When it comes to preparing for retirement, headlines about underfunded pensions can be troubling. One study found that 21 state pensions held less than 40 percent of the assets needed to pay benefits. To make up for that shortfall, each taxpayer would have to contribute an extra $1,385 per year.1
While not every worker in America is fortunate enough to have an employer-sponsored pension, it appears that even some who do may still have reason for concern. If you’re contemplating other options that could help you save for retirement in the event that your pension is underfunded, it may help to meet with a financial professional. We can discuss your individual situation and recommend insurance products to help create an additional retirement income stream.
One of the issues associated with traditional pensions is the lack of portable benefits for many public workers. In some instances, when teachers move to new states, previous years of service don’t automatically rollover and pension benefits stop growing.2 The same holds true for many police officers and firefighters.3
However, not all news on the pension front is negative. Many public pensions have become more flexible in allowing workers to retain their pension benefits even if they switch jobs.4 In addition, a new report from the National Institute on Retirement Security revealed that most public retirement systems that offer defined benefit pensions are on track to provide modest, but stable and lasting retirement income, for their workers.5
In fact, the study found that these plans are highly cost-efficient compared to individual defined contribution accounts.6 Better yet, with so much instability in layoffs, turnover and lack of 401(k) participation among private sector employers, some job seekers are returning to old-fashioned values of job security and financial stability. Public employers are able to recruit and retain well-qualified candidates who value retirement benefits over higher pay.7
By contrast, the median retirement balance held in private-sector 401(k)s is only $2,500 for all working-age households; $14,500 for those approaching retirement.8 And while the issue of portability is something many 401(k) plan sponsors tout as an advantage to help employees build a retirement nest egg throughout their careers, in reality, many employees cash out and spend their 401(k) savings when they leave one job for another.9 Individuals are encouraged to consult with a qualified professional before making any decisions about cashing out their 401(k) savings.
1 Mark J. Warshawsky and Ross A. Marchand. Forbes. Aug. 17, 2016. “A Proposal for Allowing State Pension Buyouts.” http://www.forbes.com/sites/pensionresearchcouncil/2016/08/17/a-proposal-for-allowing-state-pension-buyouts/#66d7c6e57965. Accessed Aug. 19, 2016.
2 Leslie Kan. Education Next. June 24, 2016. “Why Teachers Need Portable Benefits.” http://educationnext.org/why-teachers-need-portable-benefits/. Accessed Aug. 19, 2016.
3 Pennsylvania Municipal League. March 14, 2016. “Why Pension Portability is Important for PA Public Safety Personnel.” http://fixthenumbers.com/municipal-pension-reform/why-pension-portability-is-important-for-pa-public-safety-personnel/. Accessed Aug. 19, 2016.
4 Alicia Munnell. ThinkAdvisor. Aug. 12, 2016. “Pension Benefits May Be More Portable Than You Think: Retirement Think Tank.” http://www.thinkadvisor.com/2016/07/12/pension-benefits-may-be-more-portable-than-you-thi. Accessed Aug. 19, 2016.
6 William Fornia and Nari Rhee. December 2014. “Still a Better Bang for the Buck: Update on the Economic Efficiencies of Pensions.” http://www.nirsonline.org/index.php?option=com_content&task=view&id=871&Itemid=48. Accessed Sept. 1, 2016.
7 Alicia Munnell. ThinkAdvisor. Aug. 12, 2016. “Pension Benefits May Be More Portable Than You Think: Retirement Think Tank.” http://www.thinkadvisor.com/2016/07/12/pension-benefits-may-be-more-portable-than-you-thi. Accessed Aug. 19, 2016.
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