Pension fund bankruptcy

Protect Your Retirement From Pension Fund Bankruptcy!

If you’re counting on a pension fund to pay for your retirement, you need to listen up. That’s because pension funds aren’t nearly as reliable as you might think. As a retiree or a future retiree, you need to know what kinds of risk you’re facing, and how to protect your retirement income.

Pension Fund Returns Have Been Declining Since 2001

It’s a tough time to be a pension fund manager. That’s because the returns managers can expect to get on their pension fund investments just aren’t what they used to be.

So far this century, there have been multiple high-profile stock market declines. These have weighed heavily on pension funds who had exposure to world equity markets.

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On top of that, the current zero interest rate environment has made it difficult for pension funds to generate attractive returns on fixed income investments. Hedge funds and alternative investments haven’t been a bright spot either.

With all of these factors challenging pension fund managers, total returns have declined. According to a Wall Street Journal article this week, 20-year returns for pension funds are expected to drop below 8% when tallied for the end of 2016.

20-year pension fund returns

The article goes on to state that the statistics are even more sobering than they may appear. That’s because this data still includes the “dot com” bubble which took place in the late 1990’s.

As the last four years of this secular (and spectacular) bull market rolls off this 20-year return data, the statistics are likely to look worse before they look better.

Don’t Expect Pension Fund Returns To Improve Anytime Soon

Unfortunately, it doesn’t look like things are going to get better for pension fund managers any time soon.

Think about it for a second… U.S. stocks are near all-time highs. Not only that, but valuations are at extreme levels too. This is largely because investors have been forced to dump “safe” positions like deposits and fixed income investments. Instead, these investors need to “reach for yield” in order to fight back against low interest rates.

The end result is that many different asset classes (from traditional equities to real estate, fixed income, private equity and more), are now trading at premium values. It is unlikely that these asset classes will continue to trade materially higher because they are already high.

The chart below shows Blackrock’s expected returns over the next five years for several different asset classes. Notice that not one of these asset classes is expected to generate annual returns over 8% (and Treasuries are essentially guaranteed to give investors a negative return).

Blackrock Asset Class returns

This is extremely sobering because these are the asset classes most pension funds are counting on to generate positive returns. Without strong investment returns, many pension funds around the country may find themselves without the cash to pay retirees.

My Prediction: Pension Fund Lump Sums To Increase

My prediction for the next few years is that we will see an increasing number of pension funds offering retirees a lump-sum payout in lieu of long-term benefits.

This would make sense, because pension fund managers simply don’t have the ability to generate returns necessary to continue paying retirees. And with life expectancies expanding due to advances in medicine, this problem is getting even worse!

If you’re currently receiving monthly payments from a pension — or if you expect to receive pension payments to fund your retirement — be on the lookout for these lump sum offers.

Honestly, if I were you, I’d seriously consider taking a lump sum. After all, you’ve probably got a better chance of managing your own money well (and making it last through your retirement) than they do.

Here’s my rule of thumb. If the pension fund offers you something in the neighborhood of 10 times your normal annual payout, take it.

So for example, if you expect to receive a $3,000 monthly pension payment, that would be $36,000 per year. So if the pension plan offers you a lump sum of $360,000, with no further monthly payments, I would sign on the dotted line.

A Put Selling Strategy Can Transition Your Lump Sum Into Income

If you then put that money in a brokerage account and use it as a base to sell put contracts (one of my favorite income-generating strategies), I believe you can generate at least 10% income per year.

Actually, when I set up put-selling income plays, my general rule is to require each opportunity to pay an annualized return between 25% and 35%. But I want to leave you plenty of margin, so even if we don’t hit those return levels, you’ll still be able to generate at least $36,000 per year (or 10% of your pension fund lump sum).

If you’d like to see weekly recommendations from me on which put contracts to sell for instant income, feel free to give my Income on Demand service a try.

Now of course by accepting a lump sum, you’re taking on risk that your investments could lose money. But what you may not realize is that you were already taking that risk with your pension fund. If pension funds don’t make the returns necessary to pay beneficiaries, you could find yourself out of income without a lump sum payment.

Given the low expected returns for pension funds, it is extremely important that you have a “plan B” for your retirement. Whether that’s a lump sum payout that you manage yourself, a separate retirement fund that you set up on your own, or some other investment plan you have in place, make sure you’re not counting on a pension fund to cover your retirement payments.

Zach Scheidt