By Ellen Hoffman
A common New Year's resolution is to get a better handle on your finances and retirement planning. If that's on your to-do list, a way to start is by assessing the retirement news from last year. Several stories and trends could make a difference in how you plan and carry out your retirement. Here's my list of the most noteworthy:
PBGC Problems. The retirement story that just wouldn't go away -- and probably won't for some time -- is the future security of traditional pension plans. Only about 20% of workers still have a traditional defined-benefit pension plan. Many of them work in economically depressed industries such as steel or airlines.
When companies go out of business, merge, or for other reasons close down their pension plans, the last resort for participants is the federal Pension Benefit Guarantee Corp. (PBGC), which takes over the plans and pays at least a portion of the pensions earned by the affected workers.
As 2004 progressed, a spate of bad news came out about the PBGC's deficit of nearly $10 billion, exacerbated by the continuing economic crisis in the airline industry. Among policymakers, pension-rights advocates, and employers, a lively debate continues about just how shaky the PBGC's funding really is, the potential impact of future bankruptcies, and what's needed to shore up the fund.
If you're part of the minority who's still in a traditional pension plan, continue to rev up your savings for retirement in an IRA or any other available vehicle -- especially a 401(k) if you're lucky enough to have that as well as a traditional plan. If your company closes down the pension plan, PBGC guarantees to pay only a certain dollar amount, which may be less than what you expected.
Health-Care Hassles. The implementation of the new Medicare drug benefit is another story with a long shelf life. This one actually started in December, 2003, with the signing of a legislative overhaul of Medicare. The bill included a temporary prescription-drug benefit of up to $600 a year for Medicare participants in 2004 and 2005. The new program was so complicated that the Medicare Rights Center, an advocacy group based in New York, felt compelled to post "76 Things You Should Know About the New Medicare Drug Cards" on its Web site.
By December, 2004, only about 1.5 million of the 7 million people eligible had signed up for the card, and the idea of alleviating the problem of escalating prescription costs in the U.S. by importing drugs from Canada and other countries had gained considerable currency.
If you or a parent is on Medicare but not yet receiving the temporary drug benefit, check out www.medicare.gov or www.medicarerights.org for help in determining eligibility and enrolling. If Medicare is in your future, take note that the cost of the Part B premium -- which people on Medicare pay to cover outpatient expenses -- rose 17%, to a new high of $78.20 per month for 2005, and you can be sure that it will continue to rise.
If your health is good and you don't spend much money on health care, opening one of the new Health Savings Accounts could help you amass a cushion to help pay for that Part B and other medical costs you may incur when you retire. For more details on the pros and cons of HSAs, see BW Online, 7/15/04, "An HSA: The Right Rx For You?".
Social Insecurities. The third major retirement story of 2004 was the return of Social Security changes to the front burner. One of President Bush's first acts after being reelected was to announce that he'll push ahead on these changes in the coming year.
This suggests two steps it would be prudent to take. One is to bring yourself up to speed on how the system actually works by reading some of the agency's publications. To make sure you're current on your own prospects for benefits, take a careful look at the Social Security Statement you should be receiving annually, about three months before your birthday.
The other is to pay attention to the debate, formulate a position, and make your views known. This is one issue where members of Congress are likely to be very responsive to pressure from their constituents.
Other Changes Afoot. A few other retirement issues didn't generate as much attention but are worth knowing about. The first is a slew of new rules that could affect the retirement finances of anyone with assets in what are called nonqualified deferred compensation plans, such as a stock appreciation plan.
This is an incredibly complex issue, but the bottom line is that because of legislative changes, in the coming year you might be hearing from your human-resources department that you have to make decisions, such as whether you will take the money in a lump sum or as an annuity, very soon rather than when you're retiring. If you have one of these plans, check with your HR department about impending changes.
Also last year, the Labor Dept. announced it had collected an unprecedented $3.1 billion in the fiscal year ending Sept. 30 by settling a wide range of complaints about illegal actions by people responsible for running employee pension plans. This news should serve as a reminder to anyone who has retirement money in an employer plan that you need to pay attention to your statements and other paperwork. If you think something suspicious is going on, someone in the federal bureaucracy is willing to investigate and try to correct it if necessary.
For details about the enforcement activities, check out this press release. And to make sure you know how to monitor your own plan, take a look at the Labor Dept. publication, "Ten Warning Signs that Pension Plan Contributions Are Being Misused".
Many Happy Returns? My last fine-print story of the year comes from Jamie Milne, a financial planner in West Danville, Vt., who's chairman of the National Association of Personal Financial Advisers. Milne says in 2004 he and many of his colleagues consciously starting ratcheting down the assumptions on the rate of returns that clients can expect to receive, both when they invest before retirement and after they retire, when they're taking income form their investments.
"I'm using 7% now, and I was using 8% before," Milne says. "I think it's because of the uncertainty of the future and the outlook on the economy. We as planners are less comfortable using the higher rates of return."
This is a topic you might discuss with your own financial adviser or consider yourself, if you don't have an adviser. If you've projected a retired income based on a specific investment return, you too may want to make an adjustment.
While 2004 was more about evolving trends than specific actions, it's smart to stay abreast of these developments so you're not caught by surprise when the stories play themselves out to their not-always-logical -- or satisfactory -- conclusions.
In addition to writing Your Retirement for BusinessWeek Online, Hoffman is the author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement with Help from Uncle Sam. You can contact her through her Web site, www.retirementcatchup.com
Edited by Patricia O'Connell