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Pension Buyouts and Trends

Financial Planning

June 2013

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Pension Buyouts and Trends

Rich pension plans appear to be rapidly heading toward extinction, much like single-employer longevity and the 30-year anniversary watch. Today, only 11 companies on the Fortune 100 list offer pensions to newly hired salaried workers, as opposed to 89 back in 1985.

Pension extinction is not just a matter of employers trying to save money. It’s also a natural consequence of employees simply not staying for the long haul. After all, how much can you accrue in pension benefits if you work only a few years at a time for each employer? According to the Bureau of Labor Statistics (September 2012), the median number of years that wage and salary workers stay with their employer is currently 4.6 years. For employees age 65 and older, the median is 10.3 years. But for today’s workers age 25 to 34, the median tenure is 3.2 years.

This trend really took off during the early millennium years, a period characterized by the overzealous dot.com bubble and the entitled, instant gratification era of Gen X. Nowadays, switching jobs once a year is fairly common, and in some industries it is not even frowned upon.

Even companies that still offer pensions are starting to change their tactics. For example, many are offering the option to “buy out” their pension promise with a lump sum. Instead of receiving a regular pension paycheck throughout retirement, some companies will pay a one-time windfall, which allows the retiree to invest in an annuity or other type of investment designed to make payouts for the rest of their lives. However, whether today’s retirees will be able to manage a windfall payout for long-term income remains to be seen.

Some companies have anticipated the human failing that seems to accompany receiving a windfall; that is, the penchant to spend it all too soon. To compensate for this, last year General Motors decided to transfer the pensions for 76,000 of its salaried retirees to a group annuity plan. This move enabled the car manufacturer to eradicate $29 billion from its pension liability.

Boeing and Major League Baseball are the latest among a steady stream of companies announcing their intention to stop offering pensions to new employees, joining the ranks of other large corporations such as GE, Lockheed and Ford.

Another recent trend is that the pension plans that do exist are woefully underfunded. As of December 2012, the 100 largest U.S. corporate pension funds were short by a combined $412 billion. The Pension Research Council at Wharton Business School reports that U.S. corporations currently boast the highest level of pension underfunding in history. For example, Boeing has set aside only three-quarters of the $75 billion it owes for future pensions.

Between underfunding and cutbacks to both Social Security benefits and pension plans, we could be just a couple of decades away from having to provide the majority of our retirement income on our own. That’s why it’s so important to research, open and maintain a disciplined savings plan for employer-sponsored and/or personal retirement savings accounts.

One of the keys to saving efficiently is to take advantage of any matching contributions your company offers. Fidelity Investments recommends saving at least eight times your final annual income by the time you retire, depending on the age you retire and the amount you want in annual retirement income.

As always, consult a professional for sound advice on saving for retirement.

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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