Steady, Reliable Income…Maybe, Maybe Not

Whew—what a week with the snow and the rain and the sun, but the daffodils are popping outside my office window and that seems to make all right with the world.

With spring job and career changes (real or planned for), the topic of pensions has come up on a number of occasions so today we’re going to look at those old-fashioned income streams from several angles.

Before you move on to the next blog post, thinking “I don’t have a pension, why should I care,” let me say two things that should catch your attention: Taxes and Social Security. Whether you realize it or not, everyone not only has a pension, which we call Social Security, but also pays a pretty penny to support other people’s more traditional pensions.

By one estimate, New York State pensions cost state taxpayers more than $7 billion dollars per year, a rate that will increase exponentially as a huge number of workers reach their magic number (as early as age 55). For an illustrative example, consider the 55-year-old who retired downstate and receives a pension of more than $450,000 every year (we know this because it was part of a lawsuit). Assuming a 30-year retirement, that one pension will cost you and me more than $13 million dollars including inflation. And we’re one of the healthier states when it comes to pension funding. Pity poor Kentucky and not just for the fact that their pension support is less than 60% of what it needs to be— perhaps good ‘ole Mitch can filibuster for some additional funds.

Now, maybe you will be entitled to a pension and you are wondering what to do, either now or in the future. Right off the bat, we need to break things down between a government-funded pension and a private pension. A government-funded pension (teachers, firefighters, government workers) has some security in that the benefits are backed by the taxing ability of the state or federal government, and since these sources don’t (usually) allow a lump-sum distribution, the decisions focus more on meeting the magic number, deciding what exit date makes sense with your overall retirement planning, and how to take the pension (with or without a survivor benefit, with or without a pop-up benefit, and what percentage of benefit to lock in—all irrevocable decisions so not something to take lightly). Quite a number of these pensions are built on union contracts so there is also some security in that—impenetrable, absolutely not—but those contracts certainly make changing the benefits in the future more complicated.

Private pensions, on the other hand, are more difficult to evaluate. How strong is the company supporting the pension? Even deeper, how strong is the industry that the company swims in? If you are leaving a position in your 50s, will that company be around 35 years from now when you are still kicking back on the porch watching for the deposit to hit your account? For perspective, have a little chat with a Kodaker sometime about broken promises. Put another way, in the event of a merger, if the company you worked for is the dominant player, your pension is probably safe. Whereas if your company is the little fish, that pension could be altered/bought out/eliminated. Put all that aside, what’s another big difference? With a private pension, you can take a lump-sum distribution and roll it into an IRA which adds another decision layer—can you look in the mirror and honestly say that you’ll be diligent enough to make those dollars last for your lifetime and, if necessary, your spouse’s?

What if you’re not sure if you have a pension from some old job you had eons ago. That’s not so far-fetched an idea when you consider that as many as 30% of all pension accounts are lost, particularly in this age of mobility and more frequent job changes. Take a walk down memory lane and write down every job you’ve ever had then evaluate whether or not there might have been a pension available. Eliminate the jobs where you didn’t stay at least five years or were with smaller companies. If that leaves you with even one or two possible options, consider taking a moment to send them a letter to inquire about your options (if you are going to email something, snail mail as well). If that company isn’t around any longer, you could also contact the Labor Department and/or Pension Benefit Guaranty Corp which both provide free help to people searching for missing benefits.

As you think about your future, make sure you understand what you are owed, what options you have for the dollars, and how comfortable you are with your level of risk depending on your choice.