Relying on a Pension

Posted On: 2007-02-12
Length: 13:47

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Many of our grandparents could count on receiving traditional pensions that typically paid a guaranteed lifetime income. Such pensions promised a secure retirement to workers, with relatively little need to worry about saving or investing for the future. But, for better or worse, times have changed. In this Fidelity Personal Finance podcast, we'll come to grips with the reality that if you're relying on a pension, you may want to think again. But don't despair, because we'll also serve up some tips for safeguarding your savings.

The traditional pension has come under siege in recent years from corporations across the country, and its losing the battle. The Pension Benefit Guarantee Corporation, or PBGC, revealed in a December 21, 2005 report titled "An Analysis of Frozen Defined Benefit Plans," that 10% of companies that offer traditional defined benefit pensions have frozen their plans. This includes the likes of GM, IBM, Sprint, Verizon, and Alcoa. Many firms no longer accept new employees into their pension plans, and many plans don't allow current employees to earn additional pension benefits. In fact, in 2003, the Boston College Center for Retirement Research reported that the percentage of workers covered by a traditional pension declined from 38% in 1981 to just 19% in 2003. What's more, the trend away from traditional pensions is gaining momentum. A 2005 Watson Wyatt study entitled "More Companies Froze Terminated Pension Plans in 2004" found that 11% of Fortune 1000 companies that sponsored defined benefit plans had frozen or terminated a plan in 2004, up from 5% in 2001. The upshot, today's retirees must take a much greater role in planning and saving for their retirement. That means taking full advantage of employer-sponsored retirement savings plans, such as 401Ks, as well as personal investment vehicles, such as individual retirement accounts, or IRAs, and annuities that can supplement such plans. Conrad Citricello, a director of the graduate program on personal financial planning at Robinson College of Business at George State University states, "You may not be able to rely on a traditional defined benefit pension to keep your retirement safe." He adds, "It's up to you to come up with a diverse array of retirement resources." The simple fact is we live in a changing world. That explains why companies have shifted from traditional pensions to 401K plans and other retirement savings plans. Many of these companies are grappling with factors such as global competition, and escalating health care costs. What's more, the bear market that began this decade reduced the value of the assets that stood behind many pension plans. Finally, today's longer life spans have made it far more expensive to provide traditional pensions. Says Citricello, "when companies agreed to provide those lucrative pensions all those years ago, nobody expected retirees to routinely live to 90." Many existing pension plans don't have sufficient...