For most Americans, the pension is one of the main sources of income during the golden years of retirement. According to the Economic Policy Institute, pensions rank second only to Social Security as our primary source of retirement income. Yet, since the mid-1990’s, corporations have been terminating their pension plans. According to the Pension Benefit Guarantee Corp. (P.B.G.C.), nearly 20 companies with pension plans of $100 million or more have terminated their pension plans over the past three years. Bethlehem Steel, LTD Steel and United Airlines lead the list of high-profile companies that have terminated their plans.
What can you do to protect yourself? Here are four steps that you can take today to ensure that you have enough income when you retire:
Know your retirement income needs. Whether you’re near retirement or many years away, it is never too early to determine your retirement income needs—the amount of income you need annually to live the lifestyle you desire during retirement. Statistically, if you reach the age of 65, you are likely to live until 90, so you will need to consider annual income to support yourself during a 25-year retirement period, if not longer. For a rough estimate of your retirement income needs, multiply your current lifestyle costs by inflation (approximately 3 percent) for every year from today to the year of your retirement. This will tell you your retirement income needs, assuming you maintain the same lifestyle during retirement that you have today. For example, if today you spend $50,000 on your lifestyle and you intend to retire in 10 years, you will need annual after-tax income of approximately $67,195 the day you retire. Ask your financial adviser to help you calculate your exact retirement income needs.
Maximize all retirement savings plans today. Have you saved enough for retirement? Studies show most Americans entering retirement don’t have nearly enough assets to generate adequate retirement income. Make 2006 the year that you maximize your retirement savings. Save the maximum amount in your 401(k), ($15,000 in 2006) and your IRA ($4,000 in 2006). This combination will ensure that you build solid retirement assets for the future.
Increase after-tax savings 3 percent to 5 percent over 2005 savings levels. In addition to maximizing 401(k) and IRA savings, strive to increase your after-tax savings by at least 3 percent to 5 percent over last year. Even though you may think that you cannot afford it, find a way to save more! Reduce the waste in your budget, which everyone has; eliminate impulsive purchases; get a second job and save all after-tax earnings or start a side business to supplement your savings.
Know what you have. If you have been working at a company for more than five years, it is important for you to understand your retirement benefits options and the health of the company’s pension plan. To determine the security of your retirement benefits, contact your human resources department. It will tell you what benefits are available to you and if the company pension plan is adequately funded or underfunded. By law, the company has to tell you the financial status of the pension plan, so insist that they provide you with accurate and timely information. If your company is contemplating terminating its pension plan, your maximum benefit in 2006 under P.G.B.C. guidelines is $47,659, regardless of what the company has promised you. Keep in mind the P.G.B.C. does not cover health and welfare benefits, vacation pay, severance benefits, lump-sum death benefits that occur after the date of the plan’s termination, or disability benefits for disabilities that occur after the plan termination date. Visit the P.G.B.C. Web site at www.pgbc.gov to learn more about pension plan terminations and how they will impact your ability to receive pension benefits.
It is important that you understand the gravity of the pension crisis and take steps today to protect your benefits, or at least understand what benefits are accorded to you. If you or a family member considers a corporate pension the central component of your retirement income, you must continue to monitor the health of the company that is providing the pension but, more important, you must build financial assets outside of the pension to protect against the potential loss of your pension benefits.
David Hinson is the founder of Wealth Management Network in New York City. 646-375-2388, www.wmnllc.com. E-mail: firstname.lastname@example.org.