We have all probably heard the expression “put your oxygen mask on before helping others.” As parents, we always want what is best for our children. Sometimes, however, what we think is best may not be.
In a recent video for my YouTube channel, Red Barn Financial TV, I spoke about the differences between a pension and a 401(k)/IRA (I’ll use these terms interchangeably in this article). In that video, I explained that having a guaranteed stream of income every month is a very valuable asset and it can be even more valuable than a 401(k). This is because you can’t run out of money in the pension—you get a payment every month.
One viewer commented, “Your kids would rather inherit the 401k, they don’t get squat of your pension.”
While this is generally true, your children don’t get “squat” if you run out of money, either. They often end up picking up the slack and paying for your needs.
The purpose of my video was to share that both a pension and an IRA are valuable tools and to contrast both, not to suggest that one was better than the other. The real question is: If someone gave you $1,000 per month for the rest of your life or gave you $100,000 cash, which would be better?
Some might say, “give me the cash, because I’ll turn it into a lot more.” That could be true, but you could also end up with nothing if your investments don’t do well and you need to spend some of the money. Simply put, the $1,000 per month would total $120,000 after 10 years with no risk.
The right answer is a personal choice, and it is also a matter of how long you are likely to live; a question for which most of us don’t have an exact answer.
Consider the fact that most companies have done away with pensions, and you have to ask yourself why. Was it because a 401(k) plan was so much better for the employee, or was it because it was cheaper and less risk for the employer? I would argue that the latter is true.
There is no rule that says you can’t take a portion of your pension money and put it aside, or invest it to leave a legacy, so you can in fact have a pension and also save money for your children.
It is important to have a conversation with your children to learn whether an inheritance is important to them, or if they would be happier to see you spend your money and enjoy your life. In other words, do they have a financial need (or desire) for your money, or would your money be best spent traveling, giving to charities of your choice, or in some other way? Additionally, if your children aren’t good with money, could you be setting them up for failure by leaving them a sizeable sum?
In my May 2023 article, I spoke about the unintended consequences of dividing your money equally among your children, and the fact that taxes should be a consideration. There could be unintended consequences, and your children may inherit a tax liability that is higher than the one you would pay. If you had a pension and put money aside or invested a portion for your children, when they inherit (or are gifted) that money, there generally isn’t a tax consequence to them, so it can be a bigger benefit.
You may say that you only have an IRA, and a pension isn’t available to you. This is very common in today’s work market. There are ways in which you can create a pension for yourself so that you will have a guaranteed income every month for the rest of your life. There are also ways to create a pension for your children as well. This is something that a financial advisor like myself can help you create if it’s something that works for your situation. It’s a great idea to educate yourself and find out if this could be a good decision.
In an ideal world, you would want to save what you can and become diversified along the way.
If someone asked me whether I prefer the “stack of money” or the monthly income, I’d state that I’d like to have some of each.
The decision of whether to choose a pension or a 401(k)/IRA is a personal one. There is no right or wrong answer. It is important to weigh the pros and cons of each option and choose the one that is best for your individual situation.
(Disclaimer: The information in this article is not tax, legal or financial advice. Each person’s financial situation is different and you should not make major financial decisions without consulting a financial advisor.)
