Pension vs. 401(k)

Given a choice, which would you choose: a guaranteed fixed income for the rest of your life, or a lump sum that you could invest? As it turns out, lots of people prefer a sure thing.

 

This is what a recent survey showed about public sector employees posed with the option to select a defined benefit pension plan or a 401(k)-type defined contribution individual account. In fact, even when the defined contribution plan was the default option and workers had to proactively choose the defined benefit pension plan, they made the effort. In the eight states studied that offered a choice between the two options, all had employees choosing pensions at rates of 75 percent or higher in 2015.

 

If there’s one thing this survey can tell us, it’s that people are paying attention. Most people don’t have unrealistic expectations about stock market outperformance, “getting rich” and retiring early. Many people remember what the recession was like and want to be better prepared should it happen again – particularly during retirement.

 

A MetLife survey recently revealed that 21 percent of retirement plan participants who opted to receive their pension or 401(k) assets as a lump sum depleted that money, on average, in less than six years. Among those given only the option of a 401(k), who took a lump sum, their money ran out in an average of four years.

 

Employer-sponsored pensions aren’t that common anymore, but you don’t necessarily need one. It’s possible to reposition a portion of the assets from a retirement plan and create your own guaranteed income stream with an annuity; the guarantee is backed by the financial strength of the issuing insurance company. We can help you determine if an annuity is right for you. Please contact us to schedule a consultation.

 

Even employees who have a pension plan may not get the retirement income promised because many pensions are now underfunded. This is particularly true of private, multi-employer pension funds. These are funds typically created by labor unions and cover industries where people often work for multiple employers in a year, such as trucking or construction.

 

Many of these funds have had difficulty recovering losses since the recession because the employees also work in declining industries such as manufacturing. When pension plans don’t have enough money to pay out the income they’ve promised, sometimes they go bankrupt or pay reduced amounts. To give you an idea of how many private multi-employer pension plans are currently underfunded, according to one report, it would take $76 billion to shore up the ones on the brink of insolvency.

 

Single-employer pension plans appear to be in better shape. Their maximum pension guarantee from the government’s Pension Benefit Guaranty Corporation, should their plan fail, is $65,045 a year versus a multi-employer plan guarantee of $12,870 a year for union plan workers with 30 years of service.

 

Though many employees may still prefer a pension over a self-directed 401(k) investment plan, today’s pensions are not as generous as they were in the past. Many involve higher retirement and benefit-vesting ages, longer work periods to qualify, lower payout percentages and smaller inflation adjustments once payouts begin.



Ray Lantz

Raymond C. Lantz, Jr. is the president and founder of USA Wealth Group, Inc. Ray has many years of experience advising clients in retirement and sophisticated tax planning strategies, multi-family and commercial real estate projects, and legacy planning. Ray is a graduate of Clark University, holds a law degree from Boston College, and a master of laws in taxation from Boston University. You can hear him every Sunday on Money Wise with Ray Lantz on WBSM 1420AM or on the Radio Pup app. 


Interested in reading more?  Here are some articles that may be of interest to you:  

Public Employees Choose Pensions

The Retirement Choice Causing Some To Run Out Of Money

What happens when your pension fund runs out of money

Some Union Retirees Could See Pension Benefits Cut 90%, PBGC Chief Warns

Pension cuts getting steeper for state and local governments

 

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We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

 

                                                         

Savings and Investment Updates

The American College of Financial Services recently posted some surprising results from its Retirement Income Literacy Quiz. Nearly three-quarters of respondents ages 60 to 75 failed the test with a score of 60 percent or less.

The quiz included topics such as which expenses are covered by Medicare and long-term care insurance and what age people should start drawing benefits from Social Security. If you’re not familiar with the answers to questions such as these, we invite you to schedule a consultation so we can help you delve into retirement planning. There are many factors to consider beyond where to invest and how much you’re saved. Retirement is about preserving and distributing assets, as well as understanding the impact of longevity.

Let’s take a look at some other retirement-oriented questions that are important to answer. For example, do you know how long you have to work for your company before you can keep matched contributions to your 401(k) plan? Some companies that sponsor a 401(k) require employees to work around two to three years before employer-matching contributions are vested. If you leave the company before then, those matches won’t be added to your account balance – even if you maintain the plan with that employer after you go to work for another one.

It’s worth noting that 401(k) and other employer-sponsored retirement plans may be considered for tax reform. Recent discussions have included eliminating the tax-deferred status of retirement plan contributions, which represent a four-year tab of $583.6 billion that Congress could spend elsewhere. The discussions are in the very early stages, but things can happen quickly in Washington these days, so it’s an issue worth watching.

For those in the military, on Jan. 1, 2018, the military’s new Blended Retirement System goes into effect. Starting that day, all military personnel whose length of service spans one to 12 years will have one year to make an irrevocable choice between the old and new retirement plans. Service members who started before 2006 will automatically remain in the old plan, which offers a generous pension complete with inflation adjustments. However, anyone joining the military starting next year gets enrolled automatically in the new program, which combines reduced pension benefits with up to a 5 percent match of personal contributions to the government’s Thrift Savings Plan (TSP).

