Category: Retirement Readiness

According to the U.S. Labor Department, in 1975 there were more than 103,000 employee pension plans in place as retirement income for Americans. By 2017, that number had dropped to about 46,700. Further, the number of private pension plans — which employers fund on behalf of workers — has also dwindled as companies have shifted the burden of retirement savings to their employees through 401(k) plans or other defined-contribution plans. 

As a result of those changing realities, retiring workers now face their retirement decisions of lump sum or lifetime pension payments with concerns over whether their employers will be willing and/or able to meet the long-term commitments of their plans.

Most retirees like the idea of guaranteed income for the rest of their lives, which makes choosing continuing payments more appealing. However, today’s financial reality is that the stability of pension payments depend on the solvency of the sponsor. And while the federal Pension Benefit Guaranty Corporation (PBGC) would step in if a company could not meet its obligations, it may pay only a certain portion of an employee’s promised benefits. 

The PBGC’s multi-employer insurance program currently coversthe pensions of 10.8 million Americans. The corporation also pays monthly retirement benefits, up to legal limits, to about one million retirees whose plans ended or failed. Concerningly, the agency’s most recent annual report shows that it is currently stretched to its limits, with forecasts of insolvency by the fiscal year 2025. 

So what is the best choice to make? Below are some facts that may help in your decision-making process.

• For those eyeing a lump sum due to fear of their employer going under or otherwise struggling to meet their pension obligations, it’s important to be aware of the fact that the lump sum amount offered is generally lower in comparison to the amount promised over time. That being said, because interest rates have generally remained low, recent lump sum offers have been bigger than if rates were high. . 
• In choosing to remain in the pension plan instead over a lump sum, the amount received may be fixed-for-life as pensions typically don’t have a cost-of-living adjustment.

• Although some pensions offer spousal benefits (i.e., upon death, the husband or wife continues to receive a portion of the lifetime payments) there is nothing left for heirs. In contrast, in taking a lump sum, upon death there may be money that could be left to non-spousal heirs. 
• Choosing a lump sum and not rolling it into an individual retirement account or other qualified option will result in taxes on the distribution. Alternatively rolling the money to an IRA, will require decisions on the best ways to invest the assets to meet retirement income needs
• An alternative option is to purchase an annuity, which would provide guaranteed income for either a set number of years or for the remainder of the investor’s life, depending on the type. However, it’s significant to keep in mind that to help meet those payout obligations, insurance companies invest in stocks, which means your investment is one step removed from market investments. Additionally, there is always the risk of the insurance company going belly up. 

At the end of the day, any decision on retirement should be made in the context of the retiree’s financial plan and the long-term viability of all the companies involved.

When the COVID-19 pandemic hit the United States, the lives of Americans were quickly turned upside down. Now, three months later, many have suffered personal financial disasters due to the loss of jobs and paychecks.

There are a number of financial lessons to learn from this pandemic, chief among them the value of planning and having emergency funds. Without such funds, you can be forced to tap other accounts, take out a loan, or face more dire and damaging financial options.

So what should you do if you do not have an emergency fund set aside to cover your expenses for a few months?

1) To begin, start one as soon as you can. Divert money into the account whenever possible. If you do already have an emergency account, continue to add to it.

2) Review expenses related to your job. Consider the money you spend on transportation costs, clothing, dry cleaning, entertainment, meals and those daily coffee runs. Where you can cut costs, take that money and put it in a place where it can grow.

3) If you are worried about losing your job, or if you already experienced a pay cut, find ways to reduce your overall spending by 20% or more. Separating essentials from non-essentials is a good way to eliminate things you do not need.

4) Do not overlook the importance of estate planning and investing in your retirement. Continue to contribute to your 401K, and if you have to borrow from it, do not drain it.

5) If the events of the last three months have encouraged you to think about drawing up a will, now is the time. Also, update any estate planning that needs to be done, as well as end of life directives. 

All of the above are integral parts of proper financial planning which, as COVID-19 has reminded us, are important lessons to learn and follow.