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How to Create More Predictable Income Certainty As Pensions Fade Away

more predictable income certainty as pensions disappear

Once a corporate giant, General Electric Corporation has found itself in a downward spiral in recent years. The former staple of American business has been working to clear some substantial debt off its books.

One of the company’s latest big moves? To reduce debt by freezing its employee pension assets. This means that benefits will not continue to accrue for its employees, even though they continue to work there.

But while this is obviously better than pension termination, where the pension plan is simply dissolved, it marks the latest casualty in the pension landscape in corporate America.

A Growing Trend

There are many reasons why pensions are becoming increasingly scarce in America.

Corporations are feeling the bite to cut expenses to a bare minimum. And not just that. There are also other pressures, from the increased use of 401(k)s and other defined-contribution plans, to lengthening lifespans among retirees.

Of course, the low interest rate environment over the past several years also has made it increasingly difficult. Pension plans have fewer options to find investment choices that provide adequate income and that allow them to meet their fiduciary obligations.

Finally, many labor unions are also losing ground in their bids to negotiate retirement benefits for their members.

Research company Willis Towers Watson released an alarming study in 2018. Its findings showed that while 59% of corporate employers offered some sort of defined-benefit plan in 1998, only a mere 16% offered one as of 2017.

Furthermore, 93% of employers who offered a defined-benefit plan in 1998 no longer offered this to new hires in 2017.

More Responsibility for Lifelong Income Certainty

As pension offerings continue to decline, people are left on their own to find ways to guarantee that they won’t run out of income in retirement. And these days, retirement can easily last for 30 years or longer, depending upon a retiree’s health and other circumstances.

Those who are participating in pension plans that become frozen or are terminated completely will need to crunch some numbers.

Shore Up the Income Gaps

The first step is to determine how much they were originally going to receive from their pensions – and the amount of the reduction in benefits.

Then they will need to find a way to cover the difference from either their investments or current earnings. It’s a good time for them to examine all of the other retirement accounts that they have and to see how they are performing.

It’s highly possible that many of them will need to increase their rates of saving for their retirement plans.

Companies that freeze or dissolve pension benefits will frequently try to make up for it by offering additional benefits in their defined-contribution plans. A higher rate of matching contributions is one such possibility.

Plan participants should be sure to take advantage of all matching contributions that their employers offer.

Should You Take a Lump-Sum Option or an Annuity Offer?

Those whose pensions are being dissolved usually have two basic choices: 1) take a lump-sum distribution or, 2) purchase an annuity with what is left in their pension plan.

For many pension holders this can be a difficult choice, with many possible pros and cons to consider.

What to do if you face this dilemma? It can be wise to consult with a financial planner to help you examine all of the possibilities that can occur.

Potential Pros and Cons

As you work through both options, here are a handful of potential situations that can unfold with either choice:

Ability to Meet Pension Obligations Matters

The dollar value of any partial payment that you receive from your pension is wholly dependent upon the pension being able to meet its obligations.

If the plan does become insolvent, then the Pension Benefit Guarantee Corporation (PBGC) will step in and take over making the plan’s payments. However, you may not get as much each month as you did before.

If the plan does end up holding together, then you have an excellent defense against the possibility of outliving your income. And your spouse may even be eligible for a survivor benefit in some cases, although their payout will be less than yours was.

How Important is Control of Your Money?

If you decide to take the lump-sum distribution and roll it over into an IRA, then you will have more control over your money.

You will have a wider universe of investment and instrument options as potential choices into which you can put your money. Just remember that you will have to start taking mandatory minimum distributions when you turn age 70.5.

But this option also allows you to do some tax planning. Why? Because you can control the amount that you take out of the IRA each year.

If you choose to take the annuity payout, then your taxes will be much more predictable. But you will have little to no control over their taxation.

Potential Impact of Loss Risk

A lump-sum distribution that is rolled into an IRA will give you more control over your money. However, you may also be taking considerably more risk with your savings than you would have with preset annuity payments.

And you may end up withdrawing more out of your account than you should in some cases. That could result in your assets running dry at a time in your life when you are physically unable to replace them.

Many retirement savers saw big drops in their retirement account balances back in 2008. Some of them even had to keep working for another 5 to 10 years in order to make up for their losses.

You should consider what could happen to your retirement savings -- and your lifestyle -- if you were to incur that kind of a loss.

What makes sense as a solid retirement for people will vary depending on their different needs. Nevertheless, it's prudent to have some mix of conservative assets or instruments as part of your overall portfolio strategy.

Be Mindful of Rollover Rules for Tax Purposes

If you do choose the lump-sum distribution, make sure that you follow all of the rules that pertain to IRA rollovers.

That way you aren't left with a gigantic tax bill. Best practices generally call for a direct rollover into an IRA instead of having the financial company mail you a check and then depositing that into an IRA.

This will effectively prevent many types of mistakes from occurring, mistakes that could cost you thousands in some cases.

Potential Effects on Inheritances and Health Benefits

A lump-sum distribution can also enable you to leave a legacy for your heirs. That is, if you don’t spend all of the money in your IRA by the time you pass away.

But pension and annuity payments will stop with your death, or your spouse’s death, with nothing more going to your heirs.

Employee health benefits may also stop if you take a lump-sum distribution, which could spell trouble if you aren't old enough for Medicare. Be sure to ask your employer whether the choice that you make will affect your health coverage.

Other Factors to Consider

If you are going to lose part or all of your pension, here’s a further list of factors to consider:

  • How much income will you need each month in retirement?
  • Be sure to include probable healthcare costs such as medications and regular doctor’s visits.
  • Don't forget the cost of Medicare and any supplemental plan that you purchase.
  • How much will your pension pay you?
  • Ddo you have any other sources of retirement income, such as Social Security or investment income from an IRA?
  • How long do you and your spouse realistically expect to live after you have both stopped working?
  • Do you or your spouse’s families have a history of longevity?
  • Would a guaranteed monthly payout be sufficient for you to retire on?
  • If your spouse is entitled to a spousal benefit, would that amount be enough for he or she to live on after you are gone?
  • What is the net present value (NPV) of the future monthly payments that you will receive? (A financial planner can help you answer this question.)
  • What do you think about receiving monthly payments versus a lump-sum distribution that you will more control over?
  • Will you be able to resist the temptation of taking too much out of your account?
  • Would you like to maximize your money for yourself in retirement or would you rather leave a legacy for your heirs?

These are just some of the questions that you will face when you plan for retirement, regardless of whether your pension is reduced or eliminated or not.

A qualified financial professional can help you to answer many of these questions. Just don’t wait until you stop working before making some of these decisions, as it may be too late by then.

Need Help with Putting Your Retirement and Income Strategy in Order?

Whether retirement is 10 months or 10 years away, there are many "what ifs" to work through. If you find yourself worrying about how you can enjoy a secure retirement, don't fret.

Financial professionals stand ready to help you at SafeMoney.com. Surveys show that those who work with a financial professional often report more peace of mind, higher retirement savings, and a better overall sense of wellness.

Use our "Find a Financial Professional" section to connect with someone directly. You can request a personal, no-obligation appointment to discuss your situation, goals, and concerns. Should you need a personal referral, call us at 877.476.9723.

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