Worried You Won’t Have a Pension Like Your Parents? Here’s How to Build Your Own.

There’s a conversation that comes up a lot when I’m sitting with clients who are 10 to 15 years from retirement. It usually sounds something like this:

“My dad retired at 62 and gets a pension check every month. He never has to worry about running out of money. I don’t have anything like that. I have a 401(k) and I have no idea if it’s enough.”

That’s a real fear — and it’s a well-founded one. The retirement landscape has shifted dramatically in the last 30 years, and most people feel the gap without fully understanding what caused it or what to do about it.

Here’s the honest picture — and more importantly, what you can actually do about it.

What Happened to the Pension

Your parents’ generation largely had access to defined benefit pension plans — the kind where your employer promised you a specific monthly payment in retirement based on your years of service and salary. You showed up, you worked, you retired, and a check came every month for the rest of your life. The employer carried all the risk.

That model has almost completely disappeared from private sector employment. Today, only 15% of private sector workers have access to a traditional defined benefit pension plan, according to the Bureau of Labor Statistics. For non-union workers, the number drops even further — just 13%. Meanwhile, 43% of workers in the pension plans that still exist are in plans that are closed to new participants. The door is closing, and for most people, it’s already shut.

What replaced pensions? The 401(k) — a defined contribution plan where you bear all the risk. You decide how much to put in. You decide how to invest it. And when you retire, you figure out how to make it last for the rest of your life, however long that turns out to be.

That’s a fundamentally different proposition from a pension. And for a lot of people, it’s a scarier one.

The Social Security Math Problem

Before we talk about the solution, let’s be honest about Social Security — because a lot of people are counting on it to do more work than it actually can.

Social Security replaces approximately 40% of your pre-retirement income for an average earner. Most financial advisors suggest you need about 80-85% of your pre-retirement income to maintain your standard of living in retirement. That leaves a 40-45% gap that has to come from somewhere — your savings, a pension, or some other guaranteed income source.

For your parents’ generation, a pension filled most of that gap. For most people today, it doesn’t exist. Which means the 401(k) has to do a job it was never really designed to do — provide a lifetime guaranteed income stream for a retirement that could last 20, 25, or 30 years.

Here’s the problem with that: a 401(k) can run out. A pension can’t. Social Security can’t. If you live longer than your money, a 401(k) leaves you with nothing. That’s not a hypothetical — it’s a real risk that keeps a lot of people up at night.

The Solution: Build Your Own Pension

This is where annuities come in — and I want to explain this clearly because annuities have a reputation for being complicated, when the core concept is actually simple.

An annuity is a contract between you and an insurance company. You give the insurance company a sum of money — either all at once or over time — and in return, they guarantee you a specific income payment, either immediately or at a future date, for the rest of your life. The insurance company takes on the longevity risk. If you live to 95 or 100, they keep paying. You can’t outlive it.

Sound familiar? That’s exactly how a pension works. The only difference is that instead of your employer funding it, you fund it yourself — from your 401(k), your IRA, savings, an inheritance, or any other asset you want to convert into guaranteed income.

You are, quite literally, building your own pension.

The Types of Annuities Worth Understanding

Not all annuities are the same, and the right one depends entirely on where you are in your financial life. Here are the main categories:

Income Annuities (Immediate or Deferred)

This is the simplest and most pension-like version. You hand over a lump sum — say, $200,000 from a rollover IRA — and the insurance company starts paying you a guaranteed monthly amount immediately (or at a future date you choose), for the rest of your life.

The payment amount depends on your age, the amount you put in, current interest rates, and the specific terms of the contract. A deferred income annuity works the same way, but the income starts later. You fund it now, the insurance company grows it, and you flip the switch at a future date — say, at 70 or 75. Because the payout is deferred, the monthly income is often significantly higher when it starts.

Fixed Index Annuities (FIA)

A Fixed Index Annuity is the accumulation-focused version — and it’s become one of the most popular retirement planning tools available.

Your money grows based on the performance of a market index — typically the S&P 500 — but with a floor at zero. If the market goes up, you participate in some of that gain. If the market goes down, you don’t lose a dollar. Your principal is protected.

Once you’re ready to generate income, you can add an income rider — a contractual guarantee that specifies exactly how much monthly income you’ll receive when you turn it on, regardless of what the market has done. Some riders guarantee the income base grows at a fixed rate during the accumulation phase, giving you a predictable income floor when you retire. Carriers like Athene, Pacific Life, and MassMutual Ascend offer strong FIA products with compelling income rider options and solid financial ratings to back up those guarantees.

Multi-Year Guaranteed Annuities (MYGA)

Think of this as the insurance industry’s version of a CD — but usually with a better rate and tax-deferred growth. You lock in a fixed interest rate for a set period, and your money grows at that guaranteed rate. MYGAs are accumulation tools, not income products on their own, but they’re a smart safe-money option for cash sitting in low-yield savings or CDs.

Real People. Real Numbers. Here’s What This Actually Looks Like.

The Business Owner With a 401(k) and No Pension

A client came to me at 58 — small business owner, no pension, had built up about $350,000 in an IRA over the years. She was terrified of retiring and watching market swings eat into her savings at exactly the wrong time. Her Social Security at full retirement age would be around $1,800 a month. Her essential monthly expenses were about $3,500.

We took $150,000 of her IRA and placed it in a Fixed Index Annuity with an income rider. Her income benefit base grew at a guaranteed 7% annually. At 67, when she planned to retire, that rider was projected to generate approximately $1,100 per month for the rest of her life — guaranteed. Combined with Social Security, she had $2,900 in guaranteed income covering most of her essential expenses.

