at. They are beneficial because they offer a guaranteed source of income in retirement. Buying an annuity to cover the essentials and investing the rest in more volatile markets may be an excellent strategy for some.
The important thing is to realize that individuals, just like businesses, have both liabilities and assets. Many investors in the past have focused on obtaining the most assets possible. A less risky investor will embark on a more liability-driven investment plan, ensuring that they will be able to take care of basic costs.