2012 AFCPE conference workshop

1. Broken Promises: 10 Financial
Coping Strategies for Future
Financial Security
Barbara O’Neill
Rutgers Cooperative Extension
oneill@aesop.rutgers.edu

2. Workshop Objective
• Help employees deal with the financial aftermath of
“broken promises”
– Income losses
– Benefit reductions
• Presented as a AAFCS Webinar and to several employee
groups in NJ
• Participants asked to “check their anger at the door”
– Focus is on solutions; not confrontation or complaining
about losses

3. Polling Question: How Many
of You Have Experienced
“Broken Promises?”

4. What’s Happening?
Workers can’t even count on income and
benefits promised in their CURRENT labor
contract, not to mention promises made
years ago when they were first hired.

5. Era of Broken Promises
• Terminated pensions
• “Church plan” pension exemptions from ERISA
• Suspended 401(k) matches
• Salary cuts and freezes
• Furloughs
• Benefit cuts
• Pension COLA cuts
• Others

6. Key Themes During Past Few Years
Peggy Noonan reply to question from Maria
Bartiromo about “game-changing events
during 2011” on Wall Street Journal Report,
1/1/12
“The fall of structures that we’ve come to
rely on” and “Lots of insecurity”
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7. More Evidence of Broken Promises
New York Governor Andrew Cuomo, 12/16/11
interview about streamlining government,
including new pension benefit tiers:
“the whole system was designed at a different time
and a different place and it needs serious
reorganization.”
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8. The “New Normal” is Exacerbating
Broken Promises
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9. For Some, the Dream of Upward
Mobility is Slipping Away
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10. The Real Cause of All the Anger
While recent media reports have
covered angry protests directed at
public employees whose pension and
health benefit packages lasted longer
than most in the private sector…
…the REAL ISSUE is that workers in
both the public and private sector
have lost critical pillars of financial
planning support that they once
thought they could count on!
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11. “Broken Promises” Trends
• Increasing numbers of public (and private) sector job
benefits have been overhauled
– Employers realizing previously-promised benefits are
unsustainable and/or unaffordable
– Politically popular to slash public employee benefits
• More than half of public pensions are <80% funded
– < 80% level deemed “substantially underfunded”
• Defined benefit (DB) pension formulas and COLAs
especially under attack
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12. Frequent Pension Plan Changes
• Lower benefit tiers for new hires
• Retirement ages raised (e.g., 55 to 60, 62 to 65)
• Automatic COLAs eliminated or scaled back
• COLAs tied to pension plan performance
• Changes in pension benefit formulas
– Elimination of “sick day” bonuses
– Change from “High 3” average salary formula to
“High 5”
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13. Case Example: New Jersey PERS
• “High Three” Average Formula (Current Tier 1 and 2)
– Years of Service/55 x Final Average Salary
– 35/55 x $60,000 = $38,181 annual pension ($3,181/month)
• “High Five” Average Formula
– Years of Service/55 x Final Average Salary
– 35/55 x $52,000 = $33,090 annual pension ($2,758/month)
• Difference of > $5,000/year and $423/month
• See http://www.state.nj.us/treasury/pensions/estimate.shtml
13

14. Health Benefit Challenges
• Workers’ coverage is decreasing and/or they
are increasingly paying more for:
– Premiums
– Deductibles
– Co-payments
• From 2000 to 2010, average premiums for
family coverage through an employer
increased 114%
• More employees’ ONLY option is high-
deductible health insurance
14

