The days of working for a company for 30+ years and receiving a pension during your retirement years are basically over..... unless you work for the government or a select few companies that still offer them. So, if your employer offers a pension plan, consider yourself one of the lucky ones!
First off, what happened to pension plans???
In 1978, Congress approved The Revenue Act of 1978, which allowed for 401(k) plans. This act was implemented in the spirit of the government giving employees options for retirement outside of the standard pension plan. Sounds pretty reasonable, right?
In reality, large corporations were lobbying Congress to shut down their pension plans because they were too expensive to administer, and the employer held all of the investment risk. Corporate America needed a way to reduce costs and transfer the risk from the company onto the employee. Congress was determined to create additional options in order to shift funding away from pension plans, hence the birth of the 401(k).
The 401(k) allowed companies an alternative to pension plans so that they were no longer responsible for paying their retired employees. In addition to continuing to create a paycheck for the retired employee, the employer had a large amount of investment risk. If the underlying investments of the pension plan did not perform well, the company would have to add money to the pension plan to make sure it was properly funded. Without appropriate funding, the plan would fail, and the paychecks would stop.
What we see today is employees retiring much sooner and living longer, which translates to significantly higher pension costs that are simply unsustainable. Nearly 1 million working and retired Americans are currently covered by pension plans that are in imminent danger of insolvency, according to a 2017 Daily News article.
Since this study was released, we have seen two significant stock market declines, coupled with soaring inflation rates. This only compounds the problem, leaving the future of pensions in question and underscores the need for people to consider their options more carefully.
So, what happens if a pension is unable to pay its promised benefits?
You always want to factor in the health of the company you're taking the pension from, and whether they will be able to meet its long-term pension commitments. It could create funding problems in the future if the company is financially struggling. According to The Heritage Foundation, the Pension Benefit Guaranty Corp. (PBGC), which is similar to the FDIC, found that for a promised benefit of $24,000 a year, they are insured only up to $12,870.
Unfortunately, a few of my own clients have personally experienced this. One particular client worked for an oil and gas company his whole life and when he retired, the company ran into financial issues and eventually filed bankruptcy. His pension payment started off over $5k/month, and after 3 pensions cuts, he ended up with about $1,500/month. That was an income he was greatly dependent on in retirement!
What are your options when you retire??
If you couldn't already tell by reading, not all pensions are the same! Not every pension has the same calculations, and not all offer the same income options. When you are assessing your options, it's important to review your options carefully! Once you make that decision and receive your first check, typically your decision can NOT be reversed. This is where a financial advisor, and more specifically a Certified Financial Planner™, is extremely beneficial. They can help run different scenarios and comparisons to make sure everything is being factored in.
Most pension payments offer:
- 100% single life (provides max income, but ONLY covers your life)
- 75% or 50% joint income (usually this only covers the spouse; no kids)
- 5, 10, or 15 year period certain (typically a better option if your beneficiary is child and not a spouse)
- Partial Lump Sum or Partial Lump Sum
***I'm not going to go into great detail on the listed options above, but I will be happy to answer any questions you might have. I used to set up employer retirement plans and worked conjointly with the pension planning companies when I lived in Lubbock, so I'm extremely well versed in this area.
When accepting a lump sum from the pension and rolling it into an IRA, you gain the control over the account. Even if the income generated from the lump sum is less than the promised annuity payment from the pension, you still have control over the assets. You get to decide how and where to invest, and when you want to start using your money. Once you make the decision to start a pension, you can’t stop it. In an IRA, YOU have full control over when you want to take your money.
With a lump sum, you also have the flexibility to fully cover your spouse 100% with joint income AND you can include additional beneficiaries should both of you pass. This is particularly important for couples that have kids and would like to have the option to leave them something if money is still left in the plan. Unfortunately, pension plans almost never offer a contingent beneficiary(ies). For some people, a pension plan can be a sizeable asset, and the last thing most people want is their money to simply disappear should something happen to them and their spouse!
Another thing to factor in when considering a lump sum is your age (for a few reasons). Thanks to medical advances and technology, people are living much longer than they used to. Very few pensions offer some form of a COLA, and if you live 30 years after you started your pension payment, inflation is going to significantly impact your purchasing power! Also, for those of you that are married and have a 10+ year age difference, most pensions have a caveat that you must be less than 10 years apart in order to choose any joint life options. Well, that's frustrating!
I realize this information can be a little overwhelming, but fortunately, for those that are still wanting the benefits of a pension plan, the annuity world has made HUGE leaps and bounds, even in the 13+ years of being a financial advisor. There are annuities out there that can still give you AND your spouse joint and rising income to combat inflation, with the flexibility of adding beneficiaries (as many as you would like), and still allow you to have full control of your money. For those of you that don't have the option of an employer pension, you have this option as well!
To wrap this all up, if you are retiring soon or considering retirement, I’ll be happy to discuss this in more detail and run several different scenarios. Sometimes it absolutely makes sense to leave the pension with your employer, and sometimes you're better off taking the lump sum, or a partial lump sum and rolling it into an IRA. Give me a call or you can schedule an appointment directly with me: Heather Hennigh, CFP® AIF® - Online scheduling (oncehub.com).