Pension insecurity Part 2Written by Matt Sussman | | firstname.lastname@example.org
When last I left you traditional pension plans were in big trouble. The government agency (the PBGC – Pension Benefit and Guaranty Corporation) that insures the pensions of some 44 million American workers was insolvent. What’s a retiree to do?
Understanding the current problems is essential to creating individual solutions. For many this transition will hurt financially. The first wave of boomers will have less time to make up the shortfall created when their company moves from a traditional plan to a 401k. This same group will also have to face retirement without health insurance provided by the company.
There are a number of reform proposals on the table. Some would require higher premiums paid to fund the PBGC, others would allow fully funded plans to add extra money during good times. The Bush administration has also proposed that companies already in financial trouble not be allowed to raise their benefits, which of course has union groups howling.
With this as our back drop what do you do?
The first step in solving any problem is to create a plan. You will need to hire a real Financial Planner or do it yourself. There are numerous companies that sell planning software that will help you do this. If you choose to hire someone make sure they actually provide a written plan that will cover your net worth, insurance, investment analysis, retirement options, taxes, estate planning and long term medical care.
Remember no one works for free but make sure they actually do the work. It can be very confusing because a majority of those in the financial services industry are still financial sales people. This does not make them bad people, just not what you are looking for.
A good advisor will take the time to explain the different options you have and the pros and cons of each. They should also give you a specific option they feel would suit you best. For example when you retire your company may offer you a choice between a lump sum payout and a monthly benefit for life.
To determine which option is best, the advisor will first have to crunch the numbers to make sure the lump sum option is a viable one. Just because your company offers a lump sum doesn’t mean you should take it. Public employees and teachers fall into this category. Mistakes made filling out the forms sometimes happens. If you hire help ask if they will fill out the forms for you.
There are risks with both choices. If you take the monthly benefit and the company fails 10 years into retirement your benefit might be substantially reduced. If you take the lump sum payout you face market risk. Weigh your options carefully.
Don’t wait until the last minute to plan. GM and Delphi employees are now under the gun to decide whether to take an early retirement buyout. I am willing to bet that a majority of these hard working folks don’t want to go it alone and currently have no plan. Don’t let this happen to you. Plan ahead. Financial planning is not just for the wealthy it’s for those of us in the middle class too. We can’t afford to make a mistake.
Financial sales people will come from near and far to get a piece of this business. Some will only care about getting your investment money, not about whether you can even afford to take the offer.
If you’re a younger worker it is never too early to start planning and investing. The key to accumulating wealth, in my experience helping individuals and couples plan, is to live within your means and always save 10 to 15% of your income. This may sound easier said than done, but it can be done. It takes some effort initially and then the plan should be monitored on a regular basis. It is important to input the numbers again every couple of years.
What types of factors are used to crunch the numbers can make all the difference. I prefer an inflation rate of 4% and expected returns of 6 and 8%.
But Troy, the market has averaged over 10% for the last 100 years. True, however I do not recommend that you use the best case scenario in your plan. This way during those periods of time when the investment markets are not at there best it won’t ruin your retirement.
Remember our motto: Live for Today, Plan for Tomorrow.
Troy A. Neff is the Managing Director of Advanced Retirement Solutions in Perrysburg. He also is the host of the Troy Neff Show heard on WCWA 1230 weekday mornings’ 6a-9a. Call in with your questions or send e-mails to Troy@TroyNeff.com.