The Retirement Income Pyramid; pensions, the next level.


Income pyramid - png - v5

Our first look at the retirement income pyramid talked about Social Security.  Today, we will review pensions. Pensions are still toward the stable base, but in a lighter green showing a little more risk than Social Security, but still pretty safe from surprises, right?  Yes and no:

-Pensions from businesses are protected by regulations from the US Department of Labor which push the firms toward making the pension secure and funded.

-If your firm fails, the US Government has the Pension Benefit Guaranty Corporation (PBGC) to step in and make some or all of your guaranteed payments to you.

-Some pensions may be inflation protected with potential for an annual cost of living adjustment (COLA).

-Some pensions from governments, school districts, and religiously affiliated employers are not covered by DOL regulations or the PBGC. Even though your employer promises to pay, you may be more at risk with one of these. A potential bad surprise.

-Most pensions are not inflation protected.

Buyouts! Lump sum cash!

You may receive an offer from your employer to buy you out of the lifetime payments they promised with a lump sum (perhaps quite large) of cash. These have the potential to be a good deal or a bad surprise, depending on many factors.

The first thing to remember is that if you take the lump sum, you won’t have the guaranteed monthly payments coming in, unless you figure out how to use the lump sum to do that.  A bad surprise is when you feel rich, use some or all of the lump sum to buy the Corvette, and later have a bad retirement surprise when your monthly income does not meet your expenses.

There is a potential, repeat – potential, upside.  You may be able to invest or place the funds such that they will provide a lifetime monthly income that is larger than your employer promised.

How you can prepare if you receive a lump sum offer.

-Learn about immediate income annuities (give an insurance firm a premium, and they pay you an income for as long as you live.  Or longer, with a ‘period certain’ income annuity.  My opinion is that these are not as good right now because of the low interest rate environment, but as always, your particular situation is a key to these being appropriate for you or not.

-Learn about annuities with guaranteed lifetime income benefits which pay you an income for as long as you live, even after your funds hit zero.  If there happen to be funds left, your beneficiaries will receive them. My opinion is that these have a better potential for increasing income that could help offset inflation, but as always, your particular situation is a key to these being appropriate for you or not.

Recommendations if you get a lump sum buyout offer:
-Get professional advice from a trusted financial advisor.
-Get a second opinion from a different trusted financial advisor.
-Spend time learning as much as you need to be able to make an informed decision that fits your needs and situation.

Look for the next update on Friday, August 11 at 12:30 PM.

Actions you can take:

-Learn about immediate annuities at CNN Money
-Learn how to check how well your employer’s pension plan is funded at
-Learn about PBGC pension ‘insurance’ at PBGC

Questions, comments, or suggestions for retirement surprise areas you want to know more about?

-Leave a comment
-Use ‘Contact’, above, to send an email.


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