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Please avoid this great new retirement