No pension? How independent professionals can build their own guaranteed income

If you're an independent contractor, a physician in private practice, an attorney at a small firm or a partner in your own business, nobody is building a pension for you. There's no employer match quietly adding up in the background, and no monthly check waiting at retirement beyond Social Security.

That's the trade-off of independence. You control your work and your income, and you're also responsible for turning what you earn into income that lasts as long as you do.

The good news: you can build something that works a lot like a pension. You just have to build it on purpose.

What a pension actually gives you

A traditional pension does one thing extremely well: it pays a guaranteed amount every month for the rest of your life, no matter how long you live or what the markets do. That guarantee is what makes retirement feel secure.

Without one, most people face two worries at once: Will my money last? and What if the markets drop right when I need to retire?

The income floor

Many retirement planners start with a simple idea called an income floor.

1. Add up your essential expenses: housing, food, insurance, utilities, transportation and healthcare.
2. Cover those essentials with guaranteed income that lasts for life.
3. Use your other savings for everything else: travel, gifts, upgrades and surprises.

When the essentials are covered no matter what, the rest of your money can do its job without the pressure of paying the mortgage.

A hypothetical example

Dana is a 52-year-old physician in private practice. In retirement, she estimates:

• Essential expenses: $8,000 a month
• Estimated Social Security: $3,500 a month
• Gap to cover with guaranteed income: $4,500 a month

That $4,500 gap is her "pension to build." Everything she saves beyond it can go toward the life she wants, not just the life she needs.

Where annuities fit

An income annuity is the closest thing to a personal pension that insurance offers. You give an insurance company a sum of money, and it promises to pay you income, for life or for a set period.

• Immediate income annuities start paying right away. They're often used at or near retirement.
• Deferred income annuities start paying at a future date you choose. You buy them now and turn them on later, which can make them a way to build future income in stages.
• Income riders on some annuities provide guaranteed lifetime withdrawals while your money stays accessible in the contract.

Why this suits independent professionals: your income may rise and fall. Some deferred income annuities let you add money over time, so strong years can go toward future guaranteed income, a bit like buying your pension in installments.

What to know: money used for income generally isn't accessible like a savings account. Many annuities have surrender periods and charges for early withdrawals. Fixed payments lose buying power to inflation over time unless you plan for it. And guarantees depend on the financial strength of the insurance company.

What about life insurance?

You may hear about using indexed universal life insurance (IUL) as a "private pension." Here's the honest version.

A well-designed, well-funded permanent life insurance policy can build cash value that some people later access through policy loans. For some high earners who already have a solid foundation, that can be one flexible, supplemental source of money in retirement, along with lifelong protection for their family.

But it isn't a pension. That money isn't guaranteed. It depends on how the policy is designed and funded, on index crediting that's limited by caps, on policy charges that can rise with age, and on loans being managed carefully. If a policy is underfunded or loans grow too large, it can lapse, sometimes with a tax bill. We explain the details on our IUL services page and in our Infinite Banking guide.

The guaranteed part of your income plan should come from sources that are actually guaranteed.

Things independent professionals should think about

Start with your foundation. Before building retirement income, make sure your family and your income are protected: life insurance, an emergency reserve and a plan for disability. For many professionals, the ability to earn is their biggest asset.

Use tax-advantaged accounts. Self-employed people and practice owners may have access to retirement plans such as a SEP IRA or Solo 401(k). IAM doesn't offer these accounts, but your CPA or financial professional can help you decide whether they fit. Guaranteed income works alongside them, not instead of them.

Plan for Social Security timing. When you claim can change your benefit by a lot. Try our Social Security Estimator.

Don't assume creditor protection. Physicians and attorneys often ask whether annuities and life insurance are protected from lawsuits. That varies widely by state, and California's protections are more limited than many people expect. Ask your attorney before counting on it.

If you own a practice, protect it too. Partners and practice owners should look at key person insurance and buy-sell funding.

Your pension, on your terms

Not having a pension doesn't mean you can't have pension-like security. It means you get to design it: how much, when it starts, and how it fits with the rest of your plan.

An IAM agent can help you estimate your income gap and walk through your guaranteed income options in plain language. Your first conversation is free, with no pressure and no obligation. Book a conversation.

Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing carrier. Life insurance cash value accessed through loans and withdrawals is not guaranteed income and reduces the death benefit.