6 Steps to Your 'Personal Pension'

Financial security comes down to you.

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Rob Russell
Rob Russell

Are we seeing the unraveling of the American Dream? You work hard, raise a family, save money, and plan to retire comfortably with a reliable pension. But in the age of disappearing pensions and empty promises, you need to set aside part of your retirement savings into a “personal pension plan.”  

Unfortunately, unless you’ve professionally managed a successful pension, you’ll need some help in crafting it. To get started, here are the six most important steps to securing your retirement income:

Diversify your income streams. Sure, it’s smart to diversify your investments, but what about diversifying your income streams to lower the risk of outliving your savings. Many advisors and investors proclaim that you shouldn’t run out of money if you only withdraw 3-4 percent per year from your stock portfolio. Wrong. “Shouldn’t” implies hope, and hope is not a plan. Spread your investment dollars among as many non-correlated income-producing assets as possible (global bonds, dividend paying stocks, private REITs, MLPs, and secured floating income investments to name just a few).

Guarantee your income. Just like the foundation in your home is there to protect you during a storm, the foundation of your income plan should be guaranteed in case the perfect economic storm hits. For better or worse, the only account that can guarantee you a lifetime income is an annuity. Annuity options are plentiful—many aren’t that great—so carefully compare fees, risks, and potential performance.

Inflation-proof your income. If inflation averages three percent per year then you’ll need 30 percent more income to live a comfortable lifestyle ten years from now. Zero percent interest rates can’t last forever and much, much higher interest rates and inflation are on the other side of this government-manipulated market. Prepare by owning investments that provide income and thrive during inflationary times, like global inflation-protected bonds, and utility, energy, or natural resource stocks that pay regular dividends, or hard assets such as, again, opportunistic REITs and floating income investments.

Make responsible withdrawals from your stock account. A prudent investor will have a percentage of no more than 100 minus his or her age invested in stocks or mutual funds. So, if you are 45 years old, a prudent person would have no more than 55 percent of their money invested in equities or equity funds. I would advise that 55 percent to be extremely diversified among as many markets and sectors as possible with a bias toward higher dividend paying stocks. Assuming you achieve a blended dividend yield of 4 percent (the S&P 500 yield is 1.9 percent) commit to taking only the dividends as part of your income plan and to not withdraw principal (because reverse dollar cost averaging could cause you to run out of money during volatile market periods).

Watch fees that can eat into your income plan. If you’re paying 1 percent to an advisor to pick mutual funds (add in another 1.5 percent in fund fees) then 2.5 percent of your money is going out in fees every year…a pretty good income for your advisor and the mutual fund company! If you’re going to own mutual funds, it doesn’t pay to pay someone to “manage” the fund managers. While a good wealth advisor may be worth his orher weight in gold, find out, in writing, what their total fees are. Look for a transparent fee structure, one that is all-inclusive.

Set reasonable goals. Generating a 5-6 percent cash flow (adjusted for inflation) with a responsible level of risk is reasonable. I believe it’s possible to accomplish this by following my guidelines above. Could you generate more? Sure, with more risk, but is it really prudent to accept a greater risk of running out of money? There are no do-overs in life and in retirement this is one area of planning that you must get right!

America was born with revolutionary beliefs like individual freedom, the pursuit of happiness, and personal accountability. Maybe the silver-lining of the failures or inept management of pension plans across this great land is really taking us back to what made this country great…YOU…not the government, and not your employer. Build your “personal pension plan” and declare your independence from empty pension promises.

Robert Russell is CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to The Wall Street Journal, SmartMoney, & FOX Business.