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Once upon a time, retirement in America was referred to as “a three-legged stool.” The first leg was your expected Social Security benefits, the second leg was your own personal savings and the third was something old-timers called a pension.

A financial advisor can help you create an income plan for retirement. Find a fiduciary advisor today. 

A pension – also called a “defined benefit plan” – is a payment from a former employer that was (and sometimes still is) offered as a benefit with no contribution from you. The payment amount is based on years of service with that company. Once you’ve worked long enough to become “vested,” your benefit is guaranteed at a certain age and doesn’t end until you die. In many cases, a surviving spouse can receive a reduced benefit.

In 1975, there were 103,346 pension plans in the United States, a number that started to decline in the early 1990s and dwindled to just 46,577 plans by 2020. In many cases, the companies that promised those pensions have been sold, merged or gone out of business. However, many workers who are still entitled to receive those benefits lack any details about their pensions, including how to go about collecting them.

Unclaimed pensions are waiting to be claimed by at least 80,000 people, according to the Pension Benefit Guaranty Corp. (PBGC), the federal agency that oversees retirement security for Americans. In some cases, the people entitled to those pensions don’t even know they’re eligible to receive payments.

Resources For Locating an Unclaimed Pension

If you’re looking for a missing pension – or want to find out if you qualify to receive one, try these resources:

Previous employers. Keep your contact information updated with the benefits administrator at the companies where you worked or their successors.

Legal assistance. The Pension Rights Center is an information resource that also runs Pension Counseling and Information Programs in 31 states. These programs provide free legal assistance for help with pensions, profit-sharing and retirement savings plans.

In states without counseling and information programs, the Pension Rights Center’s Pension Help America offers assistance in finding counseling projects, government agencies and legal service providers.

Meanwhile, the National Pension Lawyer’s Network, an affiliate of the Pension Rights Center, is a free service that can refer you to lawyers who take pension cases, sometimes pro bono.

Employee Benefits Security Administration. The EBSA is part of the U.S. Department of Labor and has free counselors who can answer pension questions. The E-Fast feature on the agency’s website can find pension plan annual reports going back to 2010, which explain how to file a pension claim. The Abandoned Plan Search Tool is also on the agency’s website.

Other resources. Pension Benefit Guaranty Corp. (PBGC) can help with claiming a pension. You can call for assistance toll-free at 800-400-7242.

Meanwhile, the National Association of State Treasurers runs the National Association of Unclaimed Property Administrators, a network of to help locate unclaimed assets. Additionally, the National Registry of Unclaimed Retirement Benefits is run by PenChecks, the largest independent processor of retirement benefit distributions in the U.S.

Bottom Line

As defined-benefit pension plans have been phased out in favor of 401(k) and similar accounts, workers may not know that they qualified for a pension many years ago. In addition, as older companies have been sold, merged or closed pension plans can lose track of vested employees. Even when a company has declared bankruptcy, pension benefits may be protected by the federal Pension Benefit Guarantee Corp. (PBGC)

Tips for Claiming Your Pension

  • There are a number of resources, as listed above, for locating a missing or unclaimed pension. If you think you once qualified for a pension, don’t assume that you’ll be contacted to claim it. Remember, just because you once worked at a company that offered a pension plan you may not have worked there long enough to become vested. In that case, your pension benefits would have been forfeited when you left the company. To see how any pension income might figure in your retirement plans, try SmartAsset’s retirement calculator. This free tool will estimate how much you’ll have when the time comes to retire.
  • In most cases, an old pension likely won’t pay enough benefits to live on. You’ll still need to figure out when and how to claim your Social Security benefits and maintain your own savings to support yourself in retirement. A financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you.

Photo credit: ©iStock.com/AsiaVision, ©iStock.com/shapecharge, ©iStock.com/tumsasedgars

Source: smartasset.com

Apache is functioning normally

As unemployment numbers continue to rise, many employees are stressed about whether they’ll have a job next week or not.  Some have already, some have already lost their jobs and are scrambling to find new employment.   In this time financial planning is crucial.  This is a time when people are feeling and are desperately in need of guidance.  If you think that you are about to encounter a layoff,  you need to be focusing your attention on what can be controlled:  cutting expenditures, figuring out emergency funds, evaluating how to replace lost benefits, and making a game plan for the job search.

1. Save Emergency Cash

For those that are still employed but the future of their job is uncertain, I would encourage them to have at least 12 months of savings in cash.  Unfortunately many will not have enough.  But if they’re still employed and the emergency funds are not there, tapping into their 401(k) might be a viable option.  I know what you’re thinking.  Tapping into your 401k usually goes against all that I stand for.  And with this dismal market,  it might be a dangerous move, but;  if they become unemployed that option might now be available to them.

