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The path to retirement is never perfectly smooth, and in these uncertain times you should probably expect to hit some roadblocks on the way. What can go wrong? Plenty. Your employer can freeze its pension plan, leaving you with a shrunken benefit, or cut its retiree health benefits, dashing your dream of retiring early. The stock market can tank, decimating your savings. After you retire, inflation can eat away at the buying power of your money.
Any of these can derail the best-laid retirement plans, but there are steps you can take to stay on track. Here's what to do.
Your employer freezes your defined-benefit pension plan
Many workers (20% in fact) in private industry participate in pension plans, and 19% of them are in frozen plans, according to the Bureau of Labor Statistics. When a company freezes its pension plan, some or all of the workers stop earning some or all of their benefits from that point on. But an employer can't take away benefits already earned.Employers usually calculate pension benefits using a formula that takes into account your years of service and highest pay. When a company freezes its plan, the benefits that you've earned to that point might be what you'll get when you retire. Or they might continue to grow but under a less generous formula.
What you can do
Fortunately, most companies that freeze pension benefits offer a new or enhanced 401(k) plan that employees can use to supplement their diminished pensions. Sometimes employers kick in a more generous match. You might be able to make up the rest of the benefits you lose by putting the maximum amount into your 401(k). For example, consider the predicament of the 55-year-old earning $150,000 a year that's illustrated in the table below. He expects to retire in 10 years with a lump-sum pension of more than $535,000. But then his employer freezes the pension plan, reducing his expected benefit by more than 60%. At the same time, the employer boosts its maximum match on 401(k) contributions from 4% to 7%.To make up for more than $300,000 in lost benefits, he would have to contribute the maximum amount to his 401(k) for the next 10 years. That adds up to $22,000 a year: $16,500 plus a $5,500 catch-up contribution for people 50 and older. In addition, he should open an Individual Retirement Account and sock away as much as he can. If he contributes $6,000 a year to an IRA through age 60, he can fully compensate for the loss of pension benefits.
How realistic is it for a 55-year-old to save nearly 19% of his income? It depends on his other financial obligations, says Christine Fahlund, a senior financial planner at T. Rowe Price. "Saving that much of your salary is difficult," she says. "But at that age, many people are no longer saving for college and may have paid off their mortgage."
If you can't afford to save that much, you might consider postponing retirement for four or five years to build up your savings.
Your employer trims retiree health benefits
Health insurance is often essential to retirees who aren't old enough for Medicare and can't afford or don't qualify for an individual policy. More than 40% of 55- to 64-year-olds have diagnosed pre-existing medical conditions that could cause insurers to turn them down for individual insurance. Such benefits are also important to retirees on Medicare because they often pay costs that the program doesn't cover.Only the largest employers tend to offer retiree health coverage, and many of them have dropped or restricted access to it over the last 20 years. Between 1993 and 2001, the percentage of employers with 500 or more workers offering health benefits to early retirees fell from 46 to 29%, according to the Employee Benefit Research Institute (EBRI). Since 2001, the portion of companies offering such benefits has remained stable, but the cost to workers for coverage has increased.
More changes are coming due to recent national health-care reform. Under the new law, insurers will not be able to turn down adults with pre-existing conditions starting in 2014. Early retirees and others will be able to buy coverage through health insurance exchanges, which won't be permitted to deny coverage or charge more for it because of pre-existing conditions.