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The Money Prof
Friday, November 1 2013
You have a Pension? If so, be thankful!Did you know that about 1/3 of retirees have pensions and that number is declining. A pension is a stream of income through life expectancy. In finance terms, it is called a defined benefit plan. In the old days, most federal, state and large corporate employers offered pensions to their employees. The employer took the burden of risk and guaranteed payment to their employees for life. Some pensions begin at 65. Others begin after a minimum of work years, but at the point of eligible retirement. Some pensions include a COLA (cost of living adjustment) while others do not. Pensions are an income source, not an asset. This means when the participant (employee) dies, the benefits usually go the surviving spouse. After the surviving spouse's death, benefits end. Pensions are not part of one's estate.
A common formula is 2% for each year worked (there are maximum work year ceilings) times pre-retirement income. For example, teachers, state workers, firefighters, police, etc. are usually in the Maine State Retirement System. If one works 35 years with an average pre-retirement salary of $60,000, the pension would be in the neighborhood of $42,000 ($60,000 x 70%). To generate this type of income in a 401k or an IRA, using a 4% interest only withdrawal rate, one would have to have saved $1,050,000 in these accounts. The big advantage of pensions over 401ks is the certainty of income stream during retirement. The big advantage of 401k's is the impact on wealth and estate value. If the portfolio is invested effectively, the end result could be a competitive income stream verses the pension and the wealth factor. But, as we know investing in the stock market is not guaranteed. Today, retirees are faced with historically low interest rates and therefore reduced income streams. These low interest rates do not hurt those on pensions as much as those investing for themselves. The cost of living adjustments on pensions may be impacted, but much safer than the investment environment.
For those folks that have a pension, kudos to you for staying at your jobs and enjoying the benefits of retirement security (a future article will cover the current environment and issues facing pensions today.)
The GOLD COMPANY will help you achieve financial well being.
Offering the following services:
- Investment Portfolio Assessment
- Portfolio Development
- Securities Portfolio Management
- Retirement Planning
- Insurance/Risk Management Review
- College Planning
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- Estate Planning
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