United Airlines is just the latest in a string of pension-plan implosions. If you're covered by one, it's time for a backup strategy.

WHEN UNITED AIRLINES (UALAQ) terminated its pension plan last month, more than 120,000 of its employees saw their golden years turn to copper in the biggest pension default in history.

The cash-strapped airline said giving up the pension plan, which was underfunded by an estimated $9.8 billion, was a necessary step in its efforts to exit from Chapter 11 bankruptcy.

This was the latest in a string of high-profile pension-plan implosions. In February, US Airways (UAIRQ) terminated its plan with more than 51,000 participants. Last year, 192 pension plans were terminated because of underfunding, affecting more than 127,000 workers, according to the Pension Benefit Guaranty Corporation (PBGC), a federal pension-insurance provider.

For the rest of the millions of Americans who are covered by defined-benefit retirement plans -- 21% of the U.S. workforce, according to 2004 figures released by the Department of Labor -- it's time to ask an important question: What if this happens to me?

The good news: When a company's pension plan goes belly up, it doesn't disappear into the ether. The majority of plans are able to cover their responsibilities toward current and future retirees after termination. But for those who lack the necessary funds -- like United -- responsibility is turned over to PBGC.

Now, the bad: The payments a beneficiary receives from the PBGC might be lower -- sometimes significantly so -- than the company had promised. That's because the PBGC payouts are subjects to limits imposed by Congress each year. In 2005, the maximum payout is a little over $45,600. (For a schedule of maximum payouts based on the year a retiree starts making withdrawals, click here.)

What does that mean for retirees? If their benefit now is lower than the limit, nothing will change, explains Sue Stevens, a certified financial planner (CFP) and director of financial planning at Morningstar, a Chicago-based mutual fund company. "You'll keep receiving what you were promised," she says. On the other hand, "if you had counted on a higher pension, that could make an enormous dent in your (retirement) planning," she warns.

This mostly affects higher-salaried employees, such as the pilots at United, who stand to lose thousands of dollars in annual retirement income. For those already well into retirement, it means nothing short of a radical lifestyle adjustment.

Taking Control of Your Retirement

Longtime employees approaching retirement are hurt by a pension-plan debacle far more than younger employees, Stevens explains. That's because to calculate an employee's pension payout, companies typically use a formula based on their years of service multiplied by their final average pay and a multiplier of, say, 1.5%. Complicated math aside, this means that most of an employee's pension benefit is earned during their last years of service. The longer you work for a company and the higher your salary at retirement, the higher your pension.

This is where it gets unpleasant: The PBGC calculates your benefit based on your salary and years of service as of the time your plan was terminated, according to Jeffrey Spiker, a PBGC spokesman. So if an employee has worked for a company for 30 years when its pension plan is assumed by the PBGC, but retires five years later, his payout will be based on 30 years of service, not 35, as well as on his salary from five years earlier. The employee's final and most lucrative years on the job would be wiped out. Making matters worse, defined-benefit plan experts are questioning the ability of the PBGC to keep up with benefit payouts as an increasing number of companies are closing their pension plans. In the airline industry alone, the agency has already taken over the pensions for Eastern, Pan Am, TWA, US Airways and now, United. And many analysts fear that the other airlines currently under Chapter 11 bankruptcy will have to follow suit if they want to stay competitive with United. Already, the metal manufacturing industry is ripe with pension plan defaults. And if auto industry giants GM (GM) and Ford (F) follow suit, "then it's lights out," says Michael Anderson, professor of finance at St. Louis University in St. Louis, Mo.

"The (PBGC) is as likely to have problems paying its benefits as the Social Security system is," he says. "It won't happen tomorrow, but it's on a path to be swamped by benefit payouts."

The bottom line: With the future of the country's two guaranteed benefit systems in question, it's more important than ever to take charge of your own retirement savings. "For years, I have preached to my clients to try to take a lot more responsibility for the future," says CFP Vern Hayden of the Hayden Financial Group in Westport, Conn. "The government can let you down, the company can let you down. You're the only one you can depend on."

Damage Control
If you're worried that your pension could be significantly reduced -- or if it already has been reduced -- the first thing to do is take a look at alternative sources of income that you may have, such as a 401(k), an IRA or other savings, says CFP Mark Balasa of Balasa, Diverno & Foltz in Itasca, Ill. To see how far your 401(k) savings will take you, use our 401(k) planner. You might also want to take some time to fill out our retirement worksheets, to see what sort of income can be generated over the long haul, based on your new situation.

"If you have enough savings to support your lifestyle, you're going to be OK," Balasa says. "But the majority of people are probably not going to have enough." For them, he says, it's time to make drastic changes. "You either have to reduce what you spend, make your investment portfolio more aggressive, or go back to work." Those who have not yet retired will most likely have to postpone their retirement, or consider moving to an area with a lower cost of living. Tough choices, to be sure. For more tips, see our article on last-minute retirement planning.

Taking Charge
Whether or not you have a pension plan at work, consider what's happened at United as a wake-up call. Operate under the assumption that you and you alone are responsible for your retirement lifestyle.

If your company offers a 401(k) plan, max out, says Stevens. In 2005, you can contribute $14,000, or $18,000 if you'll be 50 or older by the end of the year. Alternatively, consider a Roth IRA or just a regular taxable account. "With any of those alternatives, they can't take (your retirement income) away from you," she says. The limit for IRAs is $4,500 for 2005 (including the $500 catch-up contribution for those over 50).

Eileen Dorsey, a CFP with Money Consultants in St. Louis, Mo., saw many of her clients' retirement plans devastated when TWA terminated its pension plan back in 2001. Her advice: Start saving at least 20% of your gross income toward retirement, even if that means your lifestyle will have to suffer. "The bottom line is, if somebody else isn't putting money into your retirement plan, you have to put it in," she says.

For more retirement saving strategies, visit our retirement section.