No Guarantees for Retirees

I recently read an article that suggested Social Security benefits, company pensions, and insurance annuity contracts provided a dependable, even guaranteed, income for retirees.  I beg to differ. Risks and uncertainties exists that can quickly derail that confidence.

In today’s economic environment, there are very few guarantees. It would be unwise to enter your retirement years with the assumption that income from any source that you do not control will always be available to provide for your financial security.

Social Security

The concern that our Social Security system is headed for real financial difficulties is no secret.  The Social Security Administration itself publishes the fact that in four years, by 2016, it will pay more in benefits than it collects in taxes. It also predicts that the Trust Fund will be exhausted by 2036 and at that time the administration will only be able to pay 77 cents for each dollar of scheduled benefits, unless changes are made.  I don’t call this much of a guaranteed income source. 

Changes must be made and many suggestions have been bantered about. Increasing retirement age, reducing benefits based on other income, and increasing the amount that is taxed have all been considered.  Nothing has been resolved.  While it is very probable that Social Security will continue to provide some level of benefit, you should assess the impact of either a reduction or loss of this income as you plan for your retirement.

Company Pensions

At one time, if a worker qualified for the company pension, it was considered golden.  A long-term employee may even expect to receive 60% or so of his/her annual income.  However, over the last couple of decades, we have seen this retirement safety net vanish. Many companies have come to the conclusion that they cannot assume the financial liability of providing a lifetime pension due to retirees living longer and the uncertain economic times that befall a company. 

Should an active employee, or retiree who is already receiving a monthly pension, be concerned?  Yes.  If a company declares bankruptcy, the retiree pension program is generally taken over by the Pension Benefit Guarantee Corporation (www.pbgc.gov), a U.S. government agency.  Even though this may seem reassuring, the problem is the PBGC benefit payment will likely be less than the expected company pension payment.   

Upon retirement, some traditional pension plan recipients may have a choice of receiving a monthly pension for life or taking an immediate cash lump sum.  (The lump sum can be rolled into an IRA to preserve its tax benefits.)  Given the concern of companies being able to meet their pension obligations for the lifetime of the retiree, the lump sum pension becomes a very appealing option.  If you are about to retire and you sense the company may have significant financial issues now or in the future, you may be better off taking a lump sum.  Once you have your retirement funds in hand, your wellbeing is no longer dependent on the company.  The old adage suggesting a “bird in hand is better than two in the bush” comes to mind.

Insurance Annuity Contracts

When you purchase an annuity from an insurance company, you are agreeing to receive monthly payments starting now, or at some point in the future, in return for the premiums you pay. Just like the company pension, this promise to pay is only good if the insurance company can remain financially viable.  When an insurance company becomes troubled, another company may take over these policies.  However, the new company may have the ability to renegotiate the terms, which would likely mean a lower payment.

Since the purpose of an annuity contract is to provide a dependable cash flow during retirement, it is important that you thoroughly investigate the financial situation of the insurance company.  Don’t rely only on the industry ratings. During the financial meltdown in 2008-09, these ratings did not provide an accurate picture.

Saving for Retirement

As you plan for your retirement, the only aspect that you can control is the amount that you personally save.  When determining this amount, keep in mind the uncertainties around the other sources of income that are available to you.  Estimating lower income from these sources than you actually anticipate will increase your required savings, but may prevent the need to make significant spending adjustments during your retirement years. 

No Guarantees with Investing

Unfortunately, there are no guarantees that the money you save for retirement will achieve the investment results that you need to secure your retirement.  However, with this situation, you are in control.  Whether you make your own investment decisions or you work with a professional financial advisor, you should always be aware of your situation and able to make adjustments to the portfolio.

Summary

A financially successful retirement does not happen on its own.  You must plan. You must understand the sources of income available to you and the potential for that income to be either eliminated or reduced.  If you can quantify your risks, you can implement a strategy to mitigate the impact.