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Money on the brain: Even those with pensions should invest in a retirement account

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A lot of people plan for retirement by investing money in a retirement account like an IRA or a 401(k). But what if you will receive a pension when you retire? Do you still need to invest on the side as well?

I recommend you do so for two main reasons.

First, you have very little control, if any, over the money you will receive from your pension. You might be able to choose whether you receive your pension in one lump sum as opposed to receiving a monthly check for the rest of your life, but that’s about it.

If you need more money one month, there’s not much you can do. Hopefully you’ll get an annual increase, probably tied to inflation, but that usually happens just once a year. Otherwise, you’ll get the same pension check for the same exact amount at the same time every month.

On the other hand, any money you save in a retirement account is yours to do with what you want, whenever you want. If you need more money one month, then you can go ahead and withdraw some money.

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There are always rules to follow with funds in retirement accounts, of course, that might restrict how you use that money.

For example, if you withdraw any money from a traditional Individual Retirement Account before age 59½ and you don’t meet certain criteria, you’ll have to pay a 10% penalty.

On the other hand, if you have a Roth IRA, you are allowed to withdraw your original contributions before you turn 59½.

So every type of retirement account is going to have a unique set of rules, but the point remains: you’ll have access to more money if you have one of those accounts, as opposed to relying solely on your pension.

Second, what if the pension you thought you were going to get when you retire disappears somehow? It can happen, as it did to several airlines such as United Airlines and Delta Air Lines in the early 2000s.

A government agency called the Pension Benefit Guaranty Corporation can step in to save the pensions for employees of bankrupt companies. Sometimes.

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In the case of United Airlines in 2005, PBGC determined it could not save the employees’ pensions. The best it could do was was reach a settlement worth $1.6 billion. It then shared the money with the eligible employees.

That $1.6 billion was a lot of money, but it didn’t go as far as you’d think when you consider there were over 100,000 employees who shared the one-time settlement instead of receiving a pension every month for the rest of their lives.

Even when PBGC can protect pension benefits for a group of employees, there are limits to how much it will pay out.

What about Illinois’ pension plans?

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According to 247wallst.com, in September, Illinois had approximately $92 billion in pension assets, and $237 billion in pension liabilities. This means Illinois has enough money to fund just under 40% of its pensions.

This severe underfunding has caused a lot of Illinois workers to be concerned about their pensions. Should they be? Absolutely.

But I wouldn’t panic. As a public school teacher, I’m confident I will receive a pension when I retire. In other words, I don’t believe Illinois’ retirement system will go bankrupt.

It would not shock me, however, if Illinois reduced my pension because it couldn’t afford to pay me the full amount. Maybe I’ll only get 92% or 88% of what I thought I was going to get, for instance.

Sure, the Illinois Constitution says that pension benefits shall not be “diminished or impaired,” but I believe “the system” would find a way to reduce my pension if it really wanted to. I’m a bit cynical, forgive me.

The upshot of all this for me is I feel a lot more comfortable putting money away every month in an investment account. Then when I retire, if I need the money, great. If I don’t need the extra money, that’s even better.

If you’re interested in starting a retirement account, it can be a bit difficult to know which type to open. In my next column, I’ll write about the most popular retirement accounts you can choose from and which one might be best for you.

Dave Kinzer is a music teacher and a financial coach in Springfield. Contact him at www.davekinzer.com. His column will appear here every other Wednesday.