You Have a Pension. Do you still need to save for Retirement?
In August 2023, the big U.S. trucking company Yellow–you’ve probably seen their trucks on the road–filed for bankruptcy. This company was 99-years-old and employed 30,000 workers.
First off, what a tragedy for the workers and their families! They no longer had jobs. But there is another facet of this bankruptcy that really caught my eye.
Yellow had a pension plan for their employees. A pension plan is an old type of company-sponsored retirement plan. It “guarantees” you a monthly check once you retire. Traditional pension plans are solely funded by the company, not you, the employee. That makes the pension plan an asset of the company. The pension plan–and all the money inside it–belongs to the company.
So what happens to the money if a company with a pension goes out of business? Well, the first thing to recognize is the company has full control over the money inside the pension. The pension money belongs to the company–not the employee or retiree. Typically when filing bankruptcy, any assets of the company are liquidated and used to pay back debt. This means bye-bye to the “guaranteed” monthly check the employees were going to get upon retirement. This means bye-bye to the “guaranteed” monthly check the retirees were currently receiving as their retirement income.
Ouch!
Everyone involved likely were depending on the pension for their retirement. Kinda puts a pit in your stomach, huh? It does for me, too.
The problem is when your retirement is completely dependent on a pension, you have zero control over how it’s managed and if you even get it.
So what are you supposed to do?
If your company offers a pension plan, you should save for retirement outside of the pension plan.
So how should you do it? How much should you invest?
Step One: Determine what percentage you need to save.
I recommend investing 15% of your income towards retirement. I suggest you consider the percentage you are required to contribute towards your pension plan as half of what they require. Example, if your company requires you to contribute 8% of your income towards their pension plan, in your head consider it as only 4%. That means if you want to invest 15% of your income toward retirement, 4% is going into the pension plan (even though it’s really 8%), and then the remaining 11% should be invested outside of the pension plan in either a 401(k), 403(b), Roth IRA, etc. Figure out the percentage you still need to invest outside of the pension plan.
Step Two: Explore your retirement plan options.
Does your company offer any additional retirement plans? A simple call to Human Resources will allow you to understand what all your options are. If there are options outside of the pension, then determine if any of them have a “match.” If so, then start your investing there. When a company matches your contributions, it’s free money. Always take the free money (duh!). If there are no additional retirement options other than the pension plan, your next best step is to use a Roth IRA to begin investing towards retirement. You can open an investment account on your own through places like Charles Swab, Fidelity and Vanguard. Or you can work with an investment advisor who can teach you how and where to invest.
Pension plans are a decent start to your retirement. However, since the money in the pension isn’t your money–but the company’s money–I strongly suggest you do your own retirement investing in addition to the pension plan. Think of the pension plan as just the cherry on top.
I hope this helps. Let me know in the comments below what you found most interesting and helpful!
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