A pension is retirement income funded by an employer (often a state or federal government agency, but some companies still offer pensions as well). Also called a defined-benefit retirement plan, a company pension is not the same as a 401(k). A 401(k) is funded with your own money and sometimes additional money from your employer (depending on the employer's plan). On the other hand, a pension is created only with your employer's money, not yours.
Many employers will give you the choice between receiving your pension as a lump sum or getting a monthly pension check for the rest of your life.2 Pension distribution plans differ, but it's worth noting that you might have the option of continuing benefits for your spouse if he or she outlives you, though your monthly check will likely be lower in this scenario.3
Some people seek out particular jobs that offer pensions because they want that steady check in retirement. However, you usually have to work at a job for a certain length of time (typically 10 years or more) before you're eligible for an employer-based pension.
An annuity is a life insurance product that provides guaranteed income. Here's how it works: You give the insurer a certain amount of money during the accumulation period. It stays with the insurer, tax-deferred, until the payout period, when the insurer pays it back to you with interest. You can choose to get the payout either in a lump sum or in monthly payments. If you take monthly payments, they usually last for life, for both you and your spouse.4
You can buy either an immediate annuity, which hits the payout period right away, or a deferred annuity, which doesn't generate payouts until an agreed-upon date in the future. Either way, you'll also need to select fixed, variable, or indexed annuities, all three of which can be either immediate or deferred:
- Fixed annuities: Guaranteed interest rates, as set by the insurer
- Variable or indexed annuities: Interest rates tied to the stock market, making the return rate more subject to volatility than fixed annuities
4. Bond ladders
Bond ladders are a little more complicated than the other options listed above, but when structured right, they can provide steady income for years. Bonds are essentially a loan made by an investor (which could be you) to a company or a government entity. The borrower (company or government entity) pays accrued interest throughout the life of the bond, and pays back the entire principal (with any non-paid interest) on a particular payment date (generally the established maturity date of the bond.)
Bond ladders are a series of bonds that mature — that is, are due for repayment — at different times. This helps even out ups and downs in interest rates, and it means you get an influx of cash from the interest you earned when each bond is repaid.5 At this point, you can use the interest earned for your living expenses, and then reinvest the principle in a new bond. You can set up something similar to this with certificates of deposit (CDs) instead of bonds. The rates of return for CDs and bonds depend on interest rates. When interest rates are high, CDs may provide higher returns than bonds; when interest rates are low, bonds might produce better returns than CDs.6
Examining your retirement income options
Although you may be looking forward to retirement, you may also be concerned about how you will maintain your financial stability. Making an effort to examine all the options, including defined income sources, can help alleviate that anxiety.
When you're ready to talk with an experienced financial advisor to develop personalized retirement solutions, Synovus is here to help. Give us a call today at 1-888-SYNOVUS (1-888-796-6887).