When it comes to providing for your financial well-being, you're the only person who can truly take control of your finances and ensure that you'll reach your goals successfully. As if you needed more proof of that after the impact that the financial crisis has had over the past year or two, the huge losses in the stock market have created massive problems for millions of people expecting their employers to provide them with substantial income after they retire.
Problems on the pension front
For years, workers have been able to count less and less on employers to contribute toward their eventual retirement. In recent years, many companies, such as 3M (NYSE: MMM ) and IBM (NYSE: IBM ) , have replaced the pension plans they offer to longtime workers with 401(k) plans for newer workers. That has helped take the pressure off employers to find investments that will finance pension payouts after workers retire.
Yet even once 401(k) plans are in place, some employers have pulled back from their financial commitments to them. During the past year, countless employers, including American Express (NYSE: AXP ) and Wynn Resorts (Nasdaq: WYNN ) , have suspended employer matching contributions to their workers' 401(k) plans.
Although workers with private employers have already suffered a lot of pain, public employees had been spared some of the damage of the financial crisis. Now, though, investment losses are coming home to roost for public pension plans, and it's quickly becoming clear that the pensions of public employees are at serious risk.
The worst of the worst
Consider the situations that some of these embattled public pension plans face, according to The Washington Post:
- New Mexico is requiring its public employees to contribute 1.5% of their salaries toward covering retirement benefits.
- After being fully solvent as recently as 2003, officials now estimate that Virginia's major pension funds will be only 60% funded by 2013.
- Despite seeing big losses from alternative investments like hedge funds, Maryland's pension fund expects to rely even more heavily on such investments.
- Other pension funds are taking huge risks to try to earn back shortfalls. California, for instance, has invested $2 billion into toxic bank assets in hopes that they'll recover.
Yet even these measures may be insufficient to get some public pension funds back into the black. The combination of huge hits to investments and overly optimistic projections before the financial crisis hit has left many states and municipalities with few options, especially when their tax revenues have fallen substantially due to the recession.
You're on your own
If you're a public worker, you have every right to be mad. You may well have given up a higher-paying job specifically in exchange for more valuable benefits like your pension. Taking away those benefits is like having your employer come back and ask you to give back half your paychecks from years ago.
However, given the problems that local governments are facing, you need to start planning what to do if your benefits are reduced. That may include taking steps like these:
- Boost your outside savings. With expectations of a healthy pension, you might not have saved as much as you otherwise would have. Now's the time to reverse that trend and start taking advantage of other ways to save for retirement.
- Balance portfolio risk. Some financial planners recommend treating pensions as the conservative part of your overall investment portfolio, leaving you greater latitude to invest in high-risk growth stocks like Ebix (Nasdaq: EBIX ) and First Solar (Nasdaq: FSLR ) even as you approach retirement. However, without that pension cushion, you should also make sure to diversify the rest of your portfolio with a greater emphasis on bonds and more conservative blue-chip stocks such as Procter & Gamble (NYSE: PG ) .
- Know your rights. Some groups are challenging the actions that governments are taking to try to shore up their pensions. Rather than simply accepting whatever happens, keep informed about what's going on and make sure you know what your rights are to fight such actions.
You may not be able to replace all of what you would get from your public pension, especially if you're close to retirement already. Yet it's unlikely that you'll lose your entire pension, so what you can set aside on your own should be enough to make ends meet. The best way to ensure that, though, is to act as soon as you can to start building a retirement nest egg you can count on 100%.