Recs

8

The Biggest Threat Yet to Your Retirement

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

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%.

Need help getting your retirement back on track? The Fool's Rule Your Retirement newsletter service can help, with lots of investing resources and guidance. Start your free 30-day trial today by clicking here.

Fool contributor Dan Caplinger has a fierce independent streak. He doesn't own shares of the companies mentioned. Ebix and First Solar are Motley Fool Rule Breakers recommendations. American Express and 3M are Inside Value recommendations. The Fool owns shares of Procter & Gamble, which is also an Income Investor pick. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy poses no threat to anyone.


Read/Post Comments (1) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 13, 2009, at 12:08 AM, dgmennie wrote:

    Overall, public employees have much better job security and benefits that public sector employees. Obviously this cannot continue as the private sector (through such devices as sales taxes, income taxes, and property taxes) cannot be expected to prop up this employment fiction forever. Besides the basic unfairnress, the money for this nonsense is just not there anymore.

    The idea that public employees have "given up" higher income they "could have earned" in the private sector is more hogwash. Any time a decent public sector job opens up, the applicant line runs around the block (assuming that insiders do not find a relative they can pad the payroll with first).

    Bottom line: We cannot all work for the govenment at someone else's expense.

Add your comment.

DocumentId: 1004801, ~/Articles/ArticleHandler.aspx, 4/19/2014 6:52:14 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

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.

Today's Market

updated 1 day ago Sponsored by:
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 2.54 0.14%
NASD 4,095.52 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

4/17/2014 4:00 PM
AXP $86.22 Down -1.18 -1.35%
American Express CAPS Rating: ****
EBIX $16.57 Up +0.07 +0.42%
Ebix CAPS Rating: ****
FSLR $67.32 Down -0.27 -0.40%
First Solar CAPS Rating: **
IBM $190.01 Down -6.39 -3.25%
International Busi… CAPS Rating: ****
MMM $137.73 Up +0.96 +0.70%
3M CAPS Rating: ****
PG $81.76 Up +0.11 +0.13%
Procter & Gamble CAPS Rating: ****
WYNN $208.00 Up +3.00 +1.46%
Wynn Resorts, Limi… CAPS Rating: **

Special Offer for Savvy Investors Like You!

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut semper dui vitae molestie venenatis. Suspendisse.

Enter Email Address:



Privacy / Legal Information
Advertisement