The Problem With Pensions is Everybody’s Problem
Source: Yahoo Finance
In a move designed to help slash its huge debt pile, General Electric said it was freezing the pension plan for 20,000 U.S. employees with salaried benefits, according to Fox Business October 7, 2019. The company will also freeze supplementary pension benefits for about 700 U.S. employees and these changes are expected to reduce net debt between $4 billion and $6 billion.
GE’s actions may be headline news today, but it won’t be the last. In fact, the coming pension crisis is so big that it’s a problem for everyone declared Forbes on May 20, 2019. Thanks to paying Dent Research for independent, objective information based on research we have been studying the life and times of pension plans since 1999. Unlike their parents and grandparents, not many workers these days have a pension. But the problem with pensions isn’t limited to the companies and the workers who have them. Some experts who analyzed recommendations made by the Pension Task Force of the Actuarial Standards Board believe the U.S. state and local government pensions could be underfunded by $5 trillion. As Market Watch put it, looked at another way, “if those pension funds tried to buy annuities from insurance companies to fund the future benefits they promised, they would be short $5 trillion.”
At the same time, some receiving pensions wake up to a whole new and very unpleasant reality, investment managers profit while hurting retirees, along with the taxpayers. Defined benefit pension plans are usually sponsored by state and local governments, labor unions, and a number of private businesses. You were there when most corporate employers shifted from pension plans to 401(k)s after the latter was created in the early 1980s. Governments and school districts continue to offer pensions to many employees.
What’s left? A disaster waiting to happen. – Market Watch
Today many plans are severely underfunded, while the expected market returns were widely optimistic, and worker longevity continues to rise. At the same time, the advisers who managed the plans received huge fees and the politicians enjoy watching the people they serve go nuts. The ability to pay future retirement benefits to workers like firefighters, policemen, and teachers come from just two sources; contributions made by governments to the funds, thanks to the taxpayers, and investment growth. The better the annual return the less must be contributed by taxpayers.
Expecting an average annual return of 7.5 percent used to be a whole lot easier. In 1995 the job could be done with one asset class, 100 percent bonds. But by 2015 the job took a lot more risk and complexity, per Callan Associates and The Wall Street journal. With only 12 percent allocated to bonds, it was necessary to hold six different asset classes to include U.S. Large Cap, U.S. Small-Cap, International Stocks, Real Estate and Private Equity. While some pension plans took on additional risk to achieve the expected returns, others maintained their more conservative postures leaving them with returns that were less than adequate.
Too many people we talk to want to believe their pension is guaranteed by someone and nothing will ever change. Now tell me who you are going to turn to when the pension runs out of money? The truth is pensions can be changed and reduced just like GE just announced. Which could happen to you sometime well into the future. Some of the good news for GE employees is that 100,000 former employees will be getting lump-sum payment options. This means they will have an option to roll money over from the pension to an IRA.
Let’s spend a moment here. Look into your heart of hearts and ask yourself do you manage money well. If the answer is no, you are probably better off taking the pension option and hoping that nothing changes before you go to heaven. If the answer is yes or you say it’s time for me to put on my adult britches and pay attention to my financial situation, you may be better off putting the funds in places where you have more control. And allow you to pass on your benefits to everyone you love standing in line behind you. If you can accept a 4 percent annual withdrawal and you are willing to see what can happen for you to achieve 5 percent to 7 percent a year or more, you may find you can maintain your lifestyle for the next 20-40 years after your last paycheck.
“Lack of money is the root of all evil.” – George Bernard Shaw
5 Tangible tips:
1. Hope is not a strategy. So, don’t be complacent expecting the plan to pay you the same amount of money for the next 20-40 years after your last paycheck. Remember to review your Social Security statement annually. Be sure you are getting the work credit you have earned.
2. Everyone loves to plan vacations and weddings. No one wants to do the math to plan their financial future. But that’s what it takes to see where you are going so that you might arrive safely and on time. Take the time to put your financial plan in order. It’s not going to get any easier.
3. Take responsibility for your future. No matter what the company does or what the government might do, save 20% of your earnings off the top, spend 80% of your income and pay off or pay down all debt. Notice it was the debt that put GE where it is today.
4. Increase your emergency savings. 40% of Americans can’t put their hands on $400 to pay for an emergency.
5. Determine in advance how much loss you can accept. Look to see what has to happen so that your portfolio may perform within your limits of loss. You’ll probably be better prepared for the good, the bad, and the unforeseen starting 2019.
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