IMPORTANT ANNOUNCEMENT ABOUT YOUR PENSION!
Pensions are a really valuable component of your retirement plan. Traditionally, they were part of the compensation package offered by every great company and every public service job. That combined with your Social Security and interest from your Savings Plan and you had an excellent chance of retiring with enough income and ensuring you would not run out of money.
THAT WAS THEN AND THIS IS NOW!
In twenty short years we now have very few companies offering pension to employees. Those pensions that were in place are being sold off to third party vendors. The PBGC (Pension Benefit Guarantee Corporation – that’s right – it’s just a company) was formed to take over failed pension plans, multiple state and city run plans are in default, multiple corporations report underfunded pension plans, and now pensions are not part of many people’s secure retirement plan. The other cultural change is that very few people will work for just one company their whole career. So they end up with bits and pieces of pension plans or no pension plan at all. It is common for the person retiring today to report a small pension from a job they used to have that amounts to enough monthly income to buy a few bags of groceries.
BUT I DO HAVE A PENSION – AND I’M WORRIED ABOUT ITS SAFETY!
So this is going to get into the mechanics about how pensions work. I’ll summarize by saying that there are two basic types; privately held pension funds, and annuity chassis run by insurance companies. There are pluses and minuses to both of these. Let’s start with private pension plans, for example the NY State Teachers Fund. This is a tremendously well run fund that has made well above the normal returns within the portfolio. But notice, they actually have the funds. They have managed to collect enough money over the years, from enough teachers, and have predicted the right number of teachers that are actuarially passing away (leaving their share in the fund), and have invested the billions in their fund well enough, that NY Teachers are safe! But what if it was a smaller contributor group, or they had shrinking employment, or they redirected some of the assets instead of funding their pension plan, or their investments didn’t do so well?
Now let’s look at the life and annuity companies. A lot of pensioners tell me they don’t trust annuities and then proudly produce a pension they are living on run by Nationwide or Prudential. A lot of them don’t even know that most pensions, especially for smaller firms, are in reality just annuities. The good news is the annuity companies actually have your funds as there is no option of “under-funding”! Life Insurance Companies are some of the most conservative investors on the planet and their legal reserves are massive and backed by state guarantee funds. But insurance companies are in business to make profits and there is much variety in the benefit and options actually being offered to the employee. How does your pension stack up?
SO YOU ARE ONE OF THE LUCKY FEW WITH A PENSION – DECISION TIME!
You’ve now got choices to make. As soon as you retire – or leave your employer – you can get a settlement. Should you take it now or wait a few years? Have you considered the impact of your passing? What if you die before the pension even starts? Taking the lump sum may be attractive, but you really might live to be 90 and that’s a lot of years to be unemployed! Stable, guaranteed income is very important, but there are many variables to consider.
ENGINEER AND TEST YOUR PLAN!
We recommend that you talk to a retirement planner that has the ability to run the various scenarios and determine how it impacts your financial future. There has been a big change in the pension world driven by these ultra-low interest rate conditions, conditions that are not likely to change in the near future. One of those has to do with how pension benefits are actually calculated – the current value of lump-sum settlements is at an all-time high but will fall when interest rates go back up! Ask the planner to show you how incomes play out if you die early, or if you or your spouse lives to be 100 (one in ten will). There is a way to recreate guaranteed incomes with annuities that may surpass the current pension plan choices and give you more flexibility. But how do these annuities work and how do I choose the best of those options?
Waterstone Financial has teamed up with Stuart Software Solutions to develop the tools needed to model various pension plan offers. It allows us to design, build and test retirement plan scenarios that will help you make one of the biggest decisions in your life.