Don't have a pension? Here's how to build one on your own

Walter Updegrave, CNN | 3/22/2017, 11:18 a.m.
I had a choice to take my pension as a lump sum or lifetime annuity payments and I opted for ...
Retirement Pixabay/geralt

NEW YORK (CNNMoney) -- I had a choice to take my pension as a lump sum or lifetime annuity payments and I opted for the lump sum. Now I feel like it was the dumbest decision of my life. I think I'm looking at a long retirement, and I'm just not very confident about investing in today's market. Any advice for what I should do now?--Bill

My first piece of advice is don't beat yourself up too much about this. Deciding between a lump sum and a pension is tough and complicated decision.

On the one hand, the guarantee of lifetime payments is appealing because it represents security and offers peace of mind. Indeed, research shows that retirees who have pension or annuity income tend to be happier in retirement than those who don't.

And yet, the prospect of getting your hands on a big chunk of money -- for many people a larger sum than they've ever had at one time in their entire life -- is also appealing. It can give you a feeling of freedom, perhaps the sense that you can live larger than you'd ever imagined.

Problem is, there's also a little thing called "wealth illusion," a term behavioral economists use to describe the fact that people often overestimate how much sustainable income they can draw from a large sum, which leaves them vulnerable from running through their money too soon.

Given the conflicting goals and feelings that the pension-vs.-lump sum issue can awaken, it's no wonder that people have a hard time making a choice. So I'm sure you're not the first one to later regret his decision.

The good news, though, is that you have the opportunity to take a mulligan, a do-over, and get the pension-like income you seek. How? By buying an immediate annuity, a type of investment that's specifically designed to turn a lump sum into guaranteed lifetime income.

For example, a 65-year-old man who invests $100,000 in an immediate annuity today would receive payments of roughly $560 a month as long as he lives. A 65-year-old woman investing the same amount would get about $530 a month for life, while a 65-year-old couple (man and woman) would receive about $470 each month as long as either is alive. To see what size payments you might get based on other ages and investment amounts, you can check out this annuity payment calculator.

Just to be clear: I'm not saying that buying an immediate annuity with your lump sum will give you the same level of payments you would get by taking the pension annuity option from your company. Insurance company annuities tend to generate somewhat lower monthly income because, unlike an employer, they have to build a profit margin into their payment rates.

Still, if not having stable income that will last no matter how long you live is what's causing your pangs of regret, this is a way to get some relief.