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Written By: Alessandra Malito.
We're excited to share that we were recently featured in a MarketWatch article! Even People with Pensions Work Into Their Retirement Years, was written by Alessandra Malito and discusses the difference in transitioning into retirement between public and private sector workers. Our President, Mychal Eagleson, was quoted and spoke with Alessandra on how it's important for those with a pension to take stock of it's funding levels because they will likely not completely lose payments, but could likely end up with payments less than they expected, especially if their pension has been chronically underfunded. A big thank you to Alessandra for including us in this piece!
Having guaranteed income for retirement in the form of a pension is a dream for many workers, but workers may still change jobs or prolong their working years before they retire.
Transitioning into retirement — the actual act of moving away from the workforce — isn’t all that different among public and private sector workers. Even though public workers get guaranteed income in the form of a pension during retirement, they still tend to take another job or reduce their hours to part-time before fully embracing retirement. Private workers, on the other hand, similarly work into their retirement years, though they may not have the option if they haven’t saved enough for their retirement.
Public workers jump into a “bridge” job after their careers, which is a temporary job before entering retirement, a new study by Boston College researchers found. They’re more likely to work part-time, unlike those in the private sector who continue to work full-time. Women were also more likely to phase out of their careers, by working 20% less hours, when they were in the public sector compared with women in the private sector.
Ultimately, the researchers found public and private sector workers move into retirement in much the same way. Bridge employment affords near-retirees fewer hours and flexibility, and a way to supplement income from their pensions. Reducing hours or going part-time offers workers the same luxuries.
Why workers may take another job or reduce hours, instead of calling it quits, varies among all workers, but ultimately it depends on financial security, said Kevin Cahill, a research economist at the Sloan Center on aging and work at Boston College (and one of the authors of the study).It comes down to: Have you saved enough? Will you be financially stable in retirement? Do you need to keep working? Private sector workers, who in many cases are not guaranteed income in retirement, can’t change how much they saved or what they’ll get from Social Security paychecks, but they can keep working, he said. “It’s probably the best way for most workers to cure their financial well-being,” he said. “This applies to the public sector workers as much as the private sector. Even though they have pensions, you can improve retirement with additional work.”
Of course, how much employees have saved directly affects how or when they will retiree. True, Americans are living longer, and this may mean they’re willing to working for longer, but that’s not always the case. In some scenarios, especially among women, people have to work through traditional retirement years because they can’t afford to retire.
Public-sector workers with pensions waiting for them are vulnerable, too. Even if they are guaranteed money in the future, it may not be enough for them to live on, or the pension system they belong to may become insolvent.
How the retirement system works
Public workers are typically more confident in their retirement, even if they do work another job before retiring. One fifth of all public sector employees were “very confident” and three-fifths were “somewhat confident” they’d have enough to live comfortably in retirement, according to a TIAA-CREF Institute and Center for State and Local Government Excellence study from 2014. But they’re afforded something private-sector workers are not: a guaranteed source of income after retirement.
Private companies are moving away from pension plans. Only 16% of Fortune 500 companies offered a defined-benefit plan (otherwise known as a pension plan) in 2017, down from 59% of the same employers in 1998, according to London-based insurance company Willis Towers Watson. Instead, some — not even close to all — private companies offer employees defined-contribution plans that require employees voluntarily save for themselves (but might include an employer match). Only a third of Americans are saving in such a plan, according to U.S. Census Bureau researchers, and that’s only if their employers offer such a plan. Only 14% of private companies do provide a 401(k), and they’re usually larger companies.
Chicago is a prime example. The city’s public pension system is on shaky ground. The Chicago Public Schools teacher pension fund, for example, has an unfunded liability of $11 billion as of April, according to the Chicago Tribune, and the city is turning to taxpayers to fill some of the gap. “We tell clients you may not get what you’re promised,” said Bryan Beatty, a financial adviser and partner at Egan Berger & Weiner in Vienna, Va. Virginia changed its public pension system in 2014 to require employees to make contributions in order to get their pensions (and close the deficit), he said. “I think you’ll see more of that,” Beatty said.
What near-retirees must know
Worst-case scenario, even if those pensions are underfunded, retirees will still get something, said Mychal Eagleson, a financial adviser at Exceptional Life Financial in Indianapolis.
Private sector workers are not as lucky, and they can’t fall back on Social Security to survive in retirement. (Many older Americans depend on Social Security though, and in 2010, the public insurance kept 35% of older Americans out of poverty, according to AARP Public Policy Institute. “It may keep lights on and food on the table, but not a lot more than that,” Eagleson said.)
People approach this revelation differently, said Terrence Herr, a financial adviser at Herr Capital in Chicago — some workers who are guaranteed pensions are worried they won’t have enough saved for retirement if their system collapses, while others still feel confident because money is expected to roll in. One of Herr’s clients, who is a teacher, is anxious about the pension system, even if she has saved enough otherwise, whereas other public employees may be more relaxed about the situation (even if they don’t have enough saved to meet their goals yet). “They have to look at the numbers,” he said.
This article was written by Alessandra Malito and originally published by MarketWatch here.
If you have any questions or would like help figuring out what the best options for your retirement planning and pension are, don't hesitate to reach out.