Typically if you’re still employed you’re allowed borrow up to half of your 401(k) balance, up to a maximum of $50,000.  Running these numbers you can guesstimate the period of how long you think it will take you to find a new job and then how much you would need to borrow to get you by until the new job is made.  If you borrow from your 401k while you are still employed then you avoid the 10% withdrawal penalty.  Sure there is some speculation in this move, but if you’re in a high demand field you may be able to use this move to your advantage.

Warning: If you do this, be sure to double check with your employer when you are due to pay it back.  It tends to vary from employer, but it could be due back immediately, within 60 days or some period greater.

2. Don’t Pay Off Debt

Another common misconception of after being laid-off is that most people want to take their savings or take their retirement savings and pay off debt, such as credit cards or even the 401(k) debt.  But in this type of market, paying off debt should not be the priority especially if you are unemployed.  The priority is to keep get your savings intact and making sure that you have plenty of cash on hand.  Sure credit card debt is bad, but just focus on making the minimum payment until you get your job situation in check.

3. Focus On Crisis Budgeting

If you’re used to going to shopping every weekend or eating out every other night at fancy restaurants, then most likely those changes are just around the corner. You need to sit down and seriously hammer out a budget of things that you need and things that you don’t need.

You may even consider working out two budgets, one for while you’re working and one for when you’re not working, so that way you can truly see how much you’re spending per month. And then, you can contemplate whether you can go on a cheaper cell phone plan, or cut your cable bill services. Sometimes adding that extra payment per month might not seem like a big deal, but $50 here and $50 there will surely add up, especially on a limited budget. Also, too, knowing which expenses you absolutely must be covered will help you realistically search for your future job.

4. Replace Lost Benefits

In the aftermath of a job loss, people should take stock of what benefits have been lost, which ones you are entitled to by law, and which ones may be portable.  how to continue health care coverage, especially if there are dependents.

Typically, employees are eligible to keep the same coverage through COBRA for at least 18 months. But, they may have to pay 102% of the cost of their insurance premium. If there premium have been subsidized by their employer, then that cost will be a rude shock.  COBRA can often be a good bridge choice, but it ends up being a health benefit. Families paying $200 a month for insurance under COBRA, it could be $1,000.  Luckily, the government just passed new law concerning COBRA benefits that qualifying period will be only responsible to pay for 35% of the benefit.  This comes at a time that should be very helpful to many that are facing layoffs ahead.

Many employers offer life insurance, long-term care insurance, disability policies and they may be portable as well. For another person or one who is not in good health, ability to take over the payments on existing $100,000 life insurance policy may save the worry of having to find another carrier. It’s better to keep it for a few months, although make sure they don’t need it, and drop it later.

5. Consider a Career Transition

Many people will be forced by an unforeseen job layoff to reassess what they want in their lives and what is meaningful to them. They may have to craft resumes, cover letters for the first time in years, and feel at a loss especially if they are switching to a new career path, which is an unfamiliar field.

If you haven’t jumped on the social media bandwagon, it’s time.  Consider Facebook, LinkedIn, Twitter and other social media sites to reconnect with old networks and also create new ones.  The more people that know your situation the better.   Also, consider starting a blog to showcase your talents. Need a good blog for inspiration?  Guess what, you’re already here.

by Steve Rhodes

Source: goodfinancialcents.com

Apache is functioning normally

What is a vesting schedule?

A vesting schedule is a way for your employer to give you some incentive to stay with them.

To be 100% vested means to be able to take all of your retirement benefits with you if you leave or have been fired.

Depending on what type of plan you have- pension or 401k- will determine your vesting schedule.

Let me make something clear.  What you contribute is always yours.  The vesting schedule pertains to what your employer contributes e.g.; the 401k match.   Here’s a look at the two different vesting schedules:

Defined Benefit (Pension) Plan

Pension plans are a dying breed but some people still have them.  Defined benefit plan must vest at least rapidly as one of the following two schedules, assuming the plan is not top-heavy. Top-heavy has to do with making sure that each employee receives a fair share of retirement benefit as it relates to their salary.

