MICHAEL WOOD – More and more, the outlook for federal pensions seems to be growing bleak. With headline after headline claiming that pensions are dying and that the government has to cut personnel to maintain its promises, it is a worrying time for Federal employees who could receive a pension on retirement.
It would be reasonable to be concerned about your retirement pension- whether all of your work and loyalty will not be paid out when you can finally retire, which can be especially challenging when you realize just how complex federal pensions can get. There are ways to make the process of understanding your pension easier, and financial professionals like Michael Wood can help you reach those goals.
What is a Pension Plan?
A pension plan is a retirement plan that promises a specific amount of money every month for a federal employee. The important distinction to be made between this and another plan like a TSP or 401(k) is that those are defined contribution plans, plans that only pay as much as the employee contributes, plus any employer matching. Pension plans have a guaranteed amount payout that can be distributed in a number of ways; whether it is as a single lump sum (though this is usually not the best option- over 20% of retirees who took the lump sum depleted their savings within five and a half years. There are also a plethora of other options when working through your pension; typically your pension is calculated using the top three years of income when you are working, but does overtime count? Is a COLA (cost-of-living) adjustment taken into account?
The important part, however, is your pension’s funding or funded ratio. Essentially, when a pension is created and maintained, the funding for your pension is represented by the funding ratio- 100% means that if you were to withdraw immediately, the funds would be 100% covered. Therefore, a good rule of thumb is that the higher the ratio, the better. Though 100% is not necessarily always a possibility, having a ratio of 80% or more is usually a good enough ratio to feel secure. To learn more about your retirement options, talk to a trusted financial professional about your financial position.
Michael Wood is the principal and owner of Integrity Retirement Planning, LLC with offices located in Cambridge, Maryland. Michael began his career in Insurance and Financial Services with Bankers Life and Casualty in 1999 where he practiced insurance until 2002 at which time he started his own company.
