http://www.fool.com/news/commentary/2004/commentary040121RB.htm?ref=btpCan You Count on Your Pension?Much of your future retirement income is in other people's hands. The amount -- and very existence -- of your Social Security benefit will depend on how the government attempts to fix the program's looming shortfalls. And if you expect a monthly pension check in your golden years, you may be in for a surprise: Poor investment returns and corporate bankruptcy have jeopardized this one-time cornerstone of retirement. In the end, you can only depend on what you can control: your personal savings.By Robert Brokamp (TMF Bro)January 21, 2004We all look forward to the day when we can deposit our duffs on retirement's proverbial three-legged stool: Social Security, a pension plan, and personal savings.But be careful: The legs of that stool aren't too sturdy.We all know that the future of Social Security is up in the air, with baby boomers poised to put a strain on those coffers. The program just won't have enough money to cover future obligations.Unfortunately, the same is being said of more and more traditional pension plans, a.k.a. defined-benefit plans. Last month, Standard & Poor's announced that the pensions offered by the companies in the S&P 500 are underfunded by $259 billion, up from $212 billion a year ago. The bear market of 2000-2002 and historically low interest rates have taken their toll on pension assets, and the stellar stock market of 2003 wasn't enough to compensate for the increased payments pensions will have to pay this year -- a situation that will only get worse as the baby boomers retire.That shortfall is just for companies in the S&P 500. Nationwide, the government estimates that pensions are underfunded by $350 million.The pension: an endangered speciesOf course, an underfunded pension is better than no pension at all -- but that's the prospect facing an increasing number of workers. A recent survey by Hewitt Associates (NYSE: HEW) found that unless Congress changes the accounting rules that govern pensions, 21% of companies say they will freeze pension benefits and 17% said they won't offer defined-benefit plans to new employees.The issue of companies getting "pension relief" is a whole other can of worms, but the fact is that fewer employers are offering defined-benefit plans. According to Hewitt, 83% of employers offered traditional pension plans in 1990. By last year, that percentage had dropped to 45%.Even if you have a pension, there's no guarantee it'll be around when you retire. Just ask the former employees of Consolidated Freightways, US Airways (Nasdaq: UAIR), or Polaroid. After these companies went bankrupt, they could no longer pay pension benefits. Their plans -- along with the plans of 149 other companies, including, of course, Frosty Morn Meats -- were taken over by the Pension Benefit Guaranty Corporation, a federally chartered agency that essentially insures pensions.While that sounds reassuring, benefit payments from the PBGC are often lower than what a retiree would have received had the company remained solvent. A Washington Post article from last October told the story of Melvin Schmeizer, a Bethlehem Steel employee for more than 35 years whose monthly pension dropped from $2,850 to $1,700 after the PBGC assumed control of the plan.Furthermore, the PBGC itself isn't on solid ground. Its fund backing single-employer plans went from a $7.7 billion surplus in 2001 to a $11.2 billion deficit in 2003. The reason: The agency is taking over more plans. Last year, the PBGC assumed control of 152 pension plans (up 5.5% from 2002) covering 206,000 people (up 10.2%). That's the largest annual increase in the total number of people covered by the PBGC. The agency paid a record $2.5 billion in benefits, almost $1 billion more than in the previous year.In a statement released last week along with the PBGC's annual report, Executive Director Steven A. Kandarian said, "The continued erosion of PBGC's financial condition underscores the need for comprehensive reforms to put pension plans on a path to better funding. While the PBGC has sufficient assets to pay benefits to workers and retirees for a number of years, the growing gap between our assets and liabilities puts at risk the agency's ability to continue to protect pensions in the future."The one leg leftNow, we don't want to sound too alarmist. Social Security will survive in some form (though future retirees should expect reduced benefits). And most beneficiaries of a defined-benefit plan will get something. Actually, in the short term, it's the investors in companies with huge shortfalls -- such as General Motors (NYSE: GM), Ford (NYSE: F), ExxonMobil (NYSE: XOM), and United Technologies (NYSE: UTX) -- that have the most to worry about, as earnings get gobbled up by pension funding.But the solvency of Social Security and your pension are ultimately out of your control. The only aspect of your retirement that is truly in your hands is your personal savings. And isn't it smarter to plan for the worst -- or at least not the best?So if you want to control how and when you retire, you'll have to save early and often. Stuff your 401(k), 403(b), or whatever your employer offers, and max out your IRA. You still have until April 15 of this year to make a contribution for 2003, so don't miss out on that tax-advantaged growth. (Visit our IRA Center for all the details.)For more on pensions -- and how to see if yours still has a pulse -- read Pension in Trouble? http://www.fool.com/news/commentary/2003/commentary030402bro.htm Furthermore, beginning this year, companies will have to reveal more information about their pensions, including asset allocation, contribution levels, future benefit payments, and investment strategies. So keep an eye on the health of your plan and your company. And if you're ever given the opportunity to get money out of the plan -- such as a lump-sum benefit payment -- give it serious consideration.For his five years of teaching sixth graders, Robert Brokamp will receive $108 a month 32 years from now. And, no, that won't be adjusted for inflation. Which is why he's still working, co-writing The Motley Fool Personal Finance Workbook and writing The Motley Fool's Guide to Paying for School. The Motley Fool is investors writing for investors.