  1. Five-year cliff vesting, no vesting is required before five years of service.  100% vesting is required at five years of service.  Referred to as a five-year cliff.
  2. Three to seven-year graduated or graded vesting.  The plan must provide vesting that is at least as fast as the following schedule:
Years of service Vested Percentage

3 20%

4 40%

5 60%

6 80%

7 100%

So in the example above, if the employer uses the graded vesting schedule and you have been employed for 5 years, then you’ll be able to take 60% of the employer’s benefit with you.

At my previous firm, I was offered a small retention package to stay (not nearly what the boys at Merrill got) and it had a 7 year vest attached to it.  Needless to say, I gave it up and started my own firm.

401k Vesting Schedules

Defined contribution plans must vest at least as rapidly as one of the following two schedules  for all employers non-elected contributions and matching contributions:

  1. Three-year cliff vesting.  No vesting is required before three years of service, 100% vesting is required upon the completion of three years of service.
  2. Two to six-year graduated or graded vesting.

The plan must provide vesting at least as fast as the following schedule.  Note: These are the same vesting schedules used to top-heavy defined benefit plan.

Years of service Vested Percentage

2 20%

3 40%

4 60%

5 80%

6 100%

The employer may choose a vesting schedule that is more favorable to the employee, but not less favorable than the cliff.

Example: ABC Company offers a 401(k) plan that has an employer match.  The company has the following vesting schedule with respect to matching contributions: 25% vested after one year, 50% vested after two years, and 100% vested after three years.

Although the vesting schedule does not exactly match the vesting schedules posted above, it is acceptable because it’s more favorable to the employees than the vesting schedule listed above.

All years of service must be counted with few exceptions.   Two of the more common exceptions are:

  1. Years prior to the implementation of the plan.
  2. Years prior to the age 18.

Both years prior to the implementation of the plan and years prior to age 18 may be considered at the choice of the employer, but it must be in the plan documents.

Employer contributions are 100% vested when:

  • Plan termination.  Benefits become 100% vested in the event of a plan termination.
  • SEP, SARSEP, and SIMPLE IRA’s. All contributions to these are fully vested.
  • Attainment of normal retirement age. In the event of an employee attaining normal retirement
  • Under a 401(k) plan, elected deferrals, qualified non-elected contributions, and qualified matching contributions are 100% vested at all times.
  • Safe Harbor contribution is to a Safe Harbor 401(k) plan.
  • Plan requires two years of service for eligibility.

It’s very important to understand your vesting schedules when you start with a new employer.  That could make the difference of walking with a good chunk towards your nest egg or walking away with nothing.  Be sure to check your benefits manual and ask your human resources department the right questions.

Source: goodfinancialcents.com

Apache is functioning normally

In recent years, the use of Deferred Compensation Plans has grown considerably. This is largely due to the current job market … employers are looking for new ways to appeal to and retain skilled employees. Looking at new ways to approach employee benefits is one way to work toward accomplishing that.  Make sure you read your employee handbook and completely understand the rules of your deferred compensation plan.

What are Deferred Compensation Plans?

In the simplest terms, a Deferred Compensation Plan allows an owner or an employee to set aside a portion of their income to be paid out at a future date. These plans are broken down into two basic categories: Qualified and Non-Qualified plans. Each type of plan holds certain advantages, but the major difference between them is in the way the plans are taxed by the IRS.

Non-Qualified Plans

In a non-qualified plan, the employer does not receive tax deductions until the time when the employee’s benefits have been paid out … and at that time the benefits are taxable to the employee. On the plus side, setting up a non-qualified plan is generally less expensive. Also, employer contributions are not limited and these plans do not have substantial reporting or filing regulations.

Qualified Plans

In a qualified plan, reporting requirements are more significant, highly paid employees may be prohibited from participating, and the amount an employer may contribute is limited. However, qualified plans include benefits that are allowed to mature tax-deferred until they are dispersed. Additional tax deferral may be possible as well, because qualified plans are commonly eligible for rollover to an IRA or other (qualified) plan.

Which Deferred Compensation Plan is Best?

Well, that’s a tricky question. Although tax deferral is generally thought of as a benefit, it could be a disadvantage if an employee’s tax rate has increased before compensation has been paid out. However, if tax rates do not rise (or if they drop), a well-compensated employee is almost always likely to benefit by deferring a portion of their income.

Tax rates are a major factor to consider when contemplating a Deferred Benefit Plan, and there are other aspects to consider as well. The best thing to do is speak with a qualified financial professional who can take a look at your unique situation and help you to determine if setting up a Deferred Benefit Plan will be a good move for you.

