The first corporate pension dates back to 1875, when the American Express Company began providing workers half of their annual salary in retirement once they hit 20 years with the company. Shortly thereafter, utilities, banking, railroads and other manufacturing companies also began providing pensions.
However, problems quickly developed after companies went out of business, leaving workers without retirement benefits. This brought about one of the most significant pieces of retirement legislation with the Employee Retirement Income Security Act (ERISA) of 1974. It made pension plans more secure by establishing regulations for employer-sponsored retirement plans.
Once seen as an anchor in the three-legged stool of retirement, pensions have slowly been phased out over the last few decades as companies and government agencies look to cut costs and shift more of the retirement-saving responsibility to the employee.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Here are three questions to consider with your pension as you approach retirement.
Should You Take the Monthly Check or Lump Sum Payment?
There are two distribution options available to retirees: You can take a lump sum distribution or monthly payments over your lifetime. The biggest question you need to ask yourself is: Will your employer be able to meet its long-term commitments?
A lump sum gives you a large amount of cash now, but the total amount you receive could be lower than what you would be paid out if you were to stay in the plan. A monthly check gives retirees guaranteed monthly income for the rest of their life. However, you may only receive a portion of those payments should your company go bankrupt.
Other things to consider include spousal benefits and taxes. Some pensions offer spousal benefits, but if you take the monthly payment route and die soon after, those benefits potentially end there, depending on the option you choose. Additionally, if you take the lump sum and don’t roll over that money into an IRA, you will pay taxes on the distribution.
How Has the Coronavirus Impacted Pensions?
Even before the coronavirus, government-backed pension funds were facing a shortfall: They don’t have enough money to pay out the benefits promised to retirees. Much of the funding for pensions comes from the stock market, and with Wall Street recovered from its pandemic lows, pension funds have largely stabilized. Some private companies hit hard by COVID-19 last year, most notably airlines, offered buyouts and early retirement packages to employees in an effort to cut costs. Some experts anticipate that trend may continue with other pension-providing companies if they begin to struggle financially as well.
New trends in the way pensions are being overseen are also creating additional concerns. More private companies are seeing financial benefits by selling their pension plans to insurance companies. Some advocates say this can be risky because insurance companies tend to not have the same government-backed protections in place. Critics also question whether these companies are more concerned about quick profits rather than long-term stability.
If My Company Offers Me a Severance Package or Buyout, How Do I Determine Which Is Right for Me?
It’s important to think about your future, because your retirement could look much different than you expected. More than 3 million older workers have left the labor force since the coronavirus pandemic began in March of 2020. If you are offered a buyout, there a couple of things you should ask yourself:
- How much money is coming into the plan? Public pensions rely on a strong tax base, so if you live in a state that has seen a decline in income and sales taxes as a result of the pandemic, it could create more funding problems for already cash-strapped cities and counties. If you have a private pension plan and your company doesn’t look to be profitable in the future, you may want to consider taking the buyout offer.
- When will employees begin withdrawing from the plan? The average life expectancy in the U.S. is 77.3. The problem is Americans are retiring much earlier, and some pension plans begin paying out employees in their 50s.
I recommend meeting with a financial adviser to look at all your options so you can make informed decisions about your future.
-
Stocks Can't Hold Meta, Microsoft Gains: Stock Market TodayThe main indexes all opened higher Thursday on impressive Big Tech earnings, but momentum faded into the close.
-
Retirement Health Care Costs Are On the Rise: What You Need to KnowA 65-year-old retiree will face significantly higher lifetime health care costs than they would have a year ago, even with Medicare. Here are the surprising totals.
-
You Don't Have to Be Wealthy to Need a Wealth ManagerNavigating complex financial decisions is hard on your own, no matter how much money you have. A wealth manager can provide comprehensive financial planning, investment management, risk management and more.
-
Despite Tariffs, These Investment Experts Are Bullish on European EquitiesEuropean equities were one of the better-performing investments during the first half of 2025. They could be a good long-term prospect for U.S. investors needing to diversify, according to these investment managers.
-
How Do You Know You Are Ready for a Gray Divorce? 15 Yes-or-No QuestionsAs more people 50 and older get divorced, many splits are initiated by women who want a new path. Answer these 15 questions to see if you might need to think about how you should move forward.
-
'Buy Now, Pay Later' for Everyday Spending? This Financial Pro Thinks It's Risky'Buy Now, Pay Later' apps can get you out of a jam when you need money quickly. But using them regularly for small purchases could create problems.
-
Five Things to Consider Before Rolling Your 401(k) into a Roth IRAConverting at least some of an old 401(k) to a Roth IRA can offer long-term tax benefits and retirement flexibility, especially if you anticipate being in a higher tax bracket later or wish to leave a tax-free legacy.
-
From Dream Apartment to Nightmare: When Your Landlord Evicts You Through No Fault of Your OwnThis is what I suggested a tenant do to get out of her lease after her landlord's inexperience and lack of action made her rental situation unsafe. It's a legal situation called 'constructive eviction.'
-
Six Steps to Being Empowered and On Track: An Expert Financial Guide for WomenWhile most female investors feel on track with their financial goals and empowered by managing their investments, many regret not starting sooner. Here's how you can get started and take control of your financial future.
-
Selling Your Business? This Powerful Insurance Option Unlocks Multigenerational WealthPrivate placement life insurance (PPLI) offers almost unbelievable investment flexibility, estate planning and tax advantages. And it's completely legit.
