Retirement Assets After A Layoff

January 17th, 2009  |  Published in 401K, Pensions  |  1 Comment

Being fired isn’t something you want to think about but with the economy in the sad state that it’s in, you should prepare for the worst and hope for the best. It’s important to find out what could happen to your retirement assets in the event you are laid off and fortunately, in most scenarios, your asset will be protected.

Your 401(k), or similar defined contribution retirement plan, will exist in a separate account outside the control of the company. Should they fire you, go out of business, or close for any reason, the funds should be in a separate account. Since it is in a separate account, in the custody of a financial firm, you can still access it, transfer it, and manage as you would if the company hadn’t fired you or closed up shop. What happens if you have company matching funds that haven’t vested when the plan ends? No problem, by law they vest immediately. There is a down side, if you borrowed money then you will be required to pay back the funds within 60 days of the plan terminating.

What about pensions or a defined benefit plan? If you are laid off, you should still be able to collect your benefits without a problem. If you company bankrupts, then you may have to turn to the Pension Benefit Guaranty Corp. to collect your benefits. They insure pensions and pay out a maximum of $54,000 a year in benefits based on what you had in your plan.

If you are fired, leave your job, or the company goes bankrupt, you will probably want to transfer your retirement assets into an IRA as soon as possible.

Vallejo, CA Declares Bankruptcy to Avoid Pensions

June 20th, 2008  |  Published in Pensions  |  1 Comment

Usually a debt obligation, such as a bond, by the federal government, state, or city is reliable and dependable. In fact, it’s so reliable that there’s a suit being raised against bond rating agencies over that very issue. Well, a pension is essentially a debt obligation and while we expect companies to potentially go bankrupt, thus effectively killing a pension (in reality the pension goes to the PBGC, Pension Benefit Guaranty Corporation, and pays pennies on the dollar), you don’t expect cities to.

Enter Vallejo, California.

You can partially blame the housing burst on sagging tax revenues but the real issue was the generous salaries and pensions offered by the city:

Thanks to retroactive benefit enhancements approved by the city council in 2000, police officers and firefighters can now retire at age 50 and receive an annual pension equal to 90% of their final pay (assuming 30 years on the job), an amount that gets increased every year to help keep pace with inflation. The old plan had given the workers a pension equal to 60% of their final pay at age 50.

So a Vallejo police sergeant making $150,000 a year can now retire at age 50 and receive an annual pension of $135,000, increased each year for inflation. To put that amount in context, you would need to amass a retirement nest egg equal to about $3.5 million to produce a similar retirement income on your own.

Police and firefighters were simply the example in the story but plenty of public employees have the same benefits and this same scenario is playing out in plenty of cities.

I don’t think any defined benefit plans are dependable, you need to supplement it with a solid retirement plan that doesn’t depend on someone else.