The company pension plan that gave our parents and grandparents steady income during their sunset years is nearly dead. That’s according to recent press attention by The New York Times Sunday Magazine (10/30 and TIME (10/24).
Journalists reporting in these media blame weak public policy, bankruptcies by major corporations and accounting tricks that allow employers to underfund retiree obligations.
« Public policy reforms enacted in1974 — the Employee Retirement Income Security Act (ERISA) and the Pension Benefit Guaranty Corporation that insures against underfunded plans are meager solutions. The PBGC only pays a percentage of benefits if your company plan fails, » says Paul J. Mauro, CLU, ChFc.
Mauro, whose Legacy Financial Advisors (www.lfsadvisors.com) serves baby boomers and older clients, says: « Laws that protect retirees have been outpaced by longer life expectancy. This overtaxes Social Security, Medicare, Medicaid and the private pension system. Diseases that used to kill us now debilitate us. This means more costly long-term care for the elderly. Drug therapies that did not exist a few years ago for high cholesterol, high blood pressure and osteoporosis can cost $300-400 per month. »
Says, Mauro, based in Milford MA, « On the economic front, the loss of manufacturing jobs, weaker unions and a higher cost of living have contributed; allowing corporations to backpedal on pensions and retiree medical benefits in favor of a few more dollars in your paycheck. »
« Public servants; teachers, firemen, police, military and government employees, as well as unionized workers who have employer-sponsored Defined Benefit Plans that guarantee steady retirement income are a minority.
« The majority of workers retiring today are part of a failed experiment to shift the burden from employer to employee. Since the mid-70s Defined Contribution Plans, better known as 401(k) and IRA accounts, placed responsibility for retirement savings squarely on the shoulders of individuals, » notes Mauro adding, « Tax incentives and company matching funds have not encouraged Americans to save nearly enough for 10, 20 or even 30 years of retirement living. The average 401(k) has only $66,000 in it. »
Six Steps You Can Take
« Some baby boomers lucked out. Those owning homes in metropolitan areas have nest eggs that can be turned into income — if they stop using their home equity as a bank account. Others saved in dribs and drabs or religiously funded their IRA accounts when company pension plans were not available, » notes Mauro.
Mauro adds, « Federal pension policy reform is needed. But in the meantime, individuals can take steps to protect their retirement income. » Here’s how.
Consolidate. By age 50, most people wind up with CDs, several bank accounts, real estate, IRA accounts, mutual funds, you name it. « Get it all together so that you know what you have, » says Mauro.
Seek Professional Help. Work with an independent professional financial advisor who does not represent an insurance company or other financial institution with a bias toward single solutions or selling products.
Get legal protection. « Hire a lawyer with elder law and estate planning expertise, » says Mauro. Although Federal estate tax limits have been raised, couples need to protect assets from probate and extraordinary medical and nursing home costs. « Only a lawyer can do this properly. »
Don’t look back. « Don’t despair over not saving that $25 per week when you first married. Forty years ago mortgage payments were less than a $100 and you could finance a new car for $50. » Many in their 50s and 60s are at peak earnings with all their big expenses behind them. With a little discipline, you can build a $300,000 or larger nest egg during the next five or ten years. »
Protect Principal. « Transfer assets into principal protect mutual funds. These funds offer the growth potential of the stock market while guarantying return of all principal at the end of five or 10 years. The protection costs about one percent of growth per year. Earning 7% instead of 8% is better than having your nest egg lose a third or half of its value during a bear market. »
Annuities help. A partial solution endorsed by The New York Times Sunday Magazine article is for more corporations to invest a portion of their employee retirement obligations in annuities. Individuals can too. Annuities come in all shapes and sizes, but their main purpose is to guarantee income for the life of retirees and their spouses. Annuity income is taxed at a lower rate than, say, CDs and the principal can be tapped if needed.
Says Mauro; « Lots of retirees have assets that grow well, but do not pay out well. Having a portion of assets in annuities provides steady monthly income worry free. Money invested elsewhere can be drawn upon periodically for large purchases — including that luxury cruise. »
Paul J Mauro CLU ChFc is Managing Partner of Legacy Financial Advisors, Milford, MA.
Securities offered through Legacy Financial Services Member NASD/SIPC. He is an excellent, outspoken source who has appeared on several TV programs including …And Thou Shalt Honor, the PBS special on aging.
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