It bothers me when I read articles like the one on NBCNews.com the other day entitled "'It's degrading': Bankrupt New England mill town offers Detroit a bleak preview", which describes the plight of pensioners. Whether it's in a small New England town or a major metropolitan area like Detroit, I find such stories sad, but maybe not for the reason many others do. It's not that I'm feeling bad for the pensioners so much because they have taken significant hits to their pensions, but because they lacked the foresight and financial awareness to realize the difference between "counting on" and "planning for" when it came to their retirement futures.
Understanding the difference between these two planning approaches is something that our family works hard at, and doing so can help avoid some of those nasty surprises like those the pensioners mentioned in the NBC News article are encountering in retirement.
Never count on money someone else controls
I don't care if it's a pension, a stock-based retirement plan, or Social Security, I never count on money that is outside my direct ability to control even if it has been "promised" to me. The federal government has promised me Social Security, but that doesn't limit them from making adjustments to the system that could hurt my future benefits. The note from the Social Security Board of Trustees' 2013 annual report regarding the potential reduction in benefits beginning in 2033 should adjustments not be made to the current system is a prime example of this. Promises are just that, promises. They aren't guarantees. The American government made plenty of promises to the native Indians in the 1800s, and look how that turned out for the Indians. Therefore, our family doesn't base our financial lives and futures solely on the promises of others.
Diversifying just in case
Diversification is a great way to avoid being caught off guard by financial issues beyond our control in retirement when it comes to things like the stock market, pensions or Social Security. Putting money into an emergency fund, investing in lower interest earning, yet more secure investments like high-interest savings, certificates of deposit, and money market funds, and even doing things like reducing expenses by paying off student loans, mortgages and vehicles loans are all options to diversify finances heading toward retirement. This way, even if one or two benefits fails to materialize in the amounts we'd hoped for, there are financial reserves at the ready to make up for, or at least compensate in some amount for the reduced income that was expected.
Build "What if" scenarios
I'm a big fan of "what if" scenarios.
What if I never get Social Security?
What if I lose my pension or it doesn't arrive in the amount I expected?
What if the stock market plunges as I near retirement or once I'm already retired?
What if I get sick or my wife gets sick?
There are all sorts of things that can happen in life that can have a dramatic influence on our personal financial situation. And being prepared for, or at least having a general idea of what to do should they occur can take some of that element of surprise out of retirement planning. And this way, rather than counting on a certain type of retirement, we're planning for a variety of retirement scenarios and are prepared better should things not go exactly as we'd hoped.
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The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
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