Many pension plans are under a lot of stress due to the coronavirus. In today’s article, I discuss what you need to do to protect yourself against your pension not fully being there in the future.
State Pension Plans
Colorado, South Carolina, and New Jersey previously decided to temporarily stop making additional payments to their state pension plans as unemployment from the coronavirus has reduced tax revenue. This is huge news as many state pension plans are already underfunded meaning that future recipients may not actually receive what they’ve been promised.
What About Corporate Pensions?
Don’t fall into the trap of thinking that this only affects state pension plans, because many corporate plans are underfunded as well. They face the potential of reduced revenue just like states which could result in corporations not properly funding their pension obligations. And ultimately this could reduce what you receive.
To make matters worse, if the coronavirus continues, many more people could lose their jobs as well as their pensions.
What Should You Do?
In the past I’ve written about how you should have a Plan B if you are expected to receive a pension. You NEED to be investing on your own and stop being so dependent on your pension plan. This would include investing in 401k’s, IRAs, and taxable accounts. You MUST take matters into your own hands and plan for worst!
Additionally, now is the time to be doing Roth Conversions. I’ve written a lot about this recently as our country and states are battling a debt crisis that will come to a head at some point. And by “come to a head” I mean that you may be severely taxed in the future.
Based on this, you should consider converting some (not all) of your pre-tax accounts (401k’s, 403b’s, Traditional IRAs) to a tax-free Roth IRA. This conversion will require you to pay additional tax when you file your tax return, but that’s okay because you may be forced to pay much more in tax in the future if you don’t do the conversion.
The worst that could happen by following this advice is you will have more money in retirement than you would have had otherwise. I understand that it might currently reduce your standard of living, but this is a sacrifice you should be making. The alternative would be depending on a pension only to be surprised by much less pension income than you expected. Don’t let this happen to you!
Please leave a comment below and let me know how you plan to handle your pension plan. Also, feel free to click on the links below to share the article. Until next time.
Brad Tinnon
CERTIFIED FINANCIAL PLANNER™