Some people get annual retirement incomes that seem out of whack with what most Americans get from their retirement plans, if they are lucky enough to have them provided by their former employers.
We have all read about the police chief in California who had a pension paying over $200,000 a year. School teachers in many states get buyout retirement packages of up to 80 percent of their yearly salaries, giving them retirement incomes from $45,000 to $90,000 or more annually
Many firemen, policemen and other government workers get hefty retirement checks after 20 years of service. Afterwards, they can get another job elsewhere, and enroll in a new retirement plan, to add to their present retirement plan income, along with social security checks.
Even politicians, such as senators or members of Congress get retirement packages of over $170,000 a year, as an annual retirement package, after serving at least one year.
Basically, there are two major retirement plans. One is a contribution plan and the other is a benefit plan. A lot of people are confused about their retirement packages and how they work. There is a substantial difference between the two plans, which have various options that be applied.
Contribution plans are what most of us have. Our employers put a fixed percent of our earnings in a retirement plan for us, each year that we work for them. Many firms and organizations require a “match.” This means that whatever you put in your retirement account each year, your employer will put an equal amount, up to a stated limit, such as 5 percent, for example.
The money in the account is invested, for interest income and growth. When you retire, you get monthly payouts, based on how much is in the account.
Benefit plans work on a different principal. Benefit plans guarantee you a fixed income, not just a fixed income when you retire. Of course, this is a very good option for the employee, who gets a set annual amount of money, no matter how the economy is doing.
There are two problems with this generous type retirement plan. First, the solvency of the retirement fund depends on accurate estimates about future events. While employers have the best intentions to protect employees, errors in determining pension liabilities can result in shortfalls, due to poor projections over time on interest rates, stock and dividend prices, and other financial factors.
The second problem is that all of us must pay for public pension benefits. Over the years, due to unionization, most federal civil service jobs, military service, and state and local government jobs have offered benefit plans. One reason is that public jobs, such as teaching, used to be underpaid. Today, workers in the public sector earn more, on average, than their colleagues in similar type private sector jobs. But they still get “rich” pension benefits.
Most public pension plans are underfunded. Where shortages occur in government benefit plans, the taxpayers pay for it with increased taxes.
Private businesses have seen a definite shift towards contribution plans. What you put in, determines how much you get out, at retirement time. Some firms used to put their retirement contributions in their company’s stocks and bonds. The trend today is towards putting no more than 30 percent in the company’s stock and the rest of the monies in other stocks, bonds, CDs, IRAs or mutual funds, or letting the employees determine their individual portfolio mixes.
If you are self-employed or don’t have a pension plan, you can create your own retirement fund. Set a goal for what you will need when you retire. Be realistic. People usually underestimate what their retirement expenses will be.
Next, estimate what your income will be, counting Social Security and other income sources income. The shortfall is what you need a pension to provide. Put money in a 401k or similar investment plan, which offers tax free growth, until it is withdrawn.
Everyone needs a decent retirement plan, because Social Security alone does not provide enough income for most people to live on. Benefit plans are more secure than contribution plans, but since most people don’t have them, it does not seem fair to have people in the private sector, who get contribution plans or no plans, subsidizing the benefit retirement plans of people who get paid both higher wages and higher retirement income.
— Bernard Featherman is a business columnist and past president of the Biddeford-Saco Chamber of Commerce. He can be reached by e-mail: bernard@featherman.com.
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