This week Gail addresses pension plans, and how they fit into your plans to retire...

Dear Friends,

What’s wrong with this math:

If you’re currently in the workforce and under age 45 there’s a one-in-three chance that either you or your spouse will retire with an old-fashioned pension — the kind that pays as long as you live.

Yet twice as many of you (60 percent) are counting on receiving income from a pension when you retire.

“To expect the probability of having a defined benefit plan to double, given the pension freezes — that’s what [blows] me away,” says Jack VanDerhei of the Employee Benefit Research Institute (EBRI).

It’s all the more astounding in light of the fact that these expensive retirement plans are going the way of the T. Rex. And not just at companies that file for bankruptcy, such as US Airways (LCC) and Bethlehem Steel.

In recent years, 17 financially healthy companies have completely or partially frozen their pension plans.

Here are a few of the biggies based on data compiled by the Center for Retirement Research at Boston College:

Year Company Employees Affected Type of Freeze
2006 IBM 117,000 Total
Alcoa New Hires
2005 Verizon 50,000 Partial
Sprint Nextel 39,000 Partial
Lockheed Martin New Hires
Hewlett-Packard 32,200 Partial
2004 Circuit City 19,000 Total
Motorola New Hires

(In a defined benefit, a.k.a. “pension,” plan you accrue, or accumulate benefits. The amount of retirement income you receive is based on the years you worked for the company and your salary. If you know both of these factors, you can figure out what your monthly check will be, i.e. your future benefit is a “defined” amount.

In most cases, when a company froze its defined benefit plan, it introduced a new plan, typically a 401(k), which is a type of defined contribution plan. As the name implies, the amount that is contributed to the plan — by the employee and by the employer — is clear. What you don’t know is what kind of income this will translate into.)

EBRI’s VanDerhei, a professor at Temple University, was director of this year’s Retirement Confidence Survey (RCS), which the Employee Benefit Research Institute has been conducting annually since 1991. The one thing that hasn’t changed since the first RCS is Americans’ apparent unbridled optimism about their financial prospects in retirement.

Two-thirds of the workers surveyed this year say they are either “very” or “somewhat” confident they’ll have enough money to live comfortably once retired.

Even allowing for the possibility that they somehow missed the screaming headlines about the dire straits many pension plans are in, this can either be classified as “irrational exuberance” or sheer stupidity.

You see, 22 percent of those who say they are “very” confident admit they aren’t even saving for retirement! Thirty-nine percent have less than $50,000 set aside. Fourteen percent aren’t contributing to the retirement plan offered by their employer. Thirty-seven percent haven’t even tried to estimate how large a nest-egg they’re going to need.

I want some of the Kool-Aid they’re drinking!

Here’s another major disconnect: Almost half (47 percent) of those surveyed want their standard of living in retirement to be the same or higher than they’re enjoying in their working years.

How they’ll accomplish this is a mystery because more than a third (36 percent) say they’ll only need 50-70 percent of their pre-retirement income when they retire. Another 28 percent figure they’ll be fine if they can generate 70-85 percent of the income they brought in while working.

Yet more than half of the folks who already have experience in this- today’s retirees!- say the amount of income they need is equal to or higher than what they earned just before they left the workforce.

There are some bright spots in the latest RCS, some areas where people seem to be waking up to reality. When asked at what age they plan to retire, more than 50 percent said either age “65” or “66 and older.” This suggests more folks have gotten the message that the age at which you can collect 100 percent of your Social Security benefit is going up.

And, surprisingly, most people have a good handle on how long they’re likely to live. Two-thirds think they’ll reach age 90; more than 40 percent expect to see 95.

The only trouble is, they’re not translating this into the amount of savings required to generate 25 or 30 years worth of “paychecks” that you essentially have to pay to yourself over this timeframe.

VanDerhei figures it “will take 10-15 years before retired baby boomers start to run out of money and Gen-Xers realize they need to plan better.” By then, of course, it could be too late for some.

He bases his prediction on the spending pattern of recent retirees, those just ahead of the boomers, who, he says, are not minding their money like “somebody who is planning for a life expectancy of 20 or more years.” Instead, according to VanDerhei, “They’re more concerned about maintaining their standard of living.”

He then points out the obvious: “If you’re going through your money post-retirement as fast as you did pre-retirement, you won’t have enough left to last your life expectancy.”

Oh, but don’t worry. If you burn through your nest-egg too quickly, at least you’ll have Social Security.

Probably.

Gail

*The Center for Retirement Research defines a “partial” freeze as one where the plan is closed to both new and some existing workers. A “total” freeze occurs when the plan is closed to new and [all] existing workers.

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If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.