A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Wednesday, June 29, 2005

Pension Problems and What to do About Them

There's a really sad story($) in today's Wall Street Journal about how companies reduce or eliminate pensions for their current and retired employees. I just want to say that I think the practice is disgusting. It's one thing to change benefits for someone in the 20s and 30s. It's quite another to send a retiree a letter saying "...oh, by the way, if you don't die before February 3, you will lose your death benefit."

We all know by now that many companies bit off more than they could chew when they promised benefits years ago. But promising something and then taking it away is much like a company buying something from a supplier and then not paying. How long do you think that company would last?

So, what's a person to do? First off, I wouldn't count on anything that has to do with a pension. If you are not putting money away in your 401(k) because you have a pension, you are TAKING A VERY BIG RISK! Start saving money on your own right now! Open a Roth IRA and max it out if you can. Then, once you retire, you are under no obligation to use the Roth. You can just let it sit there and accumulate tax-free. If you have a named beneficiary, you could possibly pass on tax-free income to them should something happen to you.

Secondly, buy your own life insurance if you need it and can afford it. Don't count on life insurance from your pension. If you get it, great, but you don't want to take a chance of leaving your spouse with nothing. Ideally, you should be building wealth so that life insurance isn't necessary.

Thirdly, when you retire, don't leave all your assets in company stock. Diversify! You should never have all your money in company stock to begin with, but you REALLY shouldn't have it all there when you retire. The WSJ article I referenced to had a story about a guy who worked for AT&T and retired with $250,000 in company stock only to see it drop to $20,000! Don't let that happen to you!

I welcome any comments and suggestions from my readers. If you have something worth saying, please say it.

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