Is Your Pension Enough?

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No small number of people do not even consider asking this question because they do not have a pension. There was a time 50 years ago where having a pension was considered to be common for most people. Today, many people look at their 401k plan as a pension, so I will take a swing at answering the question by talking some about both.

For those who have a pure pension, one that the retiree’s employer pays for exclusively with no contributions made by the employee, it, as usual, will depend on the average annual salary of the employee over the length of their employment. The average is an important number because often retirees will work for 30 years at the same company, but their overall salary increases are only slightly above the rate of inflation. When it comes time to retire, that benefit from the average salary may not be enough to provide a comfortable retirement income.

If the future retiree is making an above average wage, then there is a good chance the pension in and of itself will do more than get them comfortably by through the retirement years. That said, this does not say that people should not also have a savings strategy as well. More than just a second source of retirement income, the old saying “do not put all your eggs into one basket” applies her as well. Should anything happen that will delay or even bankrupt your pension plan, you could be facing a lot of cold winters and cancelled plans. How much you should save is going to depend on how much confidence you have in the future of the company you work for, though too much confidence is usually a bad thing. Times have changed.

As for the 401k planners, maximizing as much of your employee contribution as possible, currently set at $18,000 per year, is one of the best investments you can make. The 401k is one of the most flexible retirement options available, and if you have regular monthly deductions that add to the employer’s contribution, it makes your nest egg much fatter. As for whether you should plan on living off of it, like the average annual salary issue with the pure pensioner, that will depend on how much you make and for how long.

One aspect of the 401k plan that I am particularly fond of is the fact that you can take a loan from the accumulated proceeds of your plan. Besides being an immediately available emergency fund during your employment, it can fit into your retirement strategy by using it to pay off the remainder of your mortgage shortly before retiring. Remember, your mortgage will be taking roughly one-third of your retirement income if it is not paid in full. If you can get a lower rate of interest using your 401k loan option, then that will take a significant amount of pressure off of your retirement living expenses.

One benefit that cannot be overlooked in how effective your pension will be in retirement is your Social Security check. There are many arguments for and against depending on it as a source of retirement income, but unfortunately for many people it is their only source of income. Adding it to your pension income will make a difference, especially if you are still paying down your mortgage.

A good rule of thumb to follow is: the more sources that your retirement income comes from, the less likely you are to encounter a major shortage of income due to financial or economic conditions.