The safety of your pension

Ultimate Guide to Retirement

• Getting started
• 401(k)s & company plans
• Investing
• Annuities
• IRAs
• Self-employment plans
• Pensions and benefit plans
• Social Security
• Insurance
• Estate planning
• Living in retirement
• Getting help

More from Money Magazine

Put Santa's elves on a budget Squandering a minor's trust fund Weaker dollar, stronger returns

Best Places to Live Current Issue Subscribe to Money

(Money Magazine) -- 1. Many pension plans are underfunded

If you're entitled to a pension, you might be wondering how your plan is faring. The numbers alone suggest there's reason for concern: In 2008 assets in private defined-benefit plans fell an average of 26%, according to Watson Wyatt management consulting. That has left many plans below their legal funding target.

By law, company plans must have on hand most of the money promised to employees. This wasn't an issue when the market was on a tear: In 2007 the top 100 private plans ran surpluses, reports Watson Wyatt. But by the end of 2008, the same plans were 79% funded on average - meaning they had only 79 for every $1 due to employees.

2. But underfunded doesn't mean "can't pay"

You're not necessarily on the hook for the plan's bad investment moves (or bad luck). Pension benefits already earned are guaranteed. So employers must cover their plans' deficits.

That has many plans scrambling, but "it doesn't mean the companies can't afford to pay benefits," says Lynn Dudley of the American Benefits Council. Most plans are far from broke. Public sector plans are especially safe, as they can cover shortfalls with tax hikes and budget shifts.

3. It may, however, mean some changes in how much you'll get

Company plans may be hamstrung by certain legal restrictions from which public plans are exempt. For example, if the plan is less than 80% funded - you must be told how it's doing once a year in the annual report or a letter - you won't have the option of taking the benefit as a full lump-sum payment.

And if your plan is less than 60% funded, your company may be forced to freeze it, says Watson Wyatt actuary Alan Glickstein. That means it will pay benefits accrued but won't set aside new money on your behalf.

4. You're at greater risk of losing your job than your pension

A company "can dip into cash reserves to fund its pension," says Dallas Salisbury, CEO of the Employee Benefit Research Institute. But if there are no reserves, the firm must cut costs, which may mean layoffs. So, ironically, your pension may be safe at the expense of your job.

Even if you lose your job because your employer goes under, you'll still get checks in retirement. The Pension Benefit Guaranty Corp., a federal insurance program, will pay benefits - currently up to $54,000 a year for a 65-year-old.

5. Still, you ought to have a backup plan

While you're fairly safe on benefits accrued, don't count on future ones. In the first months of 2009 alone, a dozen large companies voluntarily froze pensions, reports the Pension Rights Center.

Given that trend, your goal should be to save enough for retirement to fill the gap between your estimated expenses and what you've earned in your pension, says Irvine, Calif., financial planner Thomas Scott. Your plan administrator can tell you what you're entitled to so far; run the numbers on the "How much will you need for retirement?"

Want a Money Makeover? E-mail us at makeover@moneymail.com.