Steve DeCesare provides insight on how you can be proactive with your pension and get the most out of this retirement savings vehicle.

By Greg Brown, Columnist
Published October 2015

For millions of Americans, a pension remains a solid “third leg” of the retirement stool after Social Security and personal savings. And while nearly all pension plans are backed by the federal government, pensions can fail. Then what do you do?

First, here are some facts to keep in mind: When a private pension plan goes under, the government does step in to assume at least part of the liability.

Corporations pay premiums to a government agency, the Pension Benefit Guaranty Corp. Just like any insurer, the agency pays out if a bankruptcy damages the viability of the plan. A striking example of this occurred in 2005, when United Airlines won the right to default on its pension obligations, resulting in the biggest-ever pension failure, with $7.4 billion in claims.

The federal government expects up to 173 multi-employer pension plans to run out of money over the coming decade. Some are large and some are small, but in every case, there is a risk that employees will receive less than they expected from a federally rescued plan.

In number terms, the government guarantees up to specific monthly payments by age if your plan fails and is turned over to the agency. In 2015, for instance, a 70-year-old can expect up to $8,318 per month, while a 62-year- old would get up to $3,959.

If your plan goes bust, and the payout is less than you had budgeted or planned for, you’ll be left scrambling to rethink your retirement strategy.“If someone fears that their pension will fail, they should plan their retirement accordingly and plan as if that source of income will not be there,” says David C. Jozefiak, a certified financial planner in Sterling Heights, Michigan. “They will need to make sure they have sufficient income from other sources to meet or exceed their expenses. They must also account for inflation and how much more their expenses may be 20, 30, or more years into retirement.”

One way is to delay receiving Social Security payments, which increases the monthly payments by about 8 percent a year up to the ultimate retirement age of 70. Delaying retirement and saving more is a help (obviously), as well as reducing expenses sooner and paying off debts, such as a mortgage.

Most important, all near-retirees should “practice” living on their eventual retirement income well ahead of the actual start of retirement, Jozefiak says. “Six months or more prior I have them begin living on that reduced income — the extra income gets saved,” he explains.

“I have found they will try very hard and be willing to make sacrifices if necessary to try to make it work,” he says. “Ultimately, they will be able to decide for themselves whether it is going to work, which makes my conversation a lot easier on either moving forward or discussing alternatives.”

One such alternative might be tapping into other assets to make up the gap. Chances are, the largest single investment you own after a pension and Social Security payments will be your home. If your mortgage is paid up, a good course of action might be to unlock some of that value, says Donald L. Reichert, a chartered financial consultant in Greenville, South Carolina.

“If someone had some real concerns about the prospect that a pension plan might fail, they have a couple of simple choices,” Reichert says. “Consider selling the home to the children and renting it back on a long- term lease, or either refinancing the home to pull a block of equity out or selling the home and renting something.”

The equity cash could be used to purchase a single-premium immediate annuity on one or both of the spouses. “Depending on age, the guaranteed rate of return on the equity used to purchase the annuity would more than likely be substantially higher than the payments on the line of credit on the borrowed amount or on the monthly rent expense,” Reichert says. “The older the annuitant, the higher the payout rate on the principal.”

To see the published version in The Franklin Prosperity Report please click here.