Betty, one of our retiree clients, must make a pension decision soon—and she does not want any retirement income stress! She could do nothing, leave it in a fixed account with a guaranteed lifetime income, or move it tax-free to her IRA. She is confused on what is best for her future.
A pension is a pre-tax retirement program completely invested and controlled by the employer, typically a large employer. The employer pays out a fixed distribution to the retiree, according to an actuarial calculation. When there are problems, the Pension Benefit Guaranty Corp (PBGC), a government agency that insures private sector pensions but is currently underfunded by about $22 billion, could take control of the pension. When this happens, many retirees do not receive their previously promised pension income as the PBGC payouts are capped.
History teaches us lessons! How do you think the employees of the large companies with failed pensions felt when they received reduced distributions or completely lost their pensions: United Airlines, Delphi, Kaiser Aluminum, Bethlehem Steel, US Airways, Delta Air Lines, Pan American Air, and Enron?
To help you decide what to do about your pension options, review the rules of investing. The first rule is to determine if you want your money to get market returns and stay ahead of inflation, so you will have growth potential and be more likely able to maintain your current lifestyle in future years.
Start by determining your retirement lifestyle needs. Divide your anticipated retirement cost of living by .04 percent, to find out how much money you need invested to cover your lifestyle with a 4 percent income ($50,000 divided by .04 = $1.25 Million). We suggest your first $2 million be kept liquid in the globally diversified stock market. No front or back loads, no commissions, no trails, no penalties, and always 100 percent liquid!
How will your employer invest your pension if you do not elect to withdraw it and move it to an IRA? We have many retired clients who worked for the automotive industry, and their pension will be invested into three tiers of corporate bonds. That means they will receive a 100 percent fixed income based on bonds that do not earn more than 4.58 percent interest. There is absolutely no way fixed incomes could stay ahead of inflation without any growth potential! Are you OK with adjusting your lifestyle each year, with fewer groceries, traveling less, and giving less?
The second rule of investing is to be consistently globally diversified, through all of the ups and downs of the market. As mentioned in an earlier article, research by Brinson, Singer, and Beebower has proven that more than 91.5 percent of investment returns come from prudent diversification. Corporate bonds are only one asset class, one level of risk, out of twenty-two different asset classes. Pension investors who are only invested in corporate bonds will be missing all the U.S. and international large and small plus growth and value companies’ stock. Are you OK with higher risks that come from having no diversification?
The third rule of investing is to rebalance your portfolio quarterly, to maintain your portfolio’s asset class correlation and desired asset class targets. Are you OK with having no opportunity for rebalancing, as investing in just corporate bonds has no growth potential?
If you would like a historical Income Report, showing how investing a lump sum in the globally free market over the last thirty-seven years would have kept up with inflation and increased your income, please contact your Free Market Coach or complete the Income Report Request Form on our website.
Doing nothing and retaining your pension, by maintaining the “nanny state of being taken care of by another,” will have long-term negative consequences for your retirement lifestyle. Accepting the risks of potential failed pensions, lack of diversification, no control, and not moving it to a Free Market IRA means you also will have no pension beneficiaries after your surviving spouse is deceased.
You have freedom of choice. Make sure you make the right educated choice for your retirement and your heirs. Check out a list of Pension Withdrawal Questions on our website to help you decide.
Written by: Maria J. Wordhouse Kuitula and Phyllis J. Veltman Wordhouse, Free Market Wealth & Stewardship Coaches, co-authored the book, Stress-Free Investing, available at Amazon.com. Maria is the President of Wordhouse Wealth Coaching and can be reached at 616-460-6518 or at [email protected]. For QUESTION LISTS and INVESTOR EDUCATION VIDEOS, go to http://wordhousewealthcoaching.com/. © Wordhouse Kuitula 2013 Photo: stock.xchng