Becoming your own pension fund | Ben Esget

By Ben Esget
Contributing writer 

Pension funds traditionally offer a guaranteed income for life upon retirement in return for years of loyal service. Many of us are not fortunate enough to have a pension fund, and even those who are may be shocked to find out their pensions could fall wildly short.

For example, the California Public Employees’ Retirement System (or CalPERS), the world’s largest pension fund, targets a 7.75 percent rate of return over the next 20 years, yet most experts agree 5 percent is more likely. The largest culprit of this is extremely low rates of return on fixed-income investments, which most pension funds are heavily invested in.

For these reasons, most people can benefit from saving to create, or subside, your own pension fund.

In setting up your own personal pension fund I would diversify across asset classes such as real-estate corporate bonds, foreign stocks, domestic stocks, commodities and government bonds. As a general rule, I would allocate enough into bonds as to reduce portfolio risk and volatility. I would sparingly use foreign stocks and commodities to offset inflation risk and to capture other areas of risk and growth.

As I got closer to retirement, I would increase the amount allocated to bonds and cash so the portfolio holds a conservative mix nearing retirement. An advanced way of allocating assets might be to concentrate on low-volatility equities (something our firm does) as a way to lower overall portfolio risk and decrease reliance on bonds.

With bonds yielding record lows and stocks historically offering better returns, using low-volatility equities is a very sound way of reducing risk without loading up on bonds. This is not to say some bond allocation would not be prudent, but rather a reduced exposure to fixed income combined with low-volatility stocks should have a similar overall risk exposure with greater return potential.

One of the better methods to create a personal pension is to create “buckets” at which you allocate capital.

If you want at least one year’s worth of expenses in cash, the portfolio’s allocation to fixed income should roughly be equivalent to your age (maybe less if using low-volatility equity approach), leaving the rest allocated to real estate, commodities and equities. Of these, three equities should make up the vast majority, leaving small portions allocated to commodities and real estate.

By creating buckets of this type you are increasing the chances that your portfolio will continue to grow and yield income throughout its life.

Ideally, the goal is to grow such an account so you could live off the dividends and income alone.  For many, however, they will be reducing principle to fund living expenses.

If this were the case I would create a budget, in percentage terms, with which you will reduce the principle annually. Maybe you say I will draw 7 percent annually every year with a target return of 5 percent, which means your portfolio will shrink by 2 percent per year during retirement.

One of the benefits of this type of investment strategy is that it takes a lot of the fear and guess work out of the equation. The strategy is on “autopilot” and has enough safety built into the system that at any point you can feel reassured that you have enough safety and liquidity to meet your needs if the stock market falls. Equally important, you have enough growth built into the model that you have a reasonable chance of outliving your money, assuming you saved enough.

One thing is for sure: With governments and pension funds around the world chronically underfunding their pensions and entitlement benefits, there has never been a better time to consider becoming your own pension fund.

Ben Esget is the president of WealthMark LLC, an investment firm in Bellingham. He writes occasional columns for Esget also runs the finance blog, in an effort to level the playing field between Wall Street and Main Street. Contact him at 360-734-1323 or

Author’s note: The information in this column should not be construed as investment advice. Everyone’s goals and investment portfolios are unique. Please contact a financial adviser or an accountant for your particular needs.

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