Financial Futures

Retirement Benefits

Washington Post columnist Martha M. Hamilton was online Tuesday, April 17 at Noon ET to discuss what kind of retirement benefit packages you should look for from your employer.

She will be joined by Ron Gebhardtsbauer, a senior pension fellow with the American Academy of Actuaries. Earlier in his career, he was chief pension actuary at the U.S. Office of Personnel Management where he participated in creating the Federal Employee Retirement System.

The transcript follows.

Read the latest column here: Unpack the Benefits Package (Post, April 15)

To read past Financial Futures columns, click here.

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Martha M. Hamilton: Hello and welcome. I'm sorry to be starting late. Especially when we have such a great guest. Ron Gebhardtsbauer is the senior pension fellow of the American Academy of Actuaries and very knowledgeable. He is not a financial adviser and cannont give advice about specific investments.

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Ron Gebhardtsbauer: Hi everyone:

My name is Ron Gebhardtsbauer. I`m the Senior Pension Fellow at the American Academy of Actuaries, and as such I am the spokesperson for pension actuaries in the US, and frequently testify in Congress, appear on TV, radio, and newsprint. Prior jobs were:

(1) as a pension consultant helping companies set up pension plans,

(2) Chief Actuary of the PBGC (Pension Benefit Guaranty Corporation), and

(3) way back in the early 1980's as the lead pension actuary for the Federal Employee Retirement Systems.

For those of you who do not know actuaries, we make projections of possible future financial risks, such as untimely death (when you have dependents needing your income), outliving one's assets in retirement, incurring large health costs, or destruction of homes, cars, and other property. We then help insurance companies and employers alleviate these risks for their employees and consumers.

I look forward to your questions!

Ron

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Laurel: Mr. Gebhardtsbauer, Some pension freethinkers believe the best way to reform Social Security would be to turn it into more of an insurance than a savings program. Basically, everyone would use the private savings systems (401k and IRA's) to fund their own retirement up to maybe 80-85 years old. Then Social Security would take over for the rest of the lucky one's life. That way everyone doesn't have to save enough to last until 99, just in case they live that long. What would it take (other than acts of Congress, etc) to move Social Security to such a system?

Ron Gebhardtsbauer: Interesting question. As you may know, Social Security's real name is OASDI (for Old Age, Survivors, and Disability Insurance). When Social Security first started, the average life expectancy was 65, so it really was seen as insurance. Now that we live so much longer, many have suggested moving the Normal Retirement Age up much further. It already has moved to age 66, and it will move up to age 67 starting in about 8 years. However, to move it up to your suggestion of age 80, I'm sure would be very difficult for Congress to pass. The UK is going up to age 68.

However, similar ideas to yours are being considered by policy people on the Hill to allow private-sector pension plans to do something like you are suggesting, but so far, there is no proposal before Congress to do that. If you have the desire, you can suggest it to your Members of Congress, and the people in the 4 Congressional Committees that handle pensions (Senate Finance, Senate HELP, House Ed & Labor, and House Ways and Means).

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Murray Hill, N.J.: Please discuss once an "ABC corporation" retiree started to receive monthly pension payment for the rest of his/her life, could the pension be stopped because the "ABC corporation" is terminated by management errors or economic condition shift.

Ron Gebhardtsbauer: Even after your employer is gone, there may be money left in the pension fund which can continue paying your benefit. If there is any concern that there is not enough money in the pension fund to pay your benefits, it will be taken over by a federal agency called the PBGC (Pension Benefit Guaranty Corporation) and they will continue your pension for the rest of your life, no matter how long you live or how bad the markets are. That's a big advantage of the "Defined Benefit" pension plan that you have. One caveat: if you have a very large pension, the PBGC might not pay the full amount.

One other point: If the PBGC doesn't hear about your company going under, you might want to call them up at 202-326-4000.

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Warrenville, Ill.: Ms. Hamilton-- Thanks for your columns and these chats. As a federal retiree--though still working three-quarters time at a different job that I love--I thought that I was prepared to retire. Financially I feel OK: I live on my Civil Service Retirement System annuity (which is about half my previous federal salary) and put most of my current salary into a 401(k), with a minimal match from my current employer.

