It used to be (just a few years ago) that if you worked for a company that offered a pension, you were one of the lucky ones. That retirement income was reasonably secure compared to workers contributing to a 401(k) or other defined contribution (DC) plan.
Not so much anymore though. First of all, government and corporate assets managed for pension payouts have underperformed in recent years due to rising costs, increased beneficiaries and economic instability, putting these plans at risk. In May, the funded status of the typical U.S. corporate pension plan fell by 6.5 to 69.8 percent, the lowest level since 2007.1
For state government pension plans, shortfalls mean that other funded services such as education will be shortchanged to shore up pension fund deficits and costs moving forward. Both corporate and government plan sponsors are looking at changing retirement plan structure for new hires in the future, including eligibility requirements and/or transitioning to a defined contribution plan.
1 [CLICK HERE to read the article, "Funded Status of U.S. Pensions Declines to Lowest Recorded Level, According to BNY Mellon," at Bizjournals.com, June 7 2012.]
So on one hand, pension assets at their scheduled level of payouts are at risk. On the other, pension sponsors are changing the structure of plans to offset these risks. For example, some plans are offering new retirees the choice between annuity benefits paid out every month for life or a lump sum of the projected value of the lifetime pension payouts. A lump sum means you’ll need to manage your own income for the rest of your life, and there are tax issues to consider. You could come out ahead if you select financial vehicles wisely and interest rates/market performance goes your way. Or, you could run short of money before you run out of retirement.
[CLICK HERE to read the article, "Deciding Between a Lump Sum and an Annuity," at The Pension Rights Center, June 5 2012.]
If you choose a one-time payout, you should get up to speed on fixed index annuity (sometimes called “hybrid” contracts that combine regular payouts with the guarantee of lifetime retirement income, called guaranteed* lifetime withdrawal benefits (GLWB).
[CLICK HERE to read the article, "Retirement income review: GLWB / GMWB," at cbsnews.com, May 24, 2012.]
There is increasing recognition and concern that DC plans will not be able to provide the same level of benefits as a defined benefit (DB) plan. Therefore many of today’s employers are beefing up their DC plan options to help their employees better secure retirement income. According to a recent survey of more than 500 large employers, 16 percent now offer a retirement income tool such as a GLWB within their 401(k) plan, with another 22 percent likely to adopt one in 2012.
[CLICK HERE to read the article, "401(k) Income Options Coming Your Way," at cbsnews.com, May 15, 2012.]
It certainly feels like the economy and the burgeoning senior population has taken a toll on nearly every component of retirement that, in the past, was rendered strong and dependable. Things like pensions, Social Security benefits and home equity. Now everything is on shaky ground and it’s like trying to tiptoe by an erupting volcano to get to the other side – retirement “paradise.”
If you’re tired of wondering if the government and/or your employer are going to be able to hold up their end of the bargain and would like to secure some retirement income funds of your very own, please give us a call. We can help you with that.
*Insurance and annuity product guarantees rely on the financial strength and claims-paying ability of the issuing insurer.
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