The remaining $200,000 in her IRA stayed invested and could grow without the pressure of being her only income source. She had a floor. Everything else became upside.

The Widow Who Was Running Out of Breathing Room

This is the scenario I think about a lot when I talk to people who assume annuities are only for high-net-worth clients. They’re not.

A widowed client came to me in her early 70s. She had $250,000 left in her 401(k) and Social Security coming in — but the two together weren’t quite enough. Not by a lot. Just enough of a gap that every unexpected expense sent her to the credit card. A car repair. A medical bill. A home repair that couldn’t wait.

The credit card balance would creep up. Then she’d pull money from the 401(k) to pay it down — which triggered a taxable event, which meant she lost even more of it to taxes. Or she’d tap a home equity line, adding debt to a fixed-income situation. It was a slow spiral that she was embarrassed about but couldn’t seem to get ahead of.

We took a portion of her 401(k) — not all of it, which is important — and converted it into a straight life immediate annuity. That means a higher monthly payment than a joint or period-certain option, because the insurance company isn’t guaranteeing payments beyond her lifetime. When she passes, payments stop. That’s the tradeoff for the higher monthly check.

But here’s what changed: she now had a predictable additional income stream every single month. Not a maybe. Not a market-dependent withdrawal. A guaranteed deposit, like clockwork, for as long as she lives.

The credit card stopped being an emergency fund. The 401(k) dips stopped. The HELOC stopped. She had breathing room for the first time since her husband passed.

And here’s the part that genuinely matters to her: if she lives a long life — and longevity runs in her family — she may very well receive significantly more in total payments than she originally put in. The insurance company is on the hook for every payment as long as she’s alive. That’s the longevity protection working in her favor.

We intentionally kept some of her 401(k) liquid — for true emergencies, for burial costs, for whatever she wants to leave her kids. That piece stays invested and accessible. The annuity is her floor. The 401(k) remainder is her flexibility.

A Note on Annuities and Medicaid Planning

One question that comes up — especially for clients without a spouse or with modest assets — is whether an annuity affects Medicaid eligibility if nursing home care is ever needed.

The answer is nuanced and worth knowing at a high level. When properly structured, a Medicaid-compliant annuity converts a countable asset (like cash or a 401(k) balance) into an income stream — which is treated differently under Medicaid’s asset calculation rules. This can be a legitimate planning strategy in certain situations. However, the income payments from the annuity are still counted toward Medicaid’s income limits, and a Medicaid-compliant annuity typically requires the state to be named as a beneficiary to recoup care costs after death — which affects what can be left to heirs.

This is a genuinely complex area that varies significantly by state and individual situation. If Medicaid planning is part of the conversation, working with an elder law attorney alongside a financial planner is the right approach — not something to navigate alone or based on general information. But it’s worth knowing the door isn’t automatically closed just because you have an annuity.

The Honest Tradeoffs

Annuities are not perfect for everyone, and good financial planning means being straight about the tradeoffs.

Liquidity is limited. Most annuities have surrender periods — typically 5-10 years — during which large withdrawals trigger penalties. Most contracts allow penalty-free withdrawals of 10% annually, and many include provisions for terminal illness or nursing home care. This is why keeping a portion of assets liquid matters — the annuity is the floor, not the entire savings.

The guarantee is only as good as the carrier behind it. Carrier ratings matter enormously. An A-rated carrier like Pacific Life (AA-) or MassMutual Ascend (A++) is a very different proposition from a carrier with questionable financials. The guarantee means nothing if the company can’t back it up 20 years from now.

A straight life annuity stops at death. The tradeoff for a higher monthly payment is that when you pass, payments end. If you’re concerned about leaving assets to heirs, keeping a portion outside the annuity — or choosing a period-certain option with a lower monthly payment — preserves that option.

You’re giving up some upside potential. The tradeoff for a guaranteed floor is that you’re not fully participating in strong market years. A portion in annuities makes sense for most people — not all of it.

Who This Conversation Is Most Important For

• Private sector workers with no employer pension who are 10-20 years from retirement
• Small business owners and self-employed people with no employer retirement plan
• People already retired who find Social Security alone isn’t quite covering essential expenses
• Anyone worried about outliving savings — especially if longevity runs in the family
• People sitting on cash in low-yield accounts that isn’t working hard enough
• Anyone who wants their essential expenses covered by guaranteed income so their investments can breathe

What to Do Next

If you’ve never had a conversation specifically about guaranteed income in retirement — not just growing your 401(k), but building a floor you can’t outlive — that conversation is overdue.

It starts with one question: how much guaranteed monthly income do you need to cover your essential expenses? Everything gets built around that number.

Mitchell Insurance Agency offers financial planning and annuity consultation across Minnesota, North Dakota, South Dakota, Iowa, Wisconsin, and Pennsylvania. We work with highly rated carriers including Athene, Pacific Life, and MassMutual Ascend to find the right structure for your specific situation — not the product that pays the most commission, but the one that actually solves your problem.

If you want to see what a guaranteed income floor could look like for you, let’s run the numbers.

Schedule a retirement income conversation with Mitchell Insurance Agency →

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Misty Mitchell is an independent insurance agent and financial planner serving clients across Minnesota, North Dakota, South Dakota, Iowa, Wisconsin, and Pennsylvania. Mitchell Insurance Agency LLC specializes in financial planning, annuities, life insurance, and personal and commercial insurance coverage.

Annuity guarantees are subject to the claims-paying ability of the issuing insurance company. This content is for informational purposes only and does not constitute financial or legal advice. Medicaid rules vary significantly by state and individual circumstance — please consult a licensed financial professional and elder law attorney regarding your specific situation.