Do you know what your income will be in retirement? Having a good estimate of your retirement income is needed to help you set goals for saving and knowing when you can quit your day job. A pension can be a big part of that formula. Financial professionals Joe Anderson and Alan Clopine discuss how to determine if you can reliably count on your pension plan.


Joe: You know Al people talk about Social Security not being there but sometimes if I have a pension that not might be there as well.

Alan: Well that’s right Joe, and you look you can look at state governments there about 70% funded meaning if you take all the states together about 70% of them have – or 70% of the funding needed is there 30% is not but then certain states are in better shape than others.

Joe: Yeah if we take a look at the worst states from a state pension. Kentucky, New Jersey, good state of Illinois. Right. They’re barely funding their state pensions. So if you live in any of these states, I would be extremely concerned. But you look at the best state good state of Wisconsin. 99% funded. But who wants to live in Wisconsin, I’m kidding, right. I’m from Minnesota. South Dakota, that’s another great place to live, 97% funded. You can freeze all winter long but just know that pensions going to be safe. And then the good state of Tennessee, 94%. So you have to look if you work for a state or municipality or a normal corporation that has a defined benefit plan. Sometimes we get a little complacent in thinking that those dollars are going to be there and Al, this just kind of proves it might not.

Alan: And so states are one thing municipalities are another thing. So if you look at municipalities, so there was a recent study 237 of the larger municipalities, and they found out that what was it- that 29% received an F grade and their definition of an F grade was 35% funding level or less. And so we’ve got a couple cities, Joe. like Chicago and New York City that really are pretty low.

Joe: Yeah, very low, Chicago is one of the worst.

Alan: Yeah and has been for years.

Joe: Absolutely. So again the point is is that if you have this defined benefit plan if you have a pension plan you know, you can’t necessarily always bank on it. So if you want to look yet right, there’s your Chicago New York cities the worst. But if I look here OK how about your corporation. So first let’s define what a defined benefit plan is. Because the 401(k) plan is 40 years old, right. Happy Birthday 401(k). So, a lot of people might not even know what a defined benefit plan or pension plan is. What is a standard retirement used to be?

Alan: Yeah because Joe, there’s less and less of those around and so defined benefit plan is simply a future benefit defined based upon a whole number of things like how many years you worked in the plan, what age you are when you retire, how much money you made. And so you have these plans that basically said you get X number of dollars as a monthly benefit. Well if these plans are underfunded, guess what? You may not get that full benefit, and that’s the problem.

Joe: Right. If you look at the 200 largest corporations that have these defined benefit plans or have these standard pension type plans. 186 of them are underfunded. So the point again here folks, is that if you have this defined benefit plan, you worked for a corporation for 30, 40 years you feel secure about that overall retirement because you have this pension plan. Well, you might want to think again a lot of these are freezing these defined benefit plans. They’re not offering them. They’re changing them. Some of the worst corporations right now we look at what Intel, Delta, I mean the list goes on and on Al. All these corporations that had these big pension plans it was a huge benefit for employees to stick around to give you know a 30 40 year career to that overall organization. But it’s just not the case anymore.

Alan: And so then if you have a pension plan. Well first of all great, because a lot of you don’t, but if you do have a pension plan try to get educated on how this how the pension plan is doing. So talk to your plan administrator, find out how funded it is, and what you’re looking for, what you’re hoping for is at least 80 percent funded. If it’s something less than that you may be receiving lesser benefits in the future. So you just got to be prepared for that. Also, check and see if your plan is insured and that’s another way to know…

Joe: Right, there’s something that’s called the PBGC. The Pension Benefit Guaranty Corp. all private companies that issue a defined benefit plan have to put money in the PBGC, but just wait a minute here the PBGC is broke too, right. Because what’s happening is that we’re living a heck of a lot longer. The actuarial tables were messed up. They were anticipating a lot higher growth rate on the overall funds within these pension plans. But if we remember 2000 through 2002 right the dot com bust and we had the worst recession since the Great Depression. So we had a 10 year time period where the U.S. markets was negative, right. So now some of these pension plans are coming back. But Al, if we did this show 10 years ago, I mean these numbers would have been significantly worse.

Alan: They were quite a bit lower. So, if you do find that you’re in a pension plan that really isn’t safe, unfortunately, you’re going to have to do more of this yourself. So anticipate perhaps some reduced benefits, you’re going to probably to save more, you may have to work a little bit longer. That’s the unfortunate reality, Joe when you’re in a pension plan this way underfunded.

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