Why Pension Plans May Not be a Slam Dunk

When you build a globally diversified portfolio you will realize inflation adjusted income throughout retirement. Unlike with many pension plans that are not inflation adjusted. The drawback is you must live with the volatility, however with a prudent process you will do this without anxiety. During retirement inflation may be your greatest risk, not stock market volatility.

USAftertaxIncomeShareByIncomeLevel
USAftertaxIncomeShareByIncomeLevel (Photo credit: Wikipedia)

Benefits can change midway through your career. One of the main advantages of a pension plan is that the income is guaranteed. Thus, you may be able to spend more than you could have otherwise because of how dependable the monthly checks will be. But as we’ve seen in recent years, benefits are being reduced with plan reforms. If you have been counting on guaranteed monthly payments and saved less through the years because of it, you’ll be affected even if the benefits are reduced slightly.Your pension could be eliminated if the employer files for bankruptcy. Private pension plans are protected by the Pension Benefit Guaranty Corporation (PBGC), so most employees will end up getting something even if an employer declares bankruptcy. But at that point, anything is possible because negotiations within the bankruptcy court could change benefits. Monthly benefits may be cut, or the accrual method may significantly change. Everything is on the table. The worst part is that you won’t know the outcome while everything is being resolved, which could takes months, if not years.

Benefits usually don’t extend beyond your lifetime. And even if they do, the income will only last through your spouse’s lifetime. This means that none of your heirs will be able to count on that income. The guaranteed income for life is a double-edged sword. On one hand, you won’t run out of income during your lifetime. But if you have enough money to sustain your lifestyle to begin with, you might want to invest on your own in hopes of leaving a bigger payout for your children.

Given the recent volatility in the equity markets many investors are looking for guarantees such as pension plans. Guarantees come with drawbacks as do all strategies. If you have a prudently designed portfolio you can effectively deal with any volatility with less anxiety.

Please comment or call to discuss how this affects you and your financial future.

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