Roger Wohlner
Saving for our retirement becomes more and more challenging each day. Longer life expectancies, fewer traditional pensions, and volatile investment markets are the most obvious challenges. Beyond that, here are seven other threats to your retirement:
Even if you have a traditional pension plan, those benefits can change. Your employer can't take away benefits you've already earned, but benefits going forward can be reduced. Traditional pension plans have experienced losses during the market decline, which will require additional contributions from companies. Companies might reduce benefits for newer employees and/or freeze plan benefits for existing workers. In the latter case, you would cease to accrue any further pension benefits. Keep an eye on your pension plan so you know if your employer makes changes.
Switching jobs can affect your retirement benefits. If you have a traditional pension plan, don't change jobs without considering the impact on your pension benefits. Many plans have a five-year time frame for vesting into a benefit. The same applies to 401(k) plans with matching employer contributions. You may find staying at your job a while longer will significantly increase your benefits.
Don't forget about pension benefits from previous employers. Many employees leave a company without realizing they are entitled to pension benefits. Before changing jobs, check with your employer to find out what benefits you are entitled to. Then keep track of the company so you can claim benefits when you retire.
Early retirement can significantly reduce your retirement benefits. Sure, it sounds great to retire before age 65 with company pension benefits. But don't just look at how much you'll receive when you retire early. Also consider what you would receive if you wait until normal retirement age. Retiring early can dramatically lower your monthly pension benefit for several reasons: You don't have as many years of service, salary increases you would have earned aren't considered, and those extra years of benefits cause a large actuarial deduction in benefit calculations.
You may not be able to count on health insurance benefits after retirement. Due to rapidly increasing costs for health insurance, many companies are either phasing out health insurance benefits for retirees or increasing retirees' share of the cost. While Medicare is still available once you turn age 65, those benefits don't cover all medical costs. Whether or not you can count on health insurance benefits is often a significant factor in deciding whether you can retire before age 65.
Social Security benefits are changing. Normal retirement age is gradually increasing from age 65 to age 67, a change affecting anyone born during or later than 1938. You can still receive reduced benefits at age 62, but the permanent reduction in benefits is increasing from 20 percent to 30 percent. These changes are meant to encourage you to retire at a later date.
Decide carefully before taking a lump-sum distribution. Some traditional pension plans allow lump-sum distributions instead of monthly pension benefits. Use that option with care. While the amount of money might seem large, are you sure you can invest it and earn more than the monthly pension option?
Planning for retirement was never easy. Make sure you have a financial plan in place and that you have considered all of your options before deciding when to retire.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. Read more about Roger here.
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