But I can confess that retirement has been one of the most stressful life changes that I've made. I can't imagine how anyone retires without a plan of action to maintain productivity and connections with life.

The dollars are important. (OK, essential.) So, I never stop worrying about them. Which leads to my question. I've been told that I can roll over my TSP account into my TIAA-CREF account at the college where I now work part time. I've also been told that as long as I keep working at that college, I don't have to touch the TIAA-CREF account. Is this advice true? (Because if it is, I want to shelter the TSP money for as long as possible. I turn 64 this summer and hope to keep working until I'm 75 at least, maybe longer if my health and my brain hold out.) Thanks again for helping people prepare to retire!

Ron Gebhardtsbauer: That's correct. If not working, you must commence distributions from your retirement account starting in the calendar year after you are age 70 1/2 (or you will have BIG penalties from the government), but if you are working, then you can delay commencement until you quit. I'm not sure how TIAA-CREF would handle it, but they may even let you move jobs to another school and still defer commencement. You should ask TIAA-CREF about that.

Before you move the money over to TIAA, you might want to compare their investment fees and investment options with those available thru the Federal Thrift Savings Plan (which has very low investment fees). Talk to both sides about that decision.

PS I understand the desire to not fully retire, now that I'm in my 50's and love my job. I'm also teaching and find that a great way to possibly phase into retirement in my 60's and 70's.

Martha M. Hamilton: You raise an important point about planning for retirement. It's not just financial. You need to know how you're going to spend your time, and many of us would love to keep working.

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Gaithersburg, Md.: What other benefits should you make sure you have in place when you retire beside the health insurance that covers you primary care and hospitalization?

Ron Gebhardtsbauer: You should consider disability insurance if you don't have it thru your employer.

In retirement, I'd also suggest that you have a life time pension from your employer, that will pay you an income for as long as you live no matter how bad the investment markets are. You don't want to run out of money when you are in your 80's and can't go back to work!

I also recommended Long Term Care Insurance to my parents (because Medicare doesn't pay for it). It makes sense unless you are fabulously wealthy and can therefore self-insure. Some employers are now making these available for employees to purchase at cost. Some people say they don't mind having Medicaid pay their nursing care costs, but I would not want to rely on places that will take me if on Medicaid.

Martha M. Hamilton: Long term care insurance also doesn't make sense for those at the lower end of the income spectrum. And you need to shop carefully and understand the differences in policies. I wrote a column about this which we'll add a link to.

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North Bethesda, Md.: This may seem like a basic question, but how do I find out exactly what my pension is. I've been with the same company for more than 10 years, and I know I have a 401(k), and I've "heard" I have a pension, but I don't recall seeing any kind of statement. I've called my benefits office who said I have one and directed me to the same firm that holds my 401(k) but when I've inquired with them, they sent me to their online site where I could only find my 401(k) account. My next step is to go back to my benefits office or re-call the 401 (k) firm. I'm in my early 30s, so it's not like I need my pension NOW, but it would be nice to know what it is (especially so I can use it as a negotiation if I ever plan to change jobs). Is it common for employers not to share pension information with their younger employees?

Ron Gebhardtsbauer: There is a federal requirement, that if your employer sponsors a pension plan, then they must give you a Summary of the pension plan, written in a way that is understandable by the employee, and it must provide information on how to calculate your pension. In addition, you can request a benefit statement once per year, in which the employer must provide your benefit determined as of a current date (as if you quit on that day).

Martha M. Hamilton: It may be that the benefits office thinks you are asking about the 401(k) when you ask about the pension, since defined contribution plans are a type of pension.

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washingtonpost.com: Should You Secure Your Health Care?

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Washington, D.C.: I have a TSP with my employer - I guess that's the only retirement benefit - or am I missing something? Should I be looking for long term health benefits in retirement from a government agency?

