Pension Plans

If you’re a participant in a defined benefit pension plan, ask yourself two questions. First, what happens if your pension plan doesn’t pay as promised? Even if your employer seems committed to its pension plan today, much could change between now and when you retire—and perhaps even after you retire.

If you’re a public sector employee, maybe a fiscal crunch will force big budget cuts, including cuts to the pension plan. If you’re a private sector employee who works for a seemingly healthy company, maybe there are financial shenanigans you’re unaware of. Perhaps the company will get hit with a business-crippling lawsuit. Maybe your employer will get taken over in a leveraged buyout, the resulting debt proves too burdensome and the company ends up in bankruptcy.

If that happens, the plan may be bailed out by the Pension Benefit Guaranty Corporation. You can find out whether your plan is covered at PBGC.gov. If an insured private pension plan is terminated, the PBGC will pay benefits up to the guaranteed maximum, currently some $5,000 a month for workers who begin benefits at age 65.

Given all this uncertainty, it’s prudent to have other retirement savings. If the pension plan doesn’t come through, those additional savings could salvage your retirement. If the plan pays as promised, you will no doubt be happy to have the extra savings.

That brings us to the second question: What about inflation? Most pensions pay monthly benefits that aren’t indexed for inflation. That means the benefit you receive at age 65 could have substantially less purchasing power by the time you’re 80 or 85. To ensure your standard of living doesn’t suffer too much as you grow older, you might save part of each pension check during the early years of retirement—or, alternatively, take the precaution of building up a decent pool of savings during your working years.

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