Those pensions sure were nice cont. – pension alternatives

Here are the options I can see:

  1. invest in some balanced portfolio and follow with the ‘safe’ withdrawal rate discussed in an earlier post
  2. Income-producing real estate
  3. Inflation-indexed annuities
  4. A bond ladder, preferably one made up of TIPS (treasury inflation protected securities)

Most people stick with #1. The problem is that it’s really not that pension-like. If your assets drop in real value enough, you’ll have to make adjustments or run the risk of running out. Given current equity valuations, there is a non-trivial chance of that. Most of us would prefer to have our basic expenses covered with a reasonable degree of certainty. This leaves #3 and #4 for at least a portion of one’s portfolio.

#2, real estate, is just here because it seems to be a lot of people’s go-to answer. Probably works if you do it right, but I wouldn’t consider it passive income –  it’s a job (buying buildings – preferably the right ones in the right places, maintaining them, dealing with tenants). Maybe great for those who have those kinds of interests and skills, but I’ll have to leave this for other blogs to cover.

#3, inflation-indexed annuities, would be the most obvious pension equivalent. Unfortunately, true inflation-indexed annuities may not exist (there’ll be a separate post on my attempts at finding one). Also, I’m happy to be proven wrong on this if someone knows of a product like that.

#4, a TIPS ladder, is in some ways just a tweak of #1: a balanced portfolio typically already includes bonds of different maturities. One could just take the bond allocation and make it into an explicit ladder. The problem here, of course, is you have to pick a horizon and err on the side of more years rather than less, which drives up the cost. Still, this is probably the closest there is to an answer. More on that later as well…

Next Up

Annuities vs bonds ladders vs safe withdrawal rates – some recent numbers.

Want to know how to set up your own pension? I just designed mine

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