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The Spectrum . Redwood City's Monthly Magazine
Pension in Trouble? Take Steps to Replace Income
By David Amman
Special to The Spectrum
In recent months, some well-known companies — including Verizon, Lockheed
Martin, Motorola and IBM — have “frozen” their pension plans. If your company
freezes its plan — or if you think it might do so in the future — you’ll want to start
thinking now of how to replace the potential lost income during your retirement
years.
When a company freezes its pension plan, contributions or additional benefits will
be discontinued during the freeze. Additional benefits typically would have
increased each year of continued employment. Generally, when you retire or if you
become disabled and can no longer work, for example, distributions will be paid to
you based on your plan’s distribution options.
Companies that freeze their pension plans may replace them with 401(k) plans, a
move that gives you both opportunities and responsibilities. Now you must determine
how much you need to save in your retirement plan. That means you need
to calculate your retirement income needs and determine how much you might
need from your 401(k).
Also, you must choose the right mix of available investments within your 401(k)
to help meet your retirement goals, given your individual risk tolerance and time
horizon. As time goes on and your situation changes, you may need to periodically
adjust your investment mix as well.
To manage your 401(k) correctly, you may want to work with a qualified investment
professional because, as you can see, there’s a lot at stake.
Roth 401(k) may be available
If your company moves from a pension plan to a 401(k), it may also provide you
with the option of putting some of your money into the new Roth 401(k). Using
the Roth feature in your 401(k) allows you to contribute after-tax dollars, which
means you pay taxes on your contributions right away. Although distributions of
Roth 401(k) contributions are always tax-free, distributions must meet a triggering
event such as retirement, disability or death. Earnings also can be tax-free once
you reach age 59 and have had the Roth 401(k) for at least five years. This taxfree
feature can be quite valuable in helping you build resources for retirement.
Other income-building possibilities
Apart from actively managing your 401(k), you have other options to help replace
some of the income you might lose from the freezing of your pension plan. Here
are some possibilities:
* Contribute to your IRA. Try to fully fund your Roth or traditional IRA,
both of which offer tax-advantaged savings and an almost unlimited array
of investment possibilities.
* Purchase an annuity. If you can afford it, you might want to purchase a
fixed annuity, which offers tax-deferred growth of earnings and can be set
up to provide you with a lifetime income stream.
* Take Social Security earlier. If your pension had not been frozen, you
might have preferred to start taking Social Security at your “full” retirement
age, which can be anywhere from 65 to 67. Now, however, you
might need to start collecting your checks at age 62. Your monthly payments
will be smaller than if you had waited, but if you need the money,
it’s there for you.
* Adjust your investment portfolio. With the help of an investment professional,
you might want to restructure your portfolio to provide you
with more income during your retirement years.
Don’t get frozen out
Clearly, it can be upsetting to see your pension frozen. But by managing your
401(k) wisely, and by considering the other steps mentioned above, you may be
able to attain sufficient retirement income to overcome the loss of what you once
counted on.
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