There was time when a pension was a guarantee of lifetime income for retirees. This is not the case anymore because many pension plans come with serious limitations. Others could be collapse and end up being administered by the federal government. Therefore you should carefully analyze and evaluate any pension plan that you are relying upon for income.
Determine what kind of plan it is
The first step you need to take is to determine what kind of plan it is. There are many different kinds of pension arrangements out there and they come with very different risks.
A traditional pension or defined benefit plan pays you a predetermined amount of money every month. These plans provide a steady stream of income but they can be very vulnerable to inflation. If there is no Cost of Living Adjustment or COLA associated with the plan inflation could destroy its buying power.
A deferred benefit plan such as a 401K pays money into an account which is used to purchase investments on behalf of the plan’s members. In the case of that plan you will have to determine what the investments are, how risky they are and how much money they are earning. You should also ask what sort of administrative fees the fund managers are charging. You can learn all of this information by reading the investment prospectus. The plan manager is required to give you a copy of this document by law.
Determine the Reliability of the Pension Plan
In the past twenty years some very big corporate pension plans have been ended or placed in receivership. In such cases the retirees will only receive a percentage of their benefits. To make matters worse, there have been allegations that some public sector pensions are under-funded and incapable of paying out all the benefits promised.
If you have a private pension plan it will be taken over by a federal agency called the Pension Benefit Guaranty Corporation or PBGC if the company that issues it goes out of business. This agency will continue making payments but often at a lower rate. You can check to see if the PBGC has taken over a pension plan by checking its website.
Public sector pensions can be evaluated by checking with the plan’s manager. They are public agencies that will have to provide members with a prospectus. Reading this should show you if the funds available will cover future liabilities. You should also monitor your local news media because it often reports on problems with public sector pension plans.
Have another Source of Retirement Income Available
The best piece of advice is to have another source of reliable retirement income available as a backup for your pension and Social Security. There are a number of investment vehicles designed to provide retirees with a steady source of income.
Persons who are still working can place part of their income in a deferred annuity. This will start giving you a regular payment when you retire and it is tax deferred. A person who is approaching retirement age or is retired and has a large amount of cash available can purchase a life annuity or a single premium immediate (SPIA) annuity. This vehicle can provide a person with a regular payment for the rest of his or her life. That way a person or couple relying on a pension can ensure financial security.