Most of us who watch the news or peruse the Internet have if not read an article or listened to a full news report about state pensions, have at least seen the headlines indicating that there are problems with a large portion of these plans. For those like me who live in Illinois, hearing about the 87 billion dollar underfunded state pension programs can seem like a regular occurrence.
The problem with pensions is that unlike a private retirement account, it's not just those involved with the plans who have to be concerned with their stability, but since they are provided through the state, when they falter, they in turn become the taxpayers' problem as well.
Maybe there's a reason why most employers outside the government realm don't offer pensions anymore. And after watching these plans falter, I'm sure as heck not going to treat my retirement plan like a pension plan, but let's say I did. What would happen?
Retirement Accounts
Let's take my $30k retirement fund and base my future value estimates on a consistent 8 percent a year return until I retire. We all know that the stock market never has a bad year, right (sarcasm hitting heavier than a load of bricks)? Yeah, right! Wishful thinking I know, but let's just say that this is what I based my assumption on over the next 35 years, just like pension plans do.
Well, under that assumption, and not adding any additional outside funds to my plan, I'd end up with about $440,000 in that account by the end of those 35 years. But I highly, highly doubt that this will be the case considering I'm about even on my retirement account returns over the past five years. Anyone who has watched the stock market for more than a week -- or even a day for that matter -- likely knows how fickle a beast it can be. So assuming that my rate of return will consistently be 8 percent each and every year like pension plans do is just asking for trouble.
Social Security
Social Security is kind of like a big pension plan on the federal level. I've paid into it, but I'm being told (unlike pension some plans that are unwilling to reduce benefits I might add) that I'm not likely to get my full estimated benefits amount in retirement. While I could bank on my currently estimated benefit totals being the totals that I receive in retirement as many pension plans might, this wouldn't be very responsible since I am fully aware that the Social Security trust fund is heading in the wrong direction and that without adjustment could only pay about 75 percent -- or less, depending upon what happens moving forward -- of my expected benefits.
Rather than turn a blind eye toward this potentially lowered income in retirement and use the "Well, this is what I was told I was going to get, so that's what should get," argument, I prefer to err on the side of caution and utilize my own lowered estimate of potential benefits.
Debt
But if I was to treat my retirement like a pension plan, continuing to overpay myself based upon unrealized income expectations, what would I leave my family or my children? Well, I'd likely leave them with plenty of debt, since I would have continued to draw more upon investment balances that weren't hitting their required marks and would then have to turn to lines of credit to fill the gaps. Since I would rather leave my children with something (or at worst, at least no debt) when I die, I am therefore working my retirement plan to center around my living off of investment returns and other more guaranteed income and savings rather than dipping into my retirement investment balance.
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