15. More About High-Deductible Plans
• Percentage of workers enrolled in high-deductible
health plans quadrupled from 2006 to 2011.
• Often called “consumer-driven health plans”
• Encourages consumers to be more conscious of
medical-care costs; comparison shopping is difficult
• 2011 quote from health insurance company CEO:
“It’s safe to say we expect enrollment in consumer-
driven health plans to continue to grow.”
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16. So What Do All These Changes Mean?
• Any income or benefit promise can be broken…even
in union contracts
• NO employee benefit is “guaranteed”
• New economic realities require adjustment to avoid
– Accumulating debt due to negative cash flow
– Setting aside inadequate retirement savings
– Outliving retirement assets
• Proactive planning can mitigate benefit losses
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17. What to Do When Your
Income/Benefits are Cut
• Work longer
• “Retire” while working
• Accelerate debt repayment
• Save the shortfall
• Consider career changes and/or freelancing
• Consider investing more aggressively
• Spend less and shop savvy
• Investigate new benefit alternatives
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18. Work Longer
• Time is an enemy (twice) for early retirees
– Fewer working years to accumulate personal
savings, pension benefits, and SS
– More non-working years to finance
• The years just prior to normal retirement age
are usually a period of peak earnings
• May have more control over “service” part of
DB pension formula than “average earnings”
– Example: tenured professor with a pay freeze
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19. Beware of “Stampedes”
• Employees heading for the door in droves fearing
that an employer will cut benefits
• Employers could cut benefits anyway (no guarantees
that you’ll be “grandfathered”)
• Examples:
– NJ state workers, teachers, uniformed personnel
– Federal government workers?
• In many cases, longer service will mitigate benefit
reductions (e.g., loss of COLAs)
– Increases “Years of Service” part of DB pension formula
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20. “Retire” While Working
• Standard Strategy #1- Retire at a planned age with less
money than anticipated due to NN events and risk running out
of money due to benefit cutbacks, increased health care costs,
longevity, etc.
• Standard Strategy #2- Retire later and risk “waiting too long”
(e.g., after age 65-70) so that death, health “issues,”
widowhood, etc. hinder planned retirement lifestyle and/or
quality of life.
• New Strategy #3- Keep working BUT use money that had
been going into savings (i.e., suspend or reduce 401(k) or
403(b) contributions) to begin enjoying “retirement activities”
NOW without actually retiring.
https://www2.troweprice.com/iws/wps/wcm/connect/d2edab0046d7abf0a87eb899d3
5c25cc/04779-
23_P1.pdf?MOD=AJPERES&CACHEID=d2edab0046d7abf0a87eb899d35c25cc
(Fahlund, C. Delaying Retirement, But Not Your Retirement Dreams)
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21. Accelerate Debt Repayment
• Mortgage principal pre-payment
– Retire mortgage before retirement
• Mortgage refinancing (lower interest rate)
• PowerPay (consumer debt)
– www.powerpay.org
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22. Save the Shortfall
• Calculate amount lost from a retirement benefit cut
• Multiply by 25 to determine shortfall savings goal
• Do the math and develop an action plan to save
– Younger workers need to save < older workers
• Example: $6,000 annual benefit loss
– Need to accumulate $150,000 by retirement
($6k x 25)
– Age 45: $3,660/year or $305 per month
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23. Consider Career Changes and/or
Freelancing
• Public sector employment benefits are generally not
as attractive as they once were
– Newer tier hires often have lower benefit tiers
• Option #1: Changing jobs could lead to better
benefits; less stress
• Option #2: Aggressively demonstrate value to
current employer (to earn a promotion)
• Option #3: Freelance for additional income or to
replace lost income due to benefit plan changes
– Increased health insurance cost-sharing
– Increased pension plan contributions
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24. Consider Investing More Aggressively
• Even with elimination of COLAs, people with DB
pensions have income for life (acts like an annuity)
– Ditto for Social Security
• Most retirees with DC plans have risk of an ever-
changing sum of money that needs to last a lifetime
• May be able to invest more aggressively if you have
streams of lifetime income
• Know your risk tolerance:
http://njaes.rutgers.edu/money/riskquiz/
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25. Spend Less and Shop Savvy
• Unpleasant as it is, you may need to spend less to
adjust to the effects of broken promises
• Adjusting to less support from an employer or
government may be a necessity, not an option
– “Stepping down” spending
– Moving to a smaller/cheaper home
– Phone apps to compare prices
– Coupons and groupons
– Asking for discounts
– Fewer trips and gifts (e.g., retirees)
– Other ideas?
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26. Investigate New Benefit Alternatives
• Explore benefit options that you might not
have considered previously
– High-deductible health insurance and an HSA or
HRA
• Do a cost-benefit analysis of alternatives
– Premium savings from high-deductible plan vs.
amount of out-of-pocket payment
• Attend benefit fairs/seminars and ask
questions
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27. Keep an Eye on Government Benefits
• Changes to Social Security
– More needs-based? Older age? Lower benefits?
• Changes to Medicare
– More needs-based? Older age? Lower benefits?
• New health care law and aftermath
• Consider using very conservative benefit estimates
for financial planning purposes
• Assume that you can’t count on promised benefits?
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28. Major Take-Away:
Focus on What You CAN Control
CAN’T Control CAN Control
• Speed of economic recovery • Healthy lifestyle
• Financial markets • Spending habits
• Labor market/unemployment • Saving habits
rate
• Investment expenses
• Housing market
• Human capital investments
• Employee benefit cutbacks
• How you spend your time
• Political environment
• Actions of lawmakers

29. Select What Works for You
• Think of these strategies as a
“Jersey diner menu”
• Adopt strategies that work for you
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30. Questions? Comments?
Experiences?