Company Pensions Are as Passé as Gold Watches
Better start planning now to self-finance your retirement
Sabrina Sloan is a 40-year-old bartender turned radio personality in Bend, Ore., and like many Americans, she has never been offered a pension by an employer, and she can't yet participate in her company's 401(k) plan. Retirement plans? "I expect to work until I can't work physically anymore," Sloan says simply.
With the decline of the traditional pension, even workers at larger companies are being forced to plan for themselves when it comes to retirement. In the past two years, more than a sixth of all employees have personally experienced a reduction in retirement benefits, according to the Employee Benefit Research Institute.
If you're not expecting to retire with a pension or are afraid that your retirement benefits might be reduced before you can cash them out, here are some ways to cope.
Save more on your own. Many companies are freezing benefits "where you get to keep what you have accrued to that point, but you won't get any more," says Craig Copeland, an EBRI senior research associate. Often, the employer will then offer to match resources invested in a 401(k) plan at a higher rate than previously offered, perhaps matching up to 6 percent of your income instead of 4 percent.
"Instead of being able to count on a certain guaranteed floor as long as you stayed at that company, you are now going to have to manage that money," says Copeland. "The only way you are going to get the additional benefit is to contribute more." But among employees who had retirement benefits cut, only a third report saving more money as a result.
Even if workers do try to save more, it's not easy to replace pension income. To make up for a frozen pension, most workers would have to bump up their savings rate by at least 10 percent, according to Jack Van Derhei, an EBRI fellow. Although two thirds of all workers say they or their spouse has saved money for retirement, 49 percent report having less than $25,000 in savings and investments. Even among workers 55 and over, almost a third have saved less than $25,000 apart from any pension plan or home equity they might have.
Familiarize yourself with the benefits you do have. Some workers are counting on retirement benefits that simply won't be there. A full 62 percent of workers expect income from a defined-benefit plan to produce regular payments for the rest of their life, but only 41 percent of workers say they or their spouse currently has a defined-benefit plan. "It just boggles the imagination as to why people under [age] 45 still think there's a chance that they will end up with one," says Van Derhei. "There's still a lot of people who are overconfident about their prospects."
Get long-term-care insurance. A quarter of workers and a third of retirees report having long-term-care insurance, which can help to pay for a nursing home, assisted-living facility, or in-home care. But EBRI estimates that only 10 percent of Americans have long-term-care coverage, which suggests that many people are counting on coverage they don't actually have. Long-term care is generally not completely paid for by Medicare, Medicaid, and many health insurance policies.
Seek investment advice. Congress enacted a law in 2006 allowing companies that manage retirement plans like 401(k)'sto offer investment advice to employees. Fifty-four percent of workers say they are likely to take advantage of the opportunity to get advice. However, only 21 percent of the people who plan to seek advice say they will implement all the recommendations. "I ignore it," says George Tarcia, 59, of Erie, Pa., who works for an automotive supplier, about the investment advice his company offers. "They're very guarded with their advice, and it's the standard boilerplate advice that you get from any of the big companies."
Get on the Internet. Many retirement plan providers use the Web to provide information about retirement accounts or allow employees to manage their own assets. While most workers are comfortable, say, using online calculators, fewer would use the Web to shift money between investment accounts, obtain professional advice, or purchase financial products.
Calculate how much you need to retire. Only 43 percent of workers report having estimated how much money they will need to retire, EBRI says. "If you don't know what goal you're shooting at, it's going to be very difficult to end up at the right place," Van Derhei says.
Take personal responsibility. Social Security may still be viable when you retire, but you shouldn't count on it as an exclusive source of income. Some 68 percent of workers are doubtful that Social Security will continue to provide benefits of at least equal value to those given today's retirees. "Now that the retirement system has changed, you need to be more reliant on your own decisions," says Copeland, "and invest in a way that will maximize what you can get while you are working and protect your assets after you retire."
This story appears in the June 11, 2007 print edition of U.S. News & World Report.