Creating a Pension Contingency Plan

If there is one thing you can expect during a presidential campaign it is a whole lot of broken promises. In 2008, historian Joseph Ellis analyzed 200 years of political promises and found only two presidents – George Washington and James Polk – kept their campaign pledges. If history is any indication, voters can only hope their preferred candidate’s actions in office, at best, come close to what was promised on the campaign trail.

This brings to mind some of the assumptions and expectations that go into a financial plan, when nothing is guaranteed. Markets can change. Jobs can disappear. Governments can change the rules. Companies can modify retirement plans. Therefore, one important element to include in your financial plan is the potential for “broken promises.”

 It is a prospect that is becoming more pertinent to private sector workers who are fortunate enough to still receive a pension.

Case in point: General Electric Co. Recently, GE announced that it was freezing pension benefits for 20,000 employees in hopes of stemming its $22.4 billion pension deficit, the largest of any American company. 

Another example, which hits close to home (having been founded by former Bell employees and our continued commitment to help AT&T employees retire), is the story of former AT&T pension plan participants who are suing the company claiming their benefits were wrongly reduced. Basically, the plaintiffs say how AT&T calculates Early Retirement and Joint and Survivor Annuity benefits is less than the actuarial equivalent of their vested accrued benefit, violating the Employee Retirement Income Security Act (ERISA).

What you can take away from these stories is that, if your employer offers a pension, you should create a contingency plan for the possibility that it may not be exactly what you expect by the time you retire. Making the right moves ahead of time will help you overcome any pension shortfalls later. Here are steps that can put you in stronger position to tackle any unexpected pension changes.

Get a pension estimate

Your pension will be one of your most important income sources in retirement. Running some pension estimates today can help you plan for tomorrow. You can see where you are now and what you may need to do — save more, work longer, etc. — to get to where you want to be. Further, you’ll get a good idea of how much you need from other income sources to fund your desired lifestyle, including in the event your pension turns out to be different than what you expect.

How do you get a pension estimate? Contact your pension plan’s administrator. Your administrator likely has a pension calculator tool located on its website that allows you to project different pension estimates at various dates in the future. Play around with different retirement dates and amounts from other income sources to help you explore a variety of retirement situations (what happens if you retire early, are laid off, work longer, save more, etc.).

Take full advantage of your 401(k)

The challenges of managing a pension plan have encouraged many companies to switch to defined-contribution plans, where all the responsibility of saving and investing rests on the shoulders of individual workers.

If your employer offers a 401(k) plan in addition to your pension, take time to understand it so you can take full advantage of its benefits. Even better, treat your account as if you don’t even have a pension.

A common rule of thumb is to save about 10-15% of your salary over the course of your career, which will allow you to replace the conventional 70-80% of your preretirement income. At the very least, save enough to receive the full employer match, if available. Over time, with the power of compounding, those matched dollars can grow to tens of thousands of dollars or more.

Navigating the various investment options and costs in a 401(k) plan isn’t always easy. Ideally, you want a low-cost mix of investments that align with your financial goals and risk tolerance. Because there is no cookie-cutter answer, most people find choosing investments a challenge. Instead of making important investment decisions on your own, consider working with a financial adviser. An adviser can review your 401(k) and help implement an investment strategy that is appropriate for your financial goals.

Ultimately, it’s too costly to invest blindly, and with the potential for changes to your pension, you don’t have much of a choice these days to not participate.

Consider an IRA

You are not limited to saving in an employer-sponsored account. An additional or alternative option is to save in an individual retirement account (IRA). With an IRA, you can potentially lower your investment costs and get direct financial help to manage it.

One significant downside is IRAs have lower annual contribution limits compared to employer-sponsored plans like 401(k)s. Still, any amount of extra retirement savings, money that is completely under your control, will help should you experience any surprises once you retire.

Claim Social Security when it’s right for you

The other guaranteed income source you can expect to rely on most in retirement is Social Security. A prevailing myth about Social Security is that everyone should wait to claim their benefit, as you can earn a credit of up to 8% per year until age 70.  

Despite the larger benefit though, it doesn’t make sense for everyone to delay. The appropriate age to file depends on personal factors, such as your assets, health and financial goals. And, if you’re married, there are a variety of claiming strategies that may make sense for your situation. The goal isn’t to just maximize your Social Security benefit but use it in a way that helps maximize your total retirement income.

The Bottom Line

With so many underfunded pensions, the risk of workers having to endure changes is real and growing. An underfunded pension and an aging workforce can push companies to take drastic measures. Do all you can today to prepare so you’re not caught off guard at a time – retirement – you can least afford them.