The economy has not been kind to retirement plans public or private, something that has forced many to rethink retirement plans. Losses in the housing market, the stock market, and investment markets, including the derivatives markets, have wrecked havoc with pension funds throughout the nation, even the world, and have damaged personal retirement savings accounts significantly. On the verge of retirement, the baby boomer generation is becoming increasingly worried about what the near future holds for them, and they are far from the only people concerned about retirement planning.

Public And Private Pension Funds Have Suffered

The losses have been stunning. According to an article written by the Wharton School and republished from the online research and business analysis journal of the Wharton School of the University of Pennsylvania by Human Resource Executive Online on May 16, 2009, “retirement accounts have lost from $2 trillion to $4 trillion, as stocks have tumbled nearly 50 percent from their peak in 2007.” The article notes that “sponsors of private and public pensions” are now in the position of being billions of dollars short of their minimum requirements, because of the losses associated with having 60 percent to 70 percent of those funds invested in equities, as is typical.

According to a May 29, 2009, article in the New York Times, the state pension fund has endured a “26.3 percent loss for the year ending March 31,” falling from $153.9 billion the year before to $109.9 billion. On May 18, 2009, the San Diego Business Journal reported that the region’s county pension fund lost 33 percent of its value, with the city’s pension fund worth falling by about 30 percent, citing “the worldwide stock market crash” as a primary contributing factor to those losses. From coast to coast, state and local governmental officials face difficult decisions on how to make up short falls, including the potential of raising taxes on already financially stressed taxpayers, many feeling a bit resentful at having to pay more in order to fund the better benefits and retirements that state and city workers typically have as compared to the average worker.

Personal Retirement Plans In Shambles For Many

The retirement plans of the average worker are a bit more precarious than those that have plans that can count on the bottom line back up plan of raising taxes. The defined benefits plans that used to be the norm for those having retirement plans through their employers gave way to the rising popularity of the defined contribution plans made possible by a 1978 amendment to the tax code. Instead of having the predefined, retirement pension amount provided by the employer for the retirement years, defined contribution plans, as pointed out by the Wharton School article, “shift the responsibility of accumulating retirement income from the employer to the employee.”

This is done through such plans as the 401 (k), in which “employers pay administrative costs and often offer to match employee contributions.” However, with the difficult economic circumstances, many employers are reducing or eliminating their contributions. With employee contributions being voluntary, as well, and economic circumstances what they are, some are finding it difficult to maintain their contribution levels. The Wharton School article brings up a very salient point, particularly with the turmoil and uncertainty in the investment market today.

“Even before the financial crisis, we have been concerned about the ability of 401(k) plans to provide secure retirement income,” Alicia H. Munnell, director of the Center for Retirement Research at Boston College, testified to Congress in February, as quoted in the Wharton School article. “Workers continue to have almost complete discretion over whether to participate, how much to contribute, how to invest, and how and when to withdraw the funds,” she testified. “Evidence indicates that people make mistakes at every step along the way. They don’t join the plan, they don’t contribute enough, they don’t diversify their holdings, they over invest in company stock, they take out money when they switch jobs and they don’t annuitize at retirement.”

In other words, defined contribution retirement plans place money management and investing in the hands of people who really don’t, on the average, have the specialized financial knowledge or skills necessary to making the best decisions about investment and retirement income securing and growing. With financial experts shaken by the extent of recent losses, it’s no wonder that many people find their retirement plans in shambles, damaged by the loss of value that real estate, 410 (k) plans, and other investments have experienced, as well as by effect that the burden of loans, mortgages, and credit card debt have on their ability to save and make up the losses before they reach retirement age.

Those relying on defined benefit retirement plans are also in a shaky position, as companies struggle to come up with the money to make the payments. The other worry is whether or not the company will survive to pay the promised benefits. Those, for example, relying on General Motors pension plans may see some changes in what they receive by the time all is said and done in the bankruptcy proceedings.

The General Motors pension plan is underfunded by about $20 billion, according to a recent USA Today report, and while the pension fund and 410 (k) plans are protected from creditors, if GM cannot bring the pension plan up to the monetary levels it needs to be via profits made after restructuring, a second bankruptcy may need to be declared and its “pension obligations” transferred to Pension Benefit Guaranty Corp., a “federal agency that insures defined pension plans.” That could result in a reduction of the amount of the benefits received by retirees. Furthermore, according to the article, GM is already “working with the Treasury to reduce some retiree benefit obligations by roughly two-thirds.”

Restructuring Retirement Priorities

A June 2, 2009, MarketWatch article by Robert Powell pointed out that “not so long ago, Americans retired debt-free.” Citing data from “Debt: The Detour on America’s Road to Retirement,” Securian’s 2009 Survey of Financial Values and Debt, the article makes it clear that times have changed. According to the article, 22 percent of baby boomers “owe at least $50,000 in non-mortgage debt in 2009, up from 12 percent in 2007,” and went on to say that “nearly four in 10 baby boomers had non-mortgage debt of $25,000 in 2009, 29 percent in 2007. The article also noted the debt levels of the boomers’ parents, with 22 percent of those people holding debt of $25,000 in both 2007 and 2009.

Debt robs people of their fiscal freedom of movement, making it harder to have the financial flexibility to deal with fluctuations in income and expenses. Despite the numbers of boomers approaching retirement age, according to the survey, “few are actively paying down their debt,” something that they may come to regret. Some already are, it seems, judging from the reduction of the number of people nearing retirement that, according to a recent survey cited in a June 2, 2009, Austin Business Journal article that believe “they will have enough money to live comfortably five years into retirement.” Just 44 percent of people feel comfortable that their retirement plans are that sure. Debt management needs to be a fundamental part of retirement planning, with an eye towards seeing debt elimination happen before retiring.

The current economic circumstances have caused real damage to the retirement plans of many, causing some to have to work longer than they’d planned or accept a lower standard of living than they’d hoped. Those with a bit of time between them and retirement would be well served to work towards reducing and then eliminating their debt as well as making up for losses incurred during this difficult economic period. People who’ve been so busy living today and haven’t invested much time or money in retirement should slow down a bit, particularly when it comes to taking on debt, and make solid plans for the future, because the productive years with the best income potentials do pass quickly.

Be Sociable, Share!