Jul
Pensions Might Not Actually Be Guaranteed
Written by Leo FranklinMost people plan on receiving retirement income from their Social Security benefits. Some will supplement this with savings. Others will have a pension from their work place to provide income in their retirement years. These pensions may not be as safe as many retirees believed.
General Motors is offering many retirees a choice between a lump sum payment or their pension for life, just like they are receiving now. The automaker is paying Prudential an estimated $26 billion to take over its pension plan. This large transaction has highlighted the fact that many corporate pensions are underfunded.
Pension liabilities among corporations across the US
According to a Bloomberg review of data that has been publicly disclosed by 1000 large companies in the US, pension liabilities exceed assets by more than $435 billion. That figure assumes the companies meet their projection of an average return on pension assets of 7.3 percent.
That assumption is down from 7.5 percent a year ago, and still above annualized returns over the past 10 years of 6.44 percent reported by corporate funds with assets greater than $1 billion, according to Wilshire Trust Universe Comparison Service. If pension don’t earn the projected amounts, the underfunded gap grows.
The public sector may be in even worse shape with some experts estimating that city, county and state pension funds are underfunded by trillions of dollars. While it is unlikely any of these pension payments will be completely eliminated, the pay outs could be lower than expected for some retirees.
Many of these retirees will be home owners, having enjoyed a secure job which allowed them to pay a mortgage every month and build up equity in their homes. That equity could now be the key to a more secure retirement. A reverse mortgage allows a home owner to age in place by providing cash based on the value of the home equity.
The home owner still owns the home, and no monthly payments are required on a reverse mortgage meaning it will not strain your monthly budget.
Despite the highly publicized declines in home values, many home owners still have a significant amount of equity in their home. This equity could offer insurance against the risks associated with any pension plan.
You could use the reverse mortgage as a readily available source of cash if your pension is cut, or you can use the proceeds from a reverse mortgage to meet day-to-day living expenses. This is a powerful and versatile financial planning tool that could help you prepare for anything. .
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