Martha M. Hamilton: I believe the federal government provides retiree health insurance--a great benefit given the constant rise in health care costs. You should check with your human resources office.

Ron Gebhardtsbauer: The federal government also provides a very valuable pension plan for it's employees. For example, if you work 30 years it can provide a benefit equal to 30% of your wages, and goes up each year almost as fast as inflation.

In addition to the Retiree Health Insurance that Martha mentioned, you should check out the Long Term Care Insurance that they offer. LTC can be very expensive (over $100 dollars per day), so you may want to consider insuring against a long stay in a nursing facility (or for home health care)

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Silver Spring, Md.: As a federal employee, I'm interested in knowing the value of the government's benefits program including health, life, pension, TSP match, vacation, sick leave, etc. What is the value of the government's benefits package compared to those at some of the bigger private companies? Does it match up favorably? Does it make up for the wage gap that exists between public and private jobs?

Ron Gebhardtsbauer: The federal government often compares their benefit and total compensation packages with the private sector. The results of a comparison depends on who we compare with. If one compares with the average employer, the federal benefits are very good. However, large private sector and union benefits are also good, and in total (when wages are included) the results are closer. People argue on exactly how to compare, and depending on the particulars, you can get an answer in either direction.

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Atlanta, Ga.: The way to reform social security is very simple, but NO ONE is discussing it. When it was created, life expectancy was about 65. The age at which one began to collect benefits.

Today, the age at which one collects benefits should be 75 or 80. No one is saying don't retire, but why are all these people who are completely capable of working getting government subsidies? It makes no sense at all.

Government should be there to help those who CANNOT work. Not those who choose not to work.

Martha M. Hamilton: As Ron mentioned, the age for collecting full benefits is already gradually being pushed back. I think moving it up more may be part of the answer (and it is being talked about plenty). But we also need to make sure that benefits are available earlier for those who cannot keep working, either because of their health or because the jobs are not there. There are plenty of folks in their 60s, 70s and 80s who would love to work if someone would hire them. And others in their early 60s who cannot continue working.

Ron Gebhardtsbauer: Exactly Martha! There are disability benefits in Social Security for those who can't work, but we'd also have to answer the question for people who want to work at older ages, but may find it impossible to find work in their area. That is what is being discuss on Capitol Hill by both the Democrats and Republicans.

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Maryland: I have to question your statement about making sure you have a pension that will pay your entire life - well, who wouldn't want that? But where are the vast majority of us supposed to find that when they aren't provided any more?

Martha M. Hamilton: They're great, and I've certainly come to value mine. Ron recently calculated that I would have had to have saved about $800,000 to buy an annuity to pay the same stream of benefits that I receive from my defined benefit pension. And annuities are a way to fill the void if you don't have a defined benefit pension. Those who are retiring will want to consider annuities that are adjusted for inflation. But they're not cheap, and, because the insurance industry is very untransparent, it's hard to comparison shop for one.

Ron Gebhardtsbauer: I encourage people to talk to their employers about wanting a pension plan. Many employers are right now considering dropping their traditional pension plan, because surveys tell them that employees don¿t care about it. The time that you have the most leverage of course, is when you are looking for a job and you tell the employer that you want a good wage, plus health and retirement benefits. But current employees can also demand it, especially if they go to the employer in a group (and maybe use an outside spokesperson), and say otherwise we will look elsewhere for work.

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London, U.K.: Hi Martha, Off-topic but a question/comment for you about the Fidelity comparison of real-estate returns vs. stock returns.

Did the Fidelity comparison account for the fact that most people buy their house with a mortgage (i.e., they borrow to "invest") whereas most people DO NOT borrow to invest in stocks and bonds (i.e., buy on margin)?

The use of debt to invest in an asset magnifies the returns (positive or negative) by the proportion of debt to equity in the house. So, if you make a 20 percent down payment, you're borrowing 80 percent -- debt to equity is thus 4:1 (80 divided by 20). That means, roughly, that if the house price rises 10 percent during your period of ownership, your return is 40 percent.

