The 42 million Americans who remain in a traditional pension plan are counting on that plan for a quarter of their monthly income after retiring, according to a new Fidelity Investment study.
That may or may not be realistic, depending on the level of their benefits. What’s crazy, though, is that nearly three in four do not know their plan’s basics – things like the vesting schedule, their payment options upon retiring and the age they become eligible to collect benefits. This suggests that most people approaching retirement have not given much thought to the details of how they will fund their later years.
We’re good at broad strokes: the survey found that folks with a pension expect equal retirement income from four sources – their private pension, savings, Social Security and 401(k) plan. But there appears to have been little actual planning in arriving at this estimate. Some 61% in the survey said they have never inquired about their monthly benefit; 43% figure their employer will tell them what they need to know when they need to know it and 29% don’t even know whom to ask.
That’s alarming because folks with a traditional pension tend to be older workers, who should not be guessing. A Towers Watson study found that only 17 Fortune 100 companies now offer new employees a traditional pension, down from 89 in 1985. So this is mostly an issue for those who have been around a while. With that in mind, here are three simple questions to get your planning started:
- Who should I ask about my plan’s particulars? Start with the human resources department. They may be able to answer your questions. But they may also refer you to a third-party plan administrator. The administrator will have a wealth of information. But it may be mostly available online, where you’ll have to click around to find what you need. Ask your HR department for help with this and you will likely get it.
- When am I eligible to collect? Employees are typically fully vested after five years of service and the typical private pension begins paying when you retire at age 65. As with Social Security, you may be able to retire early and begin collecting as early as age 55. But your monthly benefit will be much lower, and with private pensions there is almost never an inflation-based benefits increase. So in most cases the longer you wait before collecting the better.
- What are my payment options at retirement? Typically, you can take a lump sum, which for tax reasons should be rolled into an IRA; you can opt for an annuity payout, guaranteeing monthly income for life (careful, this leaves nothing for a big unexpected expense); or you can arrange a combination of both.