Another thing many people don't realize is how back-loaded most defined benefit pensions are. I kept getting annual benefit statements projecting a comfortable $2K/month pension when I retired. Even reduced 20% by my planned early retirement at 60 the pension would be about $1600/mo based on my present salary. Then I got "involuntary early retirement" at 51. My projected pension suddenly dropped by 40%. I had 24 years service but by missing the additional 9 years work that I had planned on, I also missed out on most of my pension. Even though I got another job quickly there was no way to make up for the loss in the new employer's pension program. It was also back-loaded to reward only those with many years of service. At that point my quarter century of saving and investing became my savior.In this age of uncertainty about job tenure I think everyone should strive to save enough for retirement without a pension or social security. If you eventually get something from those programs it just means you'll be able to live a little better in retirement.
Gosh, and here I was crying into my soup every night because I seem to be the only one I know without a pension or stock option plan! Since I'm getting closer to retirement, and pretty much lost a lot of what I had saved previously during the three year bear market, I'm currently stashing 30% of my gross income (50% of my net) into retirement and savings--that's all I can afford to do, but if they reduce my estimated SS payment, I'll be screwed.OK, I'll stop crying into my soup now...2old
Much of your future retirement income is in other people's hands. The amount -- and very existence -- of your Social Security benefit will depend on how the government attempts to fix the program's looming shortfalls. And if you expect a monthly pension check in your golden years, you may be in for a surprise: Poor investment returns and corporate bankruptcy have jeopardized this one-time cornerstone of retirement. In the end, you can only depend on what you can control: your personal savings.Four years ago or so, the large company where I work was puchased. The new owners were desperate enough to buy us that they agreed to terms that included sizeable increases in the defined-benefit pension for those of us with lots of years. The changes also made me eligible to retire on the basis of my years of service, and greatly reduced the penalties for taking an early lump-sum settlement. The new company froze the benefits for the old pension at these new levels, but were not allowed by the purchase agreement to convert it. They did start me as if I were a new employee in their own defined-contribution plan.A bit over a year ago, the portion of the company where I worked was sold again. This time, the new owners decided that they didn't need most of us headquarters types and laid us off. The change in control agreement gave those of us with lots of years who were laid off a large settlement, part in cash and part as a sizeable addition to the defined-contribution pension. About 30 seconds after I was officially laid off, I filed retirement papers and rolled the lump-sum from the defined-benefit plan, the entire defined-contribution plan, and my 401(k) into an IRA.I am no longer dependent on the solvency and good-will of a company that had no interest in me (nor I in it, for the most part) for the health of the pension that had been promised to me for 25 years. There are very few days that go by where, despite having to assume the investment risks myself, I don't think that getting laid off at this time might turn out to be the best thing that ever happened to me in terms of having a secure retirement. Especially on days when I read articles like this one.
