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You Can't Rely on Your Pension

If you're eligible to receive a monthly pension when you retire, congratulations! You're one of the lucky ones. But that doesn't mean you don't have to protect yourself from what could be a gruesome retirement.

Traditional pension plans, where you get a monthly check for the rest of your life, have been on the decline among employers for years. According to the Employee Benefits Research Institute, although 59% of workers expect to get pension benefits after they retire, only 41% are currently enrolled in such a plan.

Moreover, many employers are moving away from pension plans toward 401(k)-type defined-contribution plans. IBM (NYSE: IBM  ) and Verizon Communications (NYSE: VZ  ) , among many others, have frozen their pension plans so that current workers won't keep earning more benefits. Many companies, such as Hershey (NYSE: HSY  ) , have closed plans to new workers. And some, Motorola (NYSE: MOT  ) and DuPont (NYSE: DD  ) among them, have actually changed pension formulas, leading to reduced payments to retirees.

What your pension is worth
If you're still eligible for a pension, the next step is figuring out what it's worth to you. Although pensions vary among employers, most formulas take into account factors like your salary and how long you've had your job. The more you make and the more years you've put in, the more you'll typically get.

In the past, when many employees worked their entire careers with a single company, pension formulas typically rewarded loyalty and service. With many workers now moving from employer to employer, however, you may find that even if you're entitled to a pension, it won't be very much. In fact, depending on the vesting requirements your company uses, you may end up forfeiting some or all of your pension benefits if you don't work there long enough.

How to treat your pension
From an investment perspective, how much you'll receive in pension benefits affects how you should invest the rest of your money. Luckily, there's a fairly simple way to figure out what to do. Most pensions give employees the option of taking monthly payments or a one-time lump sum at retirement. By requesting the lump sum figure from your employer, you'll get an idea how much your pension is worth, based on your life expectancy and current interest rates.

Of course, you can always take your lump sum and invest it yourself. That will give you a big advantage if you find stocks that behave the way Hansen Natural (Nasdaq: HANS  ) or Celgene (Nasdaq: CELG  ) did over the past decade. Unlike a pension, if you do earn higher returns from investing, you get to keep them. However, by doing so, you miss out on the protection that lifetime monthly payments give you.

Even if you decide not to take a lump sum, you can use the figure your human resources department gives you as the value of your pension. Since it provides regular income, treat it in your portfolio the same way you would a bond or bank CD. Then rebalance your other investments accordingly to make sure you're not being too conservative.

What to do now
Although defined-benefit pensions are rapidly becoming a thing of the past among private companies, plenty of workers will get them when they retire. But you need to look at all the angles to determine if the pension will be enough to support you by itself.

If you need help understanding your pension, let us help you. A free trial to our Rule Your Retirement newsletter includes resources that will guide you through taking the pulse of your pension, deciding whether to take a lump sum, and determining whether your pension benefit is in trouble. All that and more is yours free for 30 days with no obligation to subscribe.

More on making sure you can retire well:


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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