With Pensions Disappearing, 401(k)s Are the New Foundation for Retirement
As pension freezes and cancelations of retiree healthcare benefits continue to make headlines, now more than ever, your 401(k) needs to be your foundation for retirement.
The days of our grandparents’ three-legged stool of retirement are gone.
No longer is the pension the foundation, followed by Social Security, and last, personal savings.
You now have to start with your 401(k), or other personal savings, as the foundation for retirement.
The Dying Pension
Earlier in October 2019, General Electric made headlines announcing they are freezing pension plans for 20,000 salaried US employees.
An additional 700 employees in its supplemental pension program will also have pension benefits frozen.
According to GE, this does not affect current retirees collecting pension benefits.¹
Much like other companies, GE is phasing out its pension program and encouraging people to invest in 401(k)s or other self-directed retirement plans.
In fact, effective 2012, no new workers have been enrolled in GE’s pension plan.
In June 2017, UPS announced it would freeze pensions for 70,000 nonunion workers.
Starting January 1, 2023, affected workers will stop accruing pension benefits. After which they will only be able to receive benefits earned up to that point.
According to UPS spokesperson, Steve Gaut, it is “part of a move to reduce expenses and help curb a long-term funding shortfall.”²
Instead of funding pensions, UPS said it would start contributing a company match to employees 401(k) accounts.
Countless other pension freezes have been put into effect over the last two decades in order to reduce debt and the amount spent on existing future pensions.
DuPont.
Boeing.
Kodak.
AIG.
Macy’s.
Hewlett-Packard.³
The list goes on and on, and more companies are expected to do the same in the coming years.
Eventually, pensions will be a thing of the past.
This and the uncertain future of Social Security mean you cannot rely on anyone else but yourself to ensure you retire with enough money.
“Your 401(k) must be your new foundation for retirement.”
Cuts In Retiree Health Benefits
In addition to phasing out pensions, countless organizations are cutting health benefits for retirees.
Walgreens recently announced that, due to a rise in healthcare costs, it will no longer subsidize medical benefits for former employees who hadn’t turned 64 by March 31, 2019.⁴
Walgreens has already eliminated eligibility for new hires and younger employees, but this new move affects retirees already receiving healthcare subsidies.
This has put 550 retirees who currently receive the subsidies but are under 65 in a precarious situation because they aren’t yet eligible for Medicare.
These people, who were planning on receiving healthcare subsidies can no longer count on it.
In an interview with CNBC, Walgreens employee Ed Meyerink, who is 52 and has worked as a pharmacist for the company for 27 years, said this move means he has to push back his retirement.
He was originally set to retire at 55 and was planning on healthcare subsidies. Now, he’s planning to keep working until 65, when he’s eligible for Medicare.
He told CNBC, “It means no traveling. None of the plans we have are going to come to fruition.”⁵
Since 1991, employers have been cutting retiree health coverage, so cuts aren’t out of the ordinary.
And more are expected to come.
Currently, the Ohio Public Employees Retirement System is debating cutting benefits for future employees hired after 2022 and raising the retirement age.
Other proposals are on the table, as they look to strengthen the pension system that’s $24 billion short of what it needs to fulfill its obligations.
The cut debates and freezing of healthcare benefits for retirees create an uncertain future for many Americans who have planned on these benefits.
But as the Kaiser Family Foundation put it…
As with the decline in pensions, Americans cannot rely on employer-sponsored healthcare subsidies when they retire.
Even if they are promised it.
Build Your Foundation for Retirement
If you aren’t maximizing your 401(k) savings, or fully funding your Individual Retirement Account (IRA), now is the time to start.
According to Vanguard’s How America Saves, only 13% of employees with retirement plans at work saved the then-maximum 401(k) contribution limit of $18,000 in 2017.⁷
If you can’t max out the annual 401(k) contribution limits for a given year, at least put in enough to get the full company match.
Company matching is one of the secrets to maximizing your 401(k) or workplace retirement account, and it’s often the most overlooked.
At 401(k) Maneuver, we cannot stress enough how important it is that you contribute at least the minimum of what your company will match.
Because when your company matches you, it’s like getting free money!
It may increase your retirement lifestyle.
And it may help you accumulate the amount of money you desire at retirement rather than simply having enough to get by.
Another way to ensure you’re maximizing your retirement savings…pay yourself first.
When you get paid, before you do anything else (pay bills, buy groceries, or buy anything), pay into your savings and investments first.
If you have a 401(k), your savings are automatically taken out of each paycheck.
If you have an Individual Retirement Account (IRA), you should be paying into this first as well.
Once you’ve paid yourself, then pay your bills.
Whatever is left over is yours to spend however you want.
If you don’t have much left to spend at the end of a pay period, just remember, you’re building a nest egg for the future.
Saving for retirement is a long game.
The sooner you start, the better your chances are of ending ahead, or at least on track.
Check out our retirement calculator to see how much you’ll have at retirement, and see how professional help may improve your retirement nest egg.
If you’re stuck, we recommend seeking third-party advice as soon as possible.
Download our GUIDE How to Supercharge Your 401(k) Performance Today to learn more.
Sources:
- https://www.washingtonpost.com/news/get-there/wp/2017/06/28/ups-will-freeze-pensions-for-thousands-of-nonunion-employees/
- https://www.washingtonpost.com/news/get-there/wp/2017/06/28/ups-will-freeze-pensions-for-thousands-of-nonunion-employees/
- https://www.pensionrights.org/publications/fact-sheet/companies-have-changed-their-defined-benefit-pension-plans
- https://www.cnbc.com/2019/06/07/walgreens-cuts-longtime-health-benefit-for-retired-employees.html
- https://www.cnbc.com/2019/06/07/walgreens-cuts-longtime-health-benefit-for-retired-employees.html
- https://www.latimes.com/business/hiltzik/la-fi-hiltzik-retiree-health-insurance-20160511-snap-story.html
- https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/HowAmericaSaves2018