People don't buy stocks on margin for a lot of reasons, but I don't think it's fair for Fidelity to compare unlevered real-estate returns with unlevered stock returns.

And this is coming from someone who is a lifelong renter after a bad experience owning a money pit in his early 20s!!! Thanks for your thoughtful columns.

Martha M. Hamilton: Many other readers raised the point you're making about leverage as well as pointing out that stocks usually are a riskier investment. (As I recall, the Fidelity report didn't raise the leverage issue.) Good points, but I was trying simply to counter what I often hear, which is folks talking about the current market value of their house as if it were available to them in the same way as their retirement funds and to remind homeowners that we end up investing more in those houses than we often think about when we're totalling up our equity.

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Reston, Va.: My husband and I both work, and we are in our early 30s. He is lucky enough to work for a large defense contractor that still offers a defined benefit plan (pension). I am very discouraged, though, by how many corporations have been able to walk away from their pension plans in the recent past. My question is this: In saving for retirement, can we safely "count on" receiving the pension benefits tomorrow that the company is promising us today -- especially when "tomorrow" is 30+ years away?

Martha M. Hamilton: As Ron mentioned in an earlier answer, the Pension Benefit Guaranty Corp. protects pension plans by collecting premiums from the companies it covers. So there is some help if a company declares bankruptcy or runs into other troubles. Having said that, I think it's wise to also take advantage of IRAs and 401(k)s to the extent you can. It's extra money for retirement if all goes well, and the plans can also help reduce your taxes.

Ron Gebhardtsbauer: I agree with Martha. You do not know for sure if your company will keep the pension plan. They must provide you what you have already accrued based on prior work with them, but they could freeze it going forward, so that¿s why it is always good to save in a 401(k). I'd also keep telling your employer that the pension plan is important to you. And get your co-workers to tell them too.

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Rockville, Md.: Wife and I have been examining our financial situation regarding retirement. We are mid/late 30's. We have about $550,000 combined in 401k/IRAs. Assuming no additional contributions, 7 percent return per year for 20 years would make that about $2 million. However, we both put $15,500 into our 401k and get some matching - so it will be more than $2 million. At that time, I could retire and get my defined benefit from work (36 percent of my salary). I'm thinking that we might have enough in retirement savings.

So, I was thinking about moving some of our current savings into taxable accounts (currently worth about $500,000). We own our home (no need to move until retirement) and are putting money into 529s for the kids.

Is there such a thing as having too much money in retirement accounts? When I retire, I won't quite be 59 1/2 (so I can't touch the IRAs) and I can only take a one-time-only lump sum from my 401k (but then can set up regular monthly withdrawals). Should I have more in non-retirement accounts?

Ron Gebhardtsbauer: Your retirement assets are in excellent shaper for someone in their 30's, but I don't know how much you need since I don't know your income levels (and how much you will want to live on in retirement). One good rule of them for an excellent retirement is to have 10 times your wages in retirement assets (including the value of your pensions). That will provide a lifetime income in retirement that can replace your current income and increase with inflation, and pay for LTC insurance and Medigap health insurance (to cover the items that Medicare won't pay for).

I agree it is good to have money outside your pension plan for your early retirement years, but one more note: You will have to pay taxes and a penalty on money that you take out of your IRA if you take it out before 59 1/2, but if you take it in a lifetime income you can avoid those penalties.

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Laurel: Oops, didn't think of this until 12:52...

Mr. Gebhardtsbauer, how come when designing the TSP, it didn't include an international component. (It wasn't added until the 90s).

Ron Gebhardtsbauer: International stocks were not a common option anywhere in the 1980's when the TSP was created. Foreign markets were not as well developed back then. As you noted, it was added in the 1990s when it became more popular everywhere.

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Martha M. Hamilton: Thanks for joining us here today. We weren't able to get to all the great questions submitted, so if we didn't get yours, I hope you'll try again on another chat. I have to say a huge thanks to Ron for lending his considerable expertise to the enterprise. I'll be chatting again on Tuesday May 1. And, as always, I'd love to hear from you about ideas for future columns at hamiltonm@washpost.com.

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