This year I turned 50, and I now find myself thinking about, and planning for, retirement much more than in the past. I have long since resolved that social security will not provide for my needs in retirement (nor was it ever intended to). Fortunately, I am one of an ever-shrinking group that is still covered by a defined benefit pension plan. So, how should a pension fund figure into my retirement?
Several years ago a CNN Money article asked the question, 'Can you count on those monthly pension checks from your former employer?' and provided the following five things you need to know:
1. Many pension plans are underfunded.
By law, company plans must have on hand most of the money promised to employees. This wasn't an problem until the market turned down.
2. But underfunded doesn't mean "can't pay."
You're not necessarily on the hook for the plan's underfunding. Employers must cover their plans' deficits.
3. It may, however, mean some changes in how much you'll get.
If the plan is less than 80% funded, you won't have the option of taking the benefit as a full lump-sum payment. And if your plan is less than 60% funded, your company may be forced to freeze it.
4. You're at greater risk of losing your job than your pension.
A company "can dip into cash reserves to fund its pension," but if there are no reserves, the firm must cut costs, which may mean layoffs. So, ironically, your pension may be safe at the expense of your job.
5. Still, you ought to have a backup plan.
While you're fairly safe on benefits accrued, don't count on future ones. Your goal should be to save enough for retirement to fill the gap between your estimated expenses and what you've earned in your pension.
Up until the Delta pension plan ran into problems, I (naively) assumed what I was owed from my company's pension plan was an automatic entitlement. However, events over the last several years have shown that when things go wrong, you may only receive a small portion of what was promised in a glossy HR pamphlet.
Looking at number 5. above, "you ought to have a backup plan", I would go one step further and say, "You ought to have a primary plan." My retirement plan relies primarily on what I have invested and control, such as my 401(k), IRA and taxable portfolio. I will likely get something out of my pension plan even if a 'worse case scenario' occurs, so I count that portion. As for social security, I don't even consider it in my retirement plan. If I receive anything from social security, I will just treat it as a bonus.
To achieve my retirement goals, I am investing with a specific goals in mind. In retirement, your portfolio shifts from an investing mode to an income mode by either selling appreciated (hopefully) assets and/or withdrawing dividends for living expenses. My primary plan is to build an ever-increasing income stream from dividend growth stocks such as:
Aflac Incorporated (NYSE:AFL) provides supplemental health and life insurance in Japan (80% of earnings) and the U.S. Products are marketed at work sites and help fill gaps in primary coverage. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 30 consecutive years. Yield: 2.8%
Emerson Electric Co. (NYSE:EMR) designs and supplies product technology, and delivers engineering services and solutions to a wide range of industrial, commercial, and consumer markets around the world. The company has paid a cash dividend to shareholders every year since 1947 and has increased its dividend payments for 56 consecutive years. Yield: 3.3%
Johnson & Johnson (NYSE:JNJ) is a leader in the pharmaceutical, medical device and consumer products industries. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 50 consecutive years. Yield: 3.5%
The Coca-Cola Company (NYSE:KO) is the world's largest soft drink company. KO also has a sizable fruit juice business. The company has paid a cash dividend to shareholders every year since 1893 and has increased its dividend payments for 50 consecutive years. Yield: 2.8%
Wal-Mart Stores, Inc. (NYSE:WMT) is the largest retailer in the world. Wal-Mart operates a chain of over 10,000 discount department stores, wholesale clubs, supermarkets and supercenters. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 38 consecutive years. Yield: 2.2%
As the old adage goes, 'Everyone has a plan - failing to plan is planning to fail.' Retirement planning does not have to be complicated, but not doing it will complicate your retirement.
Disclosure: Long AFL, EMR, JNJ, KO, WMT. See a list of all my dividend growth holdings here.