Saving for Retirement When You Have a Pension
The biggest mistake that many people make is to not save for retirement because they think that they have a good pension. The reason this is a mistake is obvious: pensions are not as reliable as they used to be. Most of us probably know somebody whose supposedly great pension plan disappeared leaving them with a lot less retirement income.
Pensions are Not What They Used to be
The days when almost everybody could work for thirty years at the same job and look forward to a nice pension check in the mail each month are long gone. Most of us work at several different jobs with different retirement plans during our careers.
Even when a pension is available it could be unreliable in the last decade questions have even been raised about the security of government pensions. Many private pension plans have collapsed and been placed under the administration of the Pension Benefit Guarantee Corporation. The PBGC will continue paying the benefit at a much lower rate that is more vulnerable to inflation.
Finally pensions are a defined benefit which means retirees receive a set amount each month. This payment may not keep up with the rate of inflation and pensioners could end up in a situation where their income will not cover their expenses.
Retirement Savings Mechanisms for Pension Holders
Everybody who has a pension should have some retirement savings as a backup. A person can also get tax benefits from such savings because many retirement products are tax-deferred or tax-exempt. There are two excellent savings mechanisms available to everybody even if they have a pension.
Anybody can set up a tax-deferred Individual Retirement Account or IRA. A person can contribute up to $5,000 a year to an IRA and invest the funds in a wide variety of instruments including stocks, bonds, mutual funds, ETFs and even annuities. The gains on the investment will be tax-deferred which means no taxes are due until money is withdrawn. A person can also invest in a Roth IRA in which funds are tax exempt after initial taxes are paid. Most persons who withdraw funds from IRAs before age 59½ will have to pay a 10% tax penalty in addition to normal income tax on the funds taken out.
A deferred annuity is a plan that allows a person to purchase an annuity through a series of payments or regular contributions. When they retire the plan will start making regular payments to them. The main advantage to this arrangement is that the funds are insured so the beneficiary will get them. Another plus is that there is no limit on the amount of tax-deferred funds a person can keep in annuities. Unfortunately it is also subject to the same withdrawal penalty for those under 59½.
How Much Retirement Savings Should You Have
A person should try to save as much additional retirement income as possible. A good rule of thumb is to have a minimum of one year’s income saved when you retire. The more you save the better off you will be.
What If I Have Little or No Savings and I’m About to Retire
A person who has little or no savings who is about to retire has a number of options. An individual with a lot of cash can purchase products called immediate annuities. These are tax deferred, they are insured and they will provide a regular income. Some of them are designed to provide income for life. Other options for such a person include reverse mortgages and universal life insurance policies.