Is Your Pension Truly Guaranteed

Is Your Pension Truly Guaranteed? Let's Dive In.

Imagine this: You've just graduated from the academy, landed your first gig as a law enforcement officer, signed up for the Defined Benefit Plan (aka Pension), and now picture yourself retiring on a beach, enjoying life while your friends are still grinding away.

Sounds idyllic, right?

But, is it possible that your pension, the safety net you're banking on after years of hard work, time, and money, might not be as secure as you think? Let's dig into it.

The US Department of Labor defines a Pension (aka Defined Benefit Plan) as a plan that promises a specific monthly benefit at retirement. While the word "promised" is used twice, there's a catch — "within certain limitations." What exactly does that mean?

In a 2011 article from Police Magazine, Melanie Basich explains that pension funds come from employee contributions, employer contributions, and return on investments. Employee contributions deducted from your paycheck, check. The office contributes, check. Now, watch that money grow together, envisioning retirement and those margaritas. Right?

However, stories have surfaced about mismanaged pension programs, risky moves, and uncertain pension payments. A 2019 article by Endres M warns that a police officer's "guaranteed" pension can face hidden mismanagement practices, political interference, and the risk of benefit cuts to solve underfunding problems.

On the flip side, Joan Hill, in a 2022 article on Police1.com, presents a powerful simulation example showcasing the potential of a pension. Using an assumption of a $82,000 per year pension for a 60-year-old retiree, the calculated value of the pension is staggering — $1,623,600 to live on for the rest of their life.

You'd need substantial retirement contributions, a long-term commitment, and a good return to match that cushion. For instance, investing $20,000 a year for 25 years with an expected 8% return results in just shy of $1.6 million. In comparison, many pension plans require contributions between 5-10% of your salary each year, varying by department. However, the term "guaranteed" in the financial world is a red flag.

You might be skeptical, thinking, "No way am I signing up for a pension only to have someone else spend my hard-earned money or worse, watch it disappear!" But hold on. As a Fiduciary Financial Advisor, my role is to evaluate the entire equation and guide you toward the best move. Maybe that means maxing out a Roth IRA, considering a term life insurance policy, or diversifying investments. Pensions can be fantastic, but relying solely on one is akin to putting all your eggs in one basket. Explore ways to diversify and spread out your risk, ensuring that when retirement comes knocking, you're contemplating beach choices, not financial stress.

Sources:

US Department of Labor

https://www.dol.gov/general/topic/retirement/typesofplans

Police Magazine

https://www.policemag.com/patrol/article/15348132/how-safe-is-your-pension

Poice1.com

https://www.police1.com/police-jobs-and-careers/articles/police-pensions-under-tension-gtPUe5x8dXRpiMpM/

Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.