This series is dedicated to answering the question “Can you retire on $500,000?” The answer is yes, depending on your standard of living requirements. The necessary amount of income is dependent upon the life you enjoyed before you left the workforce and the life you want afterward.

The next question is, how is the income produced and deposited into your bank account on a consistent basis?

Many individuals cry foul over the apparent extinction of defined benefit plans in exchange for the defined contribution plans like 401ks more readily used today. A defined benefit plan paid you an income as long as you lived. It rarely varied with inflation regardless of how long you lived, leaving you at risk of inflation over time. In most cases, there was a benefit provided for your spouse upon your demise, but nothing was typically offered to your children or heirs.

The defined benefit or pension allowed for a person to focus on life rather than managing investments and watching financial television shows. The financial decisions were left to professionals (CFAs and CMTs) with training and education in the discipline of asset management, and they were obligated to create and deliver the obligated monthly income. At Financial Enhancement Group, we are blessed to have both educational qualifications represented on our team.

The creation of the defined contribution plans shifted the investment management to the workforce rather than the professionally trained asset manager. This was a benefit for the company, and indeed a dirty trick played upon an unsuspecting employee base. The guaranteed income stream was gone in exchange for monthly statements that tallied your net worth. As the market rose and you contributed more to the plan, the higher your balance grew.

During your working years, a defined contribution plan truly is about accumulating and preserving your account value. Once you opt to leave the workforce, however, the emphasis changes to the creation of an income stream. That process is an entirely different science than systematically depositing money into an account via your paycheck.

Insurance companies are quick to offer a solution in the form of an annuity product. They come in all shapes and sizes and promise to do what a pension was designed to do: you trade the balance you accumulated for a guaranteed income stream that lasts as long as you do.

The number of individuals who buy these commission-based annuities is stunning. What is even more shocking is the number of purchasers who then refuse to trade the balance for the income stream. Though the notion of a “pension” sounds appealing, individuals have a difficult time giving up the ability to access the balance they worked so diligently to build.

Insurance companies have offered solutions that sound good. People buy products for certain. Rarely are they used in practice as they are sold in the beginning.

Joseph “Big Joe” Clark, whose column is published Sundays, is a certified financial planner. He can be reached at or 765-640-1524.

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