Brad Tinnon

Brad Tinnon

Articles of Interest – If You Expect To Receive A Pension You Need To Read This!!

Throughout the week, I run across articles written by other people that may be of interest to you. This week I am sharing an article from Jack Suntrup of St. Louis Post-Dispatch titled Missouri’s $4 Billion Pension Crisis Is At Our Doorstep.

If you have a pension or are entitled to a pension, whether in Missouri or not, then you need to read this article and my 3 recommendations.

In this article, Jack Suntrup discuss the severe crisis that the Missouri State Employees Retirement System (MOSERS) pension faces. This pension plan is literally $4 billion underfunded. In layman’s terms, this means that there isn’t enough money to pay everyone the benefit they were promised.

Missouri is not the only state to have struggled financially. Illinois recently suspended its PowerBall amid budget crisis. The state of California has over a $1 billion budget deficit and their state pension is underfunded by an estimated $1 trillion. The Commonwealth State of Puerto Rico filed for a form of bankruptcy earlier this year. And the state of Pennsylvania faces major budget deficits

So, what does all this mean for you?

WHAT ACTIONS CAN YOU TAKE IF YOU EXPECT TO RECEIVE A PENSION

Have a Plan B

If you are entitled to a pension, then the best advice I can give you is as follows – “Treat the pension as if you aren’t going to receive it”. It’s not completely unfathomable to think that the pension won’t be there in the future. It’s happened to people before.

Just think for a moment about the unfunded state pensions mentioned above. How will they make up for the difference? Perhaps the states will tax people more, which ultimately means you’ll have less take home pay from your pension. Or the states could reduce your pension or possibly take it away altogether. After all, if there’s no money left in the coffers, then there’s no money to pay your so-called “promised” pension. 

To protect against this, you would be best served to take matters into your own hands and have a Plan B. This Plan B would mean that you begin investing into your 401k, IRAs, taxable accounts, etc. And if the pension happens to not be there in the future, then you’ll have something to fallback on.

Don’t invest everything into muni bonds

Now that you are presumably convinced of your need to have a Plan B, don’t investment everything into muni bonds. A common trap that people fall into, especially high net worth individuals, is that they put a lot of money into municipal bonds (muni bonds for short) for the tax free benefits they provide.

For those that don’t know, muni bonds are bonds of a particular municipality or perhaps multiple municipalities. And as you can see from above, states are not always the best at managing their money, which can impact your investment return in muni bonds. People who invested in muni bonds that had large exposure to Puerto Rico lost a lot of money. It’s perfectly fine to invest in muni bonds, but they should be complemented with other types of bonds as well.

If you’ve followed me for any length of time, then you’ve undoubtedly heard me say “don’t let the tax tail wag the investment dog”. Placing everything in muni bonds would mean that you are giving up possible protection and returns just to save taxes. And that could come back to hurt you! Not to mention the fact that state financial problems could cause you to lose both your pension and your muni bond investment. 

Don’t invest in investments that make predictions

Again, I’m going with the theme that by now you are thoroughly on board with a Plan B, which means that you have decisions to make about where to invest your money.

The article that I am sharing today mentioned something very interesting. It stated that the MOSERS pension fund earned a return of 3.45% which is far below the 7.65% goal. 

The disparity is due partly because of the large amount of investment fees paid (0.88%). Although the article doesn’t mention this, we can infer from the high fees that the investments are likely actively managed investments, meaning that some investment manager is making predictions about which stocks or bonds to own. The research is clear that this is usually a losing proposition

Much lower cost investments that operate more like index funds would likely have been a much better solution for MOSERS. And will likely be a much better option for you as well!

I hope that you have found this week’s Articles of Interest informative and helpful.

Please feel free to share any comments, questions, or experiences you have below. 

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Brad E.S. Tinnon
CERTIFIED FINANCIAL PLANNER™
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