Take Control of Your Retirement Future

By Ted Benna

It's essential to plan financially for retirement -- you've probably heard that before. But you may not be aware of some recent trends and developments that make such planning even more important.

With an uncertain economy, it has become even more crucial for every individual to develop and implement a savings plan for retirement. Don't expect the government, or even a company pension and medical plan, to see you through retirement. Better to err on the side of having too much, than to end up with too little.

Double Whammy

I recently spent seven weeks traveling across the United States, speaking at seminars sponsored by mPower about the future of America's retirement. Human resources officers of some of the largest U.S. companies also attended the seminars. One common thread in their informal remarks was the pain they are experiencing in trying to manage their companies' health and retirement benefits.

Clearly, large and small companies are worried. But it's interesting to note that the issue of rising health care costs hasn't received the same level of media attention as the recent slump in 401k investments, even though they are equally serious problems.

David Wray, president of the Profit Sharing/401k Council (PSCA), spoke at six of the mPower conferences. He said employers that are PSCA members are concerned that medical cost increases could adversely impact both employer and employee contributions to 401k plans. Some employers that pick up all or most of the cost of increased premiums may have to reduce their retirement plan contributions to help offset these increases. Employers must also decide how much of these increased costs to pass on to employees. If employees must significantly increase their health-care contributions, they may reduce their own 401k contributions.

Defined-benefit pension plans, perhaps the last bastion of retirement income security at many large employers, are also encountering rough times. (Defined-benefit plans are funded and managed completely by employers.) Many companies with defined-benefit plans had relied on the booming stock market and high interest rates to increase the value of their pension funds. However, unfavorable investment performance and declining interest rates have caused companies' unfunded pension liabilities (the amount owed to the pension fund) to balloon. A recent report by Merrill Lynch projects the unfunded liability of the 346 Fortune 500 companies that have defined-benefit plans to hit $640 billion by the end of 2002.

Historically, significant pension plan underfunding has involved a few employers in the auto, steel and airline industries. But the companies with the highest level of unfunded pension liability currently go beyond these types of companies. Underfunding of pension plans may be a more serious problem than we had expected. Most, if not all, of the companies with this problem also provide medical coverage for retirees. This is also a huge liability.

Social Security and Medicare

Social Security and Medicare are an essential part of just about every worker's retirement security. Just two years ago, there was a perception that some form of Social Security privatization was going to occur. Despite all the hype, not one bill has been introduced to change Social Security. Social Security and Medicare changes are now off the table, and will not likely occur until Congress and a future President are forced by financial deficits to deal with these issues.

In the meantime, the increasing cost of prescription medication will continue to generate political pressure from senior citizens for some form of assistance. Social Security and Medicare changes will occur -- it's simply a matter of what they will be, and when. There are only two ways to improve the financial soundness of these programs: cut benefits, and/or increase tax revenues. The longer we go before we tackle these two politically sticky areas, the more severe the changes will be when they do occur.

Why the Gloom?

You may be wondering why I'm hitting you with all this gloom and doom. At the time I wrote my second book, Escaping the Coming Retirement Crisis, published in 1995, we had growing federal budget deficits that looked like they would never end. In the book, I forecast a high level of conflict between generations as we struggled to deal with unfunded retiree pension and medical liabilities at both the corporate and governmental levels.

Within a few years of the book's publishing, a few things happened to make my forecast seem irrelevant. The federal budget deficit was, surprisingly, eliminated. Also, participant 401k accounts and corporate pension fund surpluses swelled during the long bull market of the 1990s. We have, unfortunately, returned to a state where future generational conflict over unfunded retiree liabilities is again more likely.

The two big questions are:

• Will the large Fortune 500 companies that are guaranteeing lifetime pension benefits and retiree medical coverage be able to fulfill their promises?
• Will the government be able to fulfill its commitments to retirees?

The first large employer I helped to set up a 401k was Bethlehem Steel, in 1981. I suggested during my first meeting with senior management that it was time for their employees to start saving for retirement. I was politely told that Bethlehem Steel employees didn't have to save for retirement because the company would take care of them.

Today Bethlehem Steel is in bankruptcy, having entered Chapter 11 in October, 2001. A major issue for the bankruptcy court to decide is the extent to which pension and healthcare benefits will be reduced. The cost of funding these benefits is one of the reasons why the company was forced into bankruptcy.

Living in Pennsylvania, I encounter retirees who spent most of their career working for Bethlehem Steel. A large chunk of their financial security is eroding at the worst point in their lives. I can't help but wonder how many employees from companies with large unfunded pension liabilities will be in a similar position 20 years from now.

Conclusions

I've come to several conclusions as I've considered these issues.

One conclusion is that, regardless of your stage of life, your financial well being is dependent upon a robust economy and strong stock market. Even if you don't currently have money invested in the stock market, everything you have is tied to some extent to our economy and the stock market. This includes your job, personal investments, home, pension, 401k, IRA, Social Security, and so on.

Neither the government nor Fortune 500 companies can deliver promised retirement benefits unless our economy is strong. If the economy is strong, the stock market will also produce favorable long-term returns. In my opinion, the next couple of years could be critical. We need to move into a solid economic recovery with positive stock market results.

Another conclusion I have reached -- or perhaps I should say reinforced -- is the importance of proper planning. Planning for retirement is a long-term endeavor. Saving for retirement is not as easy as some people made it seem during the stock market boom. The perception was that you just contributed a bit of your income, picked the right investments, and became a 401k millionaire after a few years. Some participants were able to achieve this result, but this was the result of luck rather than a good plan.

A financially successful retirement requires a sound plan that is followed over most of an employee's working life. Family members and friends I know who have been retired for a few years and are okay financially had a plan. They started saving early, and they kept at it regardless of what the stock market was doing. They also obtained professional advice when they needed it.

I understand if you have become discouraged because the value of your retirement savings has dropped during the past couple of years. But you must not be shortsighted. You need to either stay the course or to make whatever adjustments may be needed to your investments to make them suitable for the long-term.

And, if you have never formulated a plan for retiring, now is the time to do so.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.