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    Q&A: Help! My government pension is a disaster!

    May 10, 2019

    Reader’s Question

    I’m 54 and have worked for the state of Kentucky for 20 years. Our pension fund is in terrible shape and I’m nervous I’m not going to have enough money to retire. (I want to quit working in 10 years.)

    Should I rethink my 10-year plan?

    -Sheila M.

    Answer

    This is a tough situation and we understand how scary it must be.

    Standard & Poor’s actually ranks Kentucky’s pension system as the most underfunded pension system in the country.1

    And yet, the promise of a pension was almost certainly a major reason why you took the job.

    But now, your “sure thing” has morphed into a big mess.

    To be sure, under-funded pensions aren’t just Kentucky’s problem. In fact, about half of all states have shortfalls.1

    So, truth be told, there’s a definite possibility that you could receive less than you were promised.

    In short, yes, it’s time to reassess your situation.

    First, take a step back

    It’s extremely hard to plan for the future if you don’t have a clear sense of where you stand.

    Start by focusing on the “big picture.” This means you should:

    • Get a current estimate of your monthly pension benefit.
    • Calculate your other potential retirement income streams (old 401(k)s, Social Security, inheritances).
    • Create a retirement budget that lists your expenses and other goals.

    Once you’re armed with that information.

    Determine if the cash flow from these sources covers your retirement costs.

    Then, take it a step further. If your pension gets cut by a third – or even by half – how do the numbers change?

    Just consider that as of 2016, retired Kentucky state employees saw an average annual benefit of $24,431. Depending on your goals, even a full pension might not be enough to allow you to live comfortably.

    It’s critical you’re clear about the retirement you want and how much it will cost. Only then can you know the “full” ramifications of a cut to your benefit.

    Figure out “Plan B”

    So, what happens if you run the numbers of a hypothetical pension cut and they don’t look good? It’s time for a back-up plan.

    First, save more on your own: This is the one element of the entire situation that YOU have control over.

    And even though time is against you, the positive in all of this is that, because you said you want to retire in 10 years, you still have some time. Consider this: just $300 a month over the next 10 years could still turn into about $50,000 (assuming a 6% annual return).

    Second, work longer: If you truly have your heart set on retiring in 10 years, this may not be what you want to hear. But the reality is, you may need to put your retirement on hold. This will:

    • Give your money in outside investments more time to grow.
    • Allow you to delay tapping those investments since you’ll still be getting a paycheck.
    • And, finally, it’ll give the Bluegrass State a little more time to fix its shortfall.

    But this suggestion comes with a big caveat: Not everyone chooses when they retire.

    In fact, according to the Employee Benefit Research Institute, close to half of current retirees were forced to retire earlier than they planned. Don’t automatically assume you’ll have the luxury (and health) to work longer.

    Too many pre-retirees are learning the hard way that a guarantee isn’t always guaranteed. No pension plan is bulletproof, either in the public or the private sector.

    You should prepare for the worst-case scenario.

    Next, consider a part-time job. If 10-years is your goal, and there’s a part-time job that you’d enjoy doing, you could build your Social Security benefit up, and hopefully take all that income and save it.

    In the end, if things turn out better than you’re expecting, that’s great! It’s a cherry on top.   

    Lastly, a fiduciary financial advisor can look at your situation, analyze all of your numbers, and perhaps offer a plan that leads to a positive outcome.

    The good thing is, you’re being proactive. While certainly worrisome, your situation might not be as bad as it appears. An update to your plan could be exactly what’s needed to help you hone-in, recalibrate, and reach your goals.

    1http://kentuckytoday.com/stories/pbs-documentary-delves-into-kentucky-pension-crisis,15815

     
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