If you haven’t saved enough money to retire yet, you may be thinking you’ll just keep working until you have enough. However, according to a recent survey of 1,002 retirees, 60 percent said the timing of their retirement was unexpected, citing reasons such as health issues, job loss, or the need to care for a loved one. While working longer is a worthy goal, it’s good to develop a financial plan that helps provide for possible contingencies just in case you have to pivot to “Plan B.”

Content prepared by Kara Stefan Communications.

Interested in reading more? Here are some articles that may be of interest to you:

CLICK HERE TO READ THE ARTICLE "Most Seniors Flunked a New Retirement Quiz. Could You Do Better?” 

CLICK HERE TO READ THE ARTICLE "How Long Does It Take to Vest in a 401(k) Plan?” 

CLICK HERE TO READ THE ARTICLE "What Is Washington Doing to My 401(k) Tax Break?"

CLICK HERE TO READ THE ARTICLE "What U.S. Military Need to Know About Their New Retirement Plan."

CLICK HERE TO READ THE ARTICLE "60% of Americans Have to Retire Sooner Than They’d Planned."

Raymond C. Lantz, Jr. is the president and founder of USA Wealth Group, Inc. Ray has many years of experience advising clients in retirement and sophisticated tax planning strategies, multi-family and commercial real estate projects, and legacy planning. Ray is a graduate of Clark University, holds a law degree from Boston College, and a master of laws in taxation from Boston University. You can hear him every Sunday on Money Wise with Ray Lantz on WBSM 1420AM or on the Radio Pup app. 

The Old School Stool

The proverbial “three-legged stool” of retirement funding traditionally comprised Social Security, a company pension and personal savings, but that stool has been wobbly for quite some time. In fact, the traditional pension has been replaced largely by employer-sponsored 401(k) plans. This development firmly places the responsibility of two of the three stool legs on individual savings.

In addition, this old-school stool has not kept up with one of the greatest achievements of the last 50 years: longer life expectancy. The Social Security program hasn’t kept up; current estimates project funding will be able to pay full benefits only until 2035 Presently, there are various solutions proposed for shoring up funding for Social Security, including eliminating the income tax limit ($127,200 in 2017) and increasing the full retirement age to 69

Pensions are experiencing challenges as well. Despite the efforts of the Pension Protection Act (PPA) passed in 2006, this leg of the stool is still on uneven ground and the funding relief it does provide is scheduled to end in 2020 According to one recent report, state and local pension funds in the U.S. are facing a $1.5 trillion shortfall in worker benefits.

Company-sponsored retirement plans and individual savings haven’t exactly covered the gap vacated by pensions, either. A recent survey found that only 69 percent of workers expect to receive retirement income from 401(k)s, 403(b)s and IRAs. In fact, only 16 percent of workers strongly agree that they are building a retirement “nest egg” substantial enough to support their retirement needs, and 45 percent of baby boomers expect a decrease in their standard of living when they retire.

The outlook may appear dismal, but remember that these are national numbers. What’s most important are your own numbers, including your personal savings rate, the growth potential of your investment portfolio and other retirement assets, and your ability to work longer to help save more and increase your Social Security benefits. We’re happy to sit down with you to review your current financial situation and help create strategies utilizing a variety of investment and insurance products that can help you work toward your financial goals.

Many of today’s retirement experts recommend what’s now considered the “fourth leg” of that retirement stool: continued employment. For those who can, work offers the opportunity to earn more, save more and allow retirement assets to potentially grow more. Unfortunately, this fourth leg may be more difficult for people who work in physically demanding jobs, as health issues and demands on an older body can impede continuing their trade.

In fact, one research group estimates that 54 percent of lower-educated Americans are more likely to face an income gap even if they retire when planned, compared to 36 percent of the highest-educated group.

Content prepared by Kara Stefan Communications

CLICK HERE TO READ THE ARTICLE  “Summary: Actuarial Status of the Social Security Trust Funds, June 2016.”

CLICK HERE TO READ THE ARTICLE  “Who Is Finished Paying Their 2017 Social Security Taxes? Probably Not You.” 

CLICK HERE TO READ THE ARTICLE  “Republican looks to overhaul Social Security.” 

CLICK HERE TO READ THE ARTICLE  “What Happens When DB Funding Relief Goes Away?” 

CLICK HERE TO READ THE ARTICLE  “The Pension Gap Epidemic.” 

CLICK HERE TO READ THE ARTICLE “Storm clouds are gathering for a blowout that will affect millions of Americans’ retirements.” 

CLICK HERE TO READ THE ARTICLE Center for Retirement Research at Boston College. Dec. 13, 2016. “Retirement Isn’t Always Fair.” 

CLICK HERE TO 

We are an independent firm helping individuals create retirement strategies using a variety of Raymond C. Lantz, Jr. is the president and founder of USA Wealth Group, Inc. Ray has many years of experience advising clients in retirement and sophisticated tax planning strategies, multi-family and commercial real estate projects, and legacy planning. Ray is a graduate of Clark University, holds a law degree from Boston College, and a master of laws in taxation from Boston University. You can hear him every Sunday on Money Wise with Ray Lantz on WBSM 1420AM or on the Radio Pup app.