In a word, NO.I've watched the people who had their former-Monsanto pensions shifted to Solutia - now in bankruptcy proceedings.Lately (and possibly earlier) all pensions have the disclaimer that says its at the discretion of the company to continue the program.PBGHC is in big trouble as various companies declare bankruptcy and is in the hole for large amounts (billions). What you say is true, those who fall back on PBGC have lowered benefits. As I understand the proposed bailout (under generally accepted accounting rules change), many more businesses are being exempted from paymet to PBGC.Given the current administration's predilection to eliminate public programs, I don't think I have a snowball's chance on collecting anything even vaguely meaningful on Social Security benefits. That's OK - since I planned for this in the late 60's. So long as my mother and mother-in-law can collect, I'm cool.Through sheer unadulterated luck, we socked as much as feasible into our 401k's to reduce current income taxes over the last umpteen years. That's going to be the predominant, if not the only, retirement funding MDH and I have.
billjam:Same here, only I was "restructured" out at 57. Thankfully, I was already dabbling in my own investments, and, at 59-1/2, was able to use a little of that money from my self-directed IRA to get us to SS age at 62. Now we're doing pretty well.Best bet is to look after your OWN retirement -- no question about it!Vermonter
2old4bs:Gosh, and here I was crying into my soup every night because I seem to be the only one I know without a pension or stock option plan! Are you serious? I have little or no pension except for a few hundred a month from an OLD employer (2 companies back), and nothing from the final one except my own 401k rolled over into a self-directed IRA. My wife has virtually nothing at all. She was a teacher, but worked part-time for many of those years, so her teacher's pension amounted to just about nothing! On top of that, her own SS would have been very low, too (perhaps $250/month) because, though she worked 40 quarters in her lifetime, they did NOT deduct SS while she taught! (I thought that was weird, but that was how it was in that state.) Thankfully, of course, as my spouse, she was/is entitled to almost half of what I get, so our total SS is okay.We have no paid health insurance, either, by the way, and must pay our own BC/BS, totally outside of any company plan.Cry in your soup? Heck, I get a kick out of those (in here and elsewhere) who bemoan the fact that have "only" about $4,000 a month pension AND health coverage to boot! I feel for them -- sure I do!Vermonter
mcain:About 30 seconds after I was officially laid off, I filed retirement papers and rolled the lump-sum from the defined-benefit plan, the entire defined-contribution plan, and my 401(k) into an IRAWise man.Over and over again, I have said "Watch out for your OWN retirement -- however you can do it! No company really cares as much as YOU do about YOU!"And, by the way, as much as you can, watch over your own investments, too, because no "advisor" cares as much about your money as you do, either!Vermonter
Vermonter,Too bad your wife didn't teach in Nassau County, NY (one of the highest property tax counties in the US). A teacher I know there told me he'll be retiring on about $100K a year! (I don't know how much of that is from his pension, but I'll bet it's a BIG chunk.) I'm not shedding any tears for him either...2old
2old:$100K? That's incredible. And people wonder why their taxes are so high there?She'd have done a lot better, too, had she taught full time all those years. However, it was a joint decision for us that she took 10 years off when our little ones were born, to be with them full time until they reached school age. Then she worked full time for a few years, but went to part time again to spend time with them as they grew into teen years.We have no regrets. She loved being a mom, I loved her being home as a "homemaker", and we did just fine on the decreased income because we've never been loony about blowing money on "stuff" that we didn't really want or need.Again, a $100,0000 teacher pension is truly incredible!Vermonter
Vermonter:Property Tax on the 'average' home in Nassau County is probably about $15,000-20,000/year, and most of that is spent on education. Most people are willing to pay it though, because they feel the quality of the education is worth it.I think your wife 'invested' her time wisely. :-)2old
<<<<<<Can You Count on Your Pension?>>>>>>>>>No.Well, that is you can't count on pretty much anything but a Government (Military or Civil Service) pension. At they are backed, essentially, by the full faith and credit of Uncle Sam. Uncle Sam will not dissolve your pension during a "reorganization."Anything else, can, may, and might be gone either (a) before you need it or (b) while you need it.Just take a look at a couple of things: - The *big* shift to Cash-Balance plans (IBM, Delta Airlines, etc) - The evaporation of promised retirement benefits (Bethlehem Steel, US Airways, etc).A pension that is only as good as the strength of the company behind it should be expected to provide nothing. Zip. Zilch. Nada. If it does, great, but otherwise to count on it being there when you most need it is to court disaster.The fact that companies like GE, GM, and many others can manipulate their earnings based upon their retirement plans is indicative of the permanence (or lack thereof) of such plans.My $0.02,Corky
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