Hey everyone! Right now, I'm at the FinCon convention for personal finance bloggers! (Yep, we all get together and nerd out about money for a few days.)
Just three years ago, I was brand new in this whole money blogging game. It feels like a million years ago at this point, and things have changed like crazy for me since my first FinCon. It's always awesome to see new bloggers get started, and I figured it would only be right to feature a newer blog to the scene on the site today!
Today's post from the guys over at Five Alarm Finance (they're Firefighters…awesome right?) is all about pensions, which is timely because we just removed Coral's retirement funds from the Teacher Retirement System of Texas. If I hadn't started M$M, there is a good chance that my wife and I would have had to rely on TRS in retirement. I watched a TON of teachers struggle with retirement in that system, unfortunately. If you're going to rely on a pension in retirement – keep reading. Enjoy! ~M$M
While the majority of private sector companies have abandoned the “old school” pension plan in favor of a voluntary 401k, there are still millions of Americans who will be relying on a pension for retirement income in their golden years. The problem with most pensioned employees is that they rely on their pension like Millennials rely on google maps (…including me).
Without instant navigation at our fingertips, we might as well be driving blindfolded in a foreign country. Just like a failed pension would leave most people completely lost and broke. Would you be able to navigate through retirement if your pension was cut in half?
There are a few things to consider when thinking about retirement relating to a pension. Let's start with the negatives, then we'll talk about how awesome having a pension can be.
Pensions aren't immune to failure
Pensioned employees can have their retirement benefits severely diminished for a variety of reasons including failing industry performance, shifting demographics (retirees living longer), and poor fund management. While a major pension cut may be an unlikely scenario, it has happened before and, for some, will happen again.
- In 2017, Ohio ironworkers had their pensions cut by over half due to a failed pension system.
- In 2013, the once great motor city of Detroit cut retirees pensions, eliminated cost-of-living allowances, and reduced health care benefits.
- In 2009, Delphi (General Motors) pension failed to cover 70,000 employees.
- In 2005, United Airlines defaulted on pensions for about 134,000 employees.
- Other notable failed pensions include the City of Central Falls, R.I., US Airways, Delta, and Bethlehem Steel.
The lesson here is: Become self-sufficient. Don't rely on an organization, company or government for your future well-being.
We aren't trying to scare anybody, but we do want it to be a little bit of a wake-up call. We talk to WAY too many firemen whose retirement is based almost entirely on their pension. They are making minimal contributions to a supplemental retirement plan.
This strategy (or lack thereof) may work out just fine, although you definitely won't be buying a new BMW every few years. The fact is you are simply rolling the dice as to whether the payout will forever be as promised.
A pension is actually a pay cut
A pension alone is not going to make you wealthy. A pension for most employees doesn’t provide near the same amount as their full-time salary. Many pensions pay out around 60%, which is a pretty significant pay cut!
Granted, retirement contributions will no longer be deducted from your check, and you’ll likely be in a lesser tax bracket, but this still doesn’t cover the difference. Also, some agencies will require you to pick up some, if not all, of the health care costs (which have been soaring to record rates in the past years).
To make up for the reduced income, many people end up taking another job. Now, many of you may want to keep working after a full 30 in the fire department (or where ever you've spent the last few decades). But you shouldn't have to do it out of necessity. Freedom is what we're after.
Having financial freedom means being able to choose between working because you enjoy it or chilling on the back porch of the beach house, three margaritas deep because you've earned it.
I personally want to be able to do whatever the heck I want and not be forced to keep a side job. My wife and I would like to do a lot of traveling to our favorite spots (like the Swiss Alps) and explore places we’ve yet to see (like the Amalfi Coast). We would also love to have a beach house on Bald Head Island, NC. It’s been our favorite family vacation spot for the past 15 years. Plus, I’m a car guy, so it might be cool to have some fun toys in the garage.
Whatever our hobbies or interests, most of them require at least some money (if not a lot) to be able to enjoy. Having extra retirement money saved will surely allow us to enjoy our golden years to the fullest.
Don’t get me wrong, I’m not trying to be super materialistic and only care about doing “stuff” and buying “things”, but having extra money in the bank allows us to be free.
It also allows us to do one of the most rewarding things we can do in life – share our wealth and time with those in need.
There are so many cool ways to do this and we can't wait until the day when we can give without hesitation.
Social Security isn't the answer
Speaking of failing pensions…
Let's assume that social security will be around when we retire, even if at a reduced rate.
When we retire we will likely be less than 62 years old. Our department requires us to work 30 years to be able to receive our full pension (28 years if you’ve saved up enough sick time). The age we can start working is 19, so if we start at 19 years old and work 28 years that puts us at 47 years old.
That’s 15 years until we can collect social security. Better yet, some departments only require you to work 20 years creating a 25-year gap! So if you want to fully retire at that time, you better have a pretty solid nest egg. Otherwise, plan on working an extra job in retirement to fill the gap.
Okay, enough negativity…
More likely than not, our pensions will pay out as planned. Woohoo!
Collecting a Pension is Like Winning the Lottery
I had a Captain that used to say, “If you've played your cards right, our Pension is like winning the Lottery.”
“Playing your cards right” means saving for retirement as if your pension doesn't exist. When you have an additional retirement plan that will cover your normal expenses, an extra monthly pension check can be used to fund whatever floats your boat. Like… flying to Chicago just to see a Cubs game. Or eating at the nicest restaurants and reading the menu from left-to-right, instead of right-to-left.
How about funding your Grandchildren's college (not fully though so they still have some skin in the game)? Or giving freely to those in need without blinking an eye. Or maybe just buying a boat!
What would you do if you won a scratch-off lottery ticket that paid you $5,000 a month…forever? FOR-E-VER This is the opportunity that we have.
Creating an additional retirement plan means investing in IRAs, 401ks, 457s, and non-retirement accounts just to name a few. We go into more detail on each of these in other posts and there are tons of other resources all over the internet and at your local library. But, an easy way to start is by bumping up your contributions to your employer-sponsored supplemental plan.
Hope for the Best, Plan for the Worst
When the guys at the station start talking about retirement it’s all about the pension. The terms are basically used as synonyms. It’s as if we have little control over what our retirement will look like and it’s solely based upon what the government determines we’ve earned for our years of service.
But, retirement can be so much more than what they have portioned out for us. When we decide to create our own wealth outside of the pension, we are no longer slaves to the 30-year system; we open up a world of opportunity by becoming financially free to live out our dreams.