Guaranteed Income For Life? Maybe.

Todd's Tax Service LLC

Pensions:  What is the "Pension Reform Act of 2014"?  As reported in the Star Tribune on December 14, 2015, this new legislation allows certain financially stressed plans to cut benefits. The Teamsters (Central States Pension Fund) is running huge deficits and is paying out more in benefits than it can support. Employees and retirees counting on pensions for retirement should check with their plan to find out what kind of shape it is in. Most prepare an annual financial report that can tell you whether or not it is facing deficits.

What is a pension?  A pension is a guaranteed income in retirement - usually for life but may sometimes be elected for a "period certain" such as 20 years.

How do I get a pension?  Look for a career in the public sector (Police, Fire, Teacher, Postal Employee, Civil Service) or a union trade (Electrician, Carpenter, plumber, etc). Pensions are hard to come by in the private sector. And new workers will probably not get the same the same benefits available a generation ago.

Are all pensions adjusted for inflation over time?  No. About 1/2 of the plans provide a defined benefit upon retirement that does not increase annually to cover inflation.

I'm retiring and need help selecting the retirement options on my pension?  We'll talk you through some of the questions you may have but don't guarantee the outcome of what is ultimately your decision. Generally speaking, you should elect a "survivor option" if you have a living spouse so that if you die, your spouse will receive at least 1/2 of your pension.

How do I determine what portion of my pension will be taxable? Generally speaking, most if not all of the pension will be taxable income. If total income in retirement is within the "filing requirement", it is possible to draw a pension and pay very little or no tax on the income. We can assist you in filing form W-4P with your pension administrator to make sure enough tax is withheld.

I don't have a pension, how am I ever going to be able to retire?  This is the $64,000 question. Study the information contained in my financial services very carefully. About half of seniors in America live on social security alone, with no other income. Without some planning, you will end up in this category unless you win the lottery or have rich relatives that decide to give you money.

Should I take a lump sum instead of my pension? Again, no guarantees on the outcome of this decision which is ultimately up to you. Don't ask an investment salesperson to help you on this one!

Will social security be around for those of us without pensions?  Social Security isn't going away. I expect changes which might include increasing the retirement age (especially for younger workers) and "means testing" for those with significant assets and/or income and might not be as reliant on social security for retirement income.

The pension system provides retirement income security for millions of Americans. This is the way the system is supposed to work hard for 30+ years and get rewarded with a guaranteed income in retirement.

What can go wrong?  While one might assume "guaranteed pensions" are foolproof - nothing could be further from the truth. Corporate pension funds can be raided or get into trouble when the corporation files for bankruptcy. Public pension funds can become underfunded putting promised benefits at risk. In some cases, the Pension Benefit Guaranty Corporation may step up and provide a floor under a minimum level of benefits. It should be noted that the PBGC is running huge deficits and presumably funded by the federal government to meet those shortfalls. As long as folks are willing to lend money to Uncle Sam to continue to pay for things he hasn't saved up for, this funding of deficits is likely to continue. Bottom line: Nothing is 100% Guaranteed in life.

Local Pension Tragedies...

American Can filed bankruptcy. Workers who retired received about 1/3 of the benefits they had been promised throughout their careers.

Northwest Airlines filed bankruptcy. Pensions were reduced dramatically for pilots and other employees.

National Pension Tragedies...

Detroit is now in bankruptcy and looking to reduce pension payouts for existing and future retirees. The State of Illinois is also in serious financial trouble and likely to follow suit. California has several cities in trouble, including Stockton.

Lesson learned from the above tragedies is that pensions are only as good as the investments backing them and the entities funding them.

Strategies for retirees without pensions:

Obviously having a pension makes the retirement planning process much easier. Everyone else must rely on social security and personal savings in order to fund their retirement. The financial services industry likes to promote the "4% rule" which says that you can take a withdrawal equivalent to 4% of your portfolio's value annually. The problems with this strategy are several. First, 4% of your portfolio may not be enough to meet the gap between your household budget and the income from social security. Second, the assumption that you are going to live well into your 80's or 90's may or may not come to pass. This could result in having lived frugally during the early years of your retirement unnecessarily. 

My general advice to retirees who are planning their retirement is to be more aggressive during the first 10 years of retirement with regard to their withdrawal strategy. After all, you've worked hard your entire life and may now wish to do things you were unable to do during your working years. Yes, this stategy includes the very real possibility that you may deplete some of your capital. But if you are fortunate enough to live a long and healthy life into your 80's or beyond (as most financial planners assume for everyone), having to cut down spending or downsize later in life isn't the end of the world.

Which option should you select when you retire and draw your pension?

The latest "scam" is to try to convince you to take the "Single Life" option and buy life insurance to protect your spouse in case you pre-decease your spouse (and the pension ends). There are several pitfalls with this recommendation... First, you have to successfully apply for and obtain adequate life insurance in order to do this. Second, you have to pay for the life insurance. Third, your spouse must be a very astute money manager since he or she could potentialy receive a large payout upon your death and have to manage that money in such a fashion that it lasts for his or her lifetime. All of these are significant obstacles connected with the larger single life payout option.

I recommend that you select a payout option that provides your spouse with at least 50% of your monthly benefit. This option is designed to protect your spouse and provide a guaranteed income for life.

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