March 2020

What’s in Your Pension?

In October of 2019, GE announced it was going to freeze 20,000 pensions for its employees and offer buyouts for 100,000 more. After that, it said it would beef up its 401(k)s.

All that means is they’re taking your guaranteed money and putting it in the market, where you as a GE employee have to manage it yourself.

We’re seeing this kind of thing more and more outside of GE, too. More responsibility on you as the consumer, along with other options to consider, like lump sums.

Here’s what you need to understand: Your pension is only as strong as the company providing it. At the same time, do you understand exactly what’s in your pension and how it’s funded? Could it be underfunded?

I’ve looked at many pensions with unnecessary risks in the market. Many of them extend their risk profile because they can’t get actual fixed income. When a pension is guaranteeing you 5%-7% per year while treasures and short-term CDs are around 2%, the math does not check out for security.

Let’s talk about what happens when you do choose to take the lump sum option. If your company offers you a $400,000 buyout to be off their payroll and you take it, do you suddenly make $400,000 in one year and you now have to figure how to pay taxes?

Luckily, the answer’s no. That money rolls into an IRA, where the taxes are deferred. You’ll pay taxes on that lump sum as you take out the money each year. You can bank that money and continually grow it tax-deferred. You have full control over it.

But that means now you’re in the pilot’s seat of your future. No more automatic monthly paychecks guaranteed for the rest of your life. The question is are you prepared for that kind of responsibility? Can you be sure you won’t run out of money in retirement?

Back to GE: The company is forced to redo its pensions while the market is booming. What happens when the market lulls or corrects itself? I think if the market drops, GE will be the first of many companies offering buyouts or freezing.

So what will you choose to do with your pension? Are you ready for those kinds of decisions? I advise you to do the research and find an advisor you trust who can help you analyze.

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