Vesting

Most deferred compensation plans will have some sort of vesting schedule.  I once had a very attractive deferred comp plan, but the only hitch was that it had a 9 year vesting schedule.   This is commonly referred to as “golden handcuffs“.  It’s a nice benefit, but makes it a much tougher decision if you are ever faced with a attractive offer elsewhere.   Be sure you understand all the rules when it comes to your deferred comp plan.

Source: goodfinancialcents.com

Apache is functioning normally

Over the weekend while attending my town’s Friday night football game, I struck up a conversation with an acquaintance of mine, and we started talking about the market. The fellow I was talking about was a believer in the market, and knew that the current crisis that we are in would eventually pass, and the market would continue to strive as it usually does. What he found most peculiar was with some of the sediments of his fellow co-workers, who were participating in the 401k. His co-worker’s belief was that with the market being as bad as they were, they were going to no longer defer to their 401k, and refrain from taking advantage of the pre-tax contributions into their retirement plan.  They were giving up free money! He was stunned by his co-worker’s remarks, and as equally as I, and compared that to a conversation that I had, with some other workers from another local employer.  It prompted me to write this blog in regards in to things you should not do when it comes to your 401k.

1. Do not stop contributing to your 401k no matter what.

Just because the markets are down does not mean you should not contribute. In fact if there was a time ever to contribute, this would be the time. The simplest reasons is that right now despite the market’s turmoils, currently the market is at a discount, and what that means is that there are a lot of great companies that exist out there, that are currently “on sale”. This is a time to buy stocks, at a cheap price in hopes to benefit from the appreciation in later years. This strategy can also be called dollar cost averaging, which means as long as you are contributing on a consistent or periodic basis, you’ll take advantage of buying shares at a lower price in down markets, and compare that to buying shares at a higher price in up markets, which should then all balance out for a dollar cost average.

If the market has you completely terrified, then consider changing all future contributions to short or intermediate bonds.  At least that way you’re money is making a little interest while the market tries to figure itself out.

2. Do not put all of your 401k into the money market.

While I understand the disbelief in the markets right now to where you want to shift all of your money into the money market, by doing this would be a great mistake. If you believe that making money in the market is to buy low and sell high, then by shifting your money into the money market from your other investments, it would be the exact opposite; buying high and selling low. If you’ve seen your 401k depreciate in the last several months, the only way to get that back is by staying exactly where you’re at. Now, I understand for those nearing retirement, that this can be a compromising situation, but if you visit the rule of 72, meaning that you take 72 divided by the interest rate on your investments, and that will tell you how long it will take to double your money. That also, too, will give you an indicator how long it will take you to recoup the losses that you have incurred. By shifting to the money market, chances are, you are making somewhere in the 2% interest rate, which means it would take you almost 20 to 30 years just to double your money, and to recoup your other money that you’ve lost, would be a great time.

3. Do not borrow against your 401k.

This can be said in an up market or down market, but I had to throw it in there. Borrowing against your 401k is never advisable, especially in a down market. Look to start an emergency fund of some kind so that you can have that to fall back on in case of an emergency. If you don’t have an emergency fund, start one now. There’s no sense in contributing to your 401k if you have to pull it out just pay the bills.

Source: goodfinancialcents.com

Apache is functioning normally

How much do you need to retire? The usual suggestion provided by financial planners and retirement calculators is 75% to 85% (roughly 80%) of your pre-retirement income. But is that really enough money to retire with security? Does the 80% rule-of-thumb work under all circumstances, or is it merely a rough approximation to simplify the retirement planning process? Let’s examine these issues more closely…

Is 80% Of Pre-Retirement Spending A Realistic Budget?

The basis for the 80% spending rule is that your living expenses are expected to decline once you retire thus your spending should decrease without forcing you to lower your lifestyle. For example, you’ll no longer need to purchase expensive professional clothing and your transportation costs will drop without a daily commute to work. Additionally, your children will probably be grown and out of the house, and you will no longer have to fund your retirement savings. You may even have your home paid in full thus eliminating your mortgage payment and you may be in a lower tax bracket. All these factors indicate your spending should drop during retirement.

Unfortunately, the issue is not as clear as it might appear on the surface. The analysis above assumes certain types of spending will decrease while all other spending remains the same. That is not realistic. For example, many new retirees like to hit the open road and see the world thus increasing their travel budgets. Similarly, it is the rare retiree who does not face rising health care costs.

In short, the 80% rule of thumb is a generalization designed to simplify the retirement planning process at the expense of accuracy. It makes many assumptions about your future that may not be true for you. It is no substitute for making a real budget based on your actual plans for retirement, and it could actually jeopardize your financial security. To make this point clear we will examine five reasons why your expenses may actually increase during retirement instead of decrease…

Longer And More Active Retirements

People are living longer and more active retirement lifestyles than ever before. Increasing longevity has made 60 the new 40. If you plan an early retirement so you can sail around the world or take frequent wine-tasting trips to France and Italy, the cost of those leisure activities and travel can easily offset any decrease in work-related expenses. Alternatively, if you are planning an early retirement it will mean you need more money to support a longer life of leisure. A longer retirement means you can’t spend as much investment principal each month, and a more active retirement means you need more savings and income to support a more expensive lifestyle.

Health Care In Retirement

Health care costs have risen steadily and there is every reason to believe that trend will continue. Additionally, your chances of serious illness or need for expensive medications increases with age. A single medical event can be devastating to your retirement savings if you are not prepared, and if you don’t have long term care insurance then assisted living or nursing home expenses can deplete your retirement savings.

Other Ways Expenses Could Rise

Maybe you haven’t paid off your house, or possibly you took out a home equity loan to remodel. The 80% rule-of-thumb assumes you no longer support dependents, but you may still be paying a child’s college expenses. Alternatively, you might be caring for an aging parent who is living in your home. These expenses certainly won’t go away just because you retire.

Lower Taxes May Be Wrong

The assumption that your taxes will drop during retirement could be totally incorrect. After all, if your retirement income level is similar to pre-retirement income then where will the tax relief come from? In addition, growing budget deficits at all levels of government combined with entitlement program problems indicates a greater likelihood of rising tax rates rather than falling tax rates. In short, the idea that your tax rate will decrease during retirement may turn out to be just the opposite.

Spending Statistics Misrepresent Real Spending

Many research studies have been conducted on the spending patterns of the elderly. One of the more famous studies comes from Ty Bernicke in the Journal of Financial Planning where he cites numbers from the U.S. Department of Labor’s Consumer Expenditure Survey indicating that retirees spend less as they age. A typical 75-year-old spends about half as much as the average 45-to-54-year-old. Overall, spending declines about 25% each decade from age 55 to 75.

This appears to be conclusive evidence that spending does in fact decline with age during retirement; however, there are a couple of major flaws in the research. The first problem results from these figures failing to include long term care costs. You can solve that problem with insurance but there is no solution to the next problem…

Bernicke’s analysis was based on a snapshot in time thus it only compares nominal dollar spending and does not adjust for inflation. In other words, it compares the spending habits of a 75 year old today to the spending habits of a 45 year old on the same day. It does not track a 45 year old over a period of 30 years to determine if their spending decreases with time as the study would imply. Instead, it compares the two different groups at a single point in time.

The problem with this approach is it fails to adjust spending for inflation. A mere 3% inflation will double spending in just 25 years which will more than offset the expected reduction claimed by Bernicke’s research. In fact, it could potentially cause an increase in spending – contrary to what his research would imply.

A More Accurate Approach For Determining How Much Money You Need To Retire

In summary, you would be wise to forget the oversimplified rules of thumb when trying to figure out how much money to retire. Your financial security is at stake and you deserve better. Instead, it is far more prudent to develop a realistic budget for your retirement spending based on your actual retirement plans. You don’t have to make it perfect because nobody can predict the future, but you do want to make it as accurate as you can.

A personal budget for retirement is necessary because your life situation is unique. Only you know the financial situation facing your maturing children and aging parents that might affect your budget. Only you know about your globetrotting plans to travel the world for a decade or two before slowing down. That means you will need to add that expense into your budget for a decade or two before removing it. If you have long term care insurance then add the premiums as an expense into your budget, and if you don’t then build a cushion into your savings for self-insurance. In short, develop a plan for retirement and then develop a budget to reflect your plan.

When you complete the budgeting process you may be happily surprised to learn you only need 60% of pre-retirement income making you better off than expected – or your dreams could require 140% of pre-retirement income causing a challenge. This is key to your financial security because the difference between these two numbers can either break the back of your retirement savings or make a meager nest egg look plentiful. Because the range of outcomes is so wide and the stakes are so high, the only realistic solution is to replace the rule of thumb with a carefully developed retirement budget based on your unique needs to figure out how much you really need for retirement.

It is the only prudent thing to do.

About The Author

Todd R. Tresidder is a financial coach who blogs about retirement planning, wealth building and investment strategy. He wrote the book How Much Money Do I Need To Retire teaching you how to overcome the hidden problems behind retirement calculators that threaten your financial security.

Source: goodfinancialcents.com