As with any money — investment or otherwise — there’s always a risk. And pensions are not exempt. For example, government workers may experience pension shortfalls. So what are the risks involved with pensions?
What does this mean? Well, in some states, pension plans may be reduced. And, in others, pension funds may completely run out by 2028.
To check the status of the pension in your state, check out sources like the Tax Foundation.
What if you’re in the private sector? Well, there’s a federal law called the Employee Retirement Income Security Act, or ERISA. It guarantees if your employer is still in business, you will receive a payout.
But, what if your employer runs into financial hardships? As a consequence, they have an underfunded pension plan or go belly up. There are a few risks involved with pensions in the private sector.
Again, there is some protection here. And, it comes in the form of the federal Pension Benefit Guaranty Corp. Be aware that there is no such PBGC backstop for benefit plans for public employees as state and local municipalities address these.
It’s reminiscent of how the FDIC insures bank deposits if a bank fails. In this case, the PBGC will swoop in like Superman and save the day by guaranteeing benefits.
What the PBGC Does and Doesn’t Guarantee.
As explained by the PBGC, these guarantee the “basic benefits” you earned before your pension plan’s termination date or the date your employer’s bankruptcy proceeding began, if applicable)” including:
- Pension benefits at normal retirement age
- Most early retirement benefits
- Annuity benefits for survivors of plan participants
- Disability benefits
Just note that it does not gumtree the following benefits:
- Health and welfare benefits
- Vacation pay
- Severance benefits
- Lump-sum death benefits for a death that occurs after the date the plan ended
- Disability benefits for a disability that occurs after the plan’s termination date (or the date your employer’s bankruptcy proceeding began, if applicable)
Also, the “PBGC does not guarantee any monthly pension amount that is greater than the monthly benefit your plan would have provided if you had retired at your normal retirement age.” The reason is that PBGC payouts have a maximum monthly limit. This is one of the big risks involved with pensions.
For 2021, a 65-year old who is the only individual receiving the maximum benefit is $6,034.09. For the joint-and-survivor annuity, it’s $5,430.68.
- What is a pension plan?
- How does a Pension Plan Work?
- How a pension works
- The Move to Defined-Contributions
- Are pensions taxable?
- The Difference Between a Pension and a 401(k)
- The History of the Pension Plan
- The Link Between Your Pension and Your Job
- How to Find Old 401(k) and Pension Accounts
- Vesting Your Pension Funds
- It’s SEP to You
- Do You Really Need a Pension?
- How Much Should You Contribute to Your Pension Plan?
- How Much are You Allowed to Contribute a Pension Plan?
- Where’s My Money?
- Calculating the Value of Your Retirement Fund
- Common Causes of Errors in Pension Calculation
- Can I Tap My Pension Plan Early?
- Monthly Annuity or Lump Sum?
- Are There Any Risks Involved With Pensions?
- What Happens With My Pension When I Retire?
- What Happens to Your Pension if You Die?
- Can You Have a Pension and 401(k) and IRA?
- Final Retirement Tips