Today the State of Maryland announced that its program assets were 37% short of covering pension benefits promised to thousands of retirees. Several other states and even corporate pension programs have deeply underfunded pension plans with Funding Ratios of less than 70%. The Funding Ratio is a measure of current plan assets relative to projected pension benefit obligations. For example; if a pension plan has $60 million in assets and has $100 million of benefits to pay its participants its funding ratio is 60/100 or 60%, meaning this pension is $40 million short. There are only 3 ways to make up the difference:
- Generate Outsized Returns: So, expect to see both private and public pension plans diving deeper and deeper into exotic asset classes such as hedge funds, private equity, commodities and even real estate to try and beef-up returns. The downside is the more risk does not always equal more reward and these pensions could end up in an even bigger hole.
- Inject more capital: In other words, someone will need to pony-up and simply contribute more money in the pension plan which means for private funds a decrease in profits (not a likely option) and for public pensions it means an increase in taxes. The problem with raising taxes is that our federal, state and local governments already need that money for something else: To Fund Our “Cocaine-like” Debt Addiction.
- Reduce Benefits: The likely option and the one that will likely happen after options #1 and #2 cause even further damage (or somehow save the day, although unlikely.
So, what can you do knowing that you are likely to receive less in the way of pension (and health) benefits going forward? Well, here are 5 ideas to get your started.
1. Take Control: Take control of your own financial freedom and do not rely on your pension (or social security) in your financial planning. Consider it gravy; not your meat and potatoes. In other words, see your financial planner and take a look at your current financial position and your future goals and this time run a scenario where your pension provides you $0, goose eggs, nothing. See what your shortfall looks like and talk about the best way to handle it.
2. Save More: Easy said then done, I know this, we all know this. BUT, this could be huge for you down the line. Just a 1% increase in savings over the next 10 years will have a material and possibly life-changing impact on your retirement.
3. Start a Business: Again, easy said then done, but our tax code provides so many incentives to start a little something on the side. http://www.newsweek.com/2009/08/11/start-your-own-business-now.html
4. Reduce Debt: I can not say it enough, “Get out of debt” and definitely do not retire with any debt on your personal balance sheet.
5. Track Your Net Worth: Read my colleague’s blog post which explains how to calculate your net worth and why its important: http://networthprotect.com/2011/07/19/how-to-calculate-your-personal-net-worth-and-why-you-should/
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