Barriers to Retirement 1: Insufficient Pensions

This begins a 6-part series outlining the barriers that may prevent many from retiring

You probably harbor a dream of retiring in your 60s. Your retirement will rely on a combination of 5 pillars: 1) a pension, 2) Social Security, 3) home equity, 4) a 401K and other savings, and 5) investments. Unfortunately, you may not retire—and not know it. Your 5 pillars, if you are like most people, have crumbled and will collapse under the weight of neglect or erosion.

Typical Pension Plans

America offers 2 main pension plans to workers. Most, especially the middle aged workers, do not comprehend the difference in the two. The difference will imperil their retirement.

1. The defined benefit (DB) plan guaranteed pensioners a predetermined retirement income (benefit) based on their longevity, salary, and terms defined by the employer. A defined benefit will continue until the person’s death.
2. The defined contribution (DC) plan guarantees the employer will contribute to the person’s pension (usually a 401K or variation) or match the individual’s contribution by a certain percent. The individual then lives on the money they have until the money runs out.

Vanishing and Frozen Defined Benefit Pensions

Most defined benefit plans are vanishing. The consulting firm Towers Watson published an article in September 2010 called Pension Freezes Continue Among Fortune 1000 Companies in 2010,  The article stated that Fortune 1000 companies

• Offering, and not freezing, DB plans dropped from 59% in 2004 to only 38% in 2010
• Freezing DB plans more than quadrupled — from 45 in 2004 to 208 in 2010
• With one or more frozen pension plans rose from 7% to roughly 36%.”

Ellen Schultz, the author of Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers, shared this insight about why the decrease in an interview. She said “It wasn't an accident. It is the result of actions companies took starting in the 1990s to profit from their plans. Employers took perfectly healthy plans with a quarter trillion dollars in aggregate surpluses, and they siphoned out the money through a variety of means."

Mark Miller wrote in Are Vanishing Pensions Just Another Case of Corporate Greed? “The fate of DB plans is a critical retirement policy issue. Like Social Security, DB pensions are key to retirement security because they do something private accounts cannot: provide lifetime income. DB pensions and Social Security are far more valuable than private accounts because they insure against longevity risk -- the risk that you'll run out of money before you run out of time.”

Reasons You May Not Have a Pension when You Retire

1. You changed jobs so frequently that you never vested in a pension plan
2. You worked 2-3 part-time jobs. Part-time employees seldom qualify for pensions.
3. You worked for very small companies that did not provide any kind of pension
4. You either never contributed or contributed to little to a defined contribution plan
• The Journal of Financial Services Research in 2007 found that while 71% contribute to their Defined Contribution plans, only 12% make maximum contributions.
• The data also infers that 29% will have no pension to rely on for retirement. In addition, 88% will have much less than they can afford to live on)
5. Your company (like GM, Hostess, and others) “receive relief of their pension debts” by declaring bankruptcy

Join me on Wednesday when we discuss why you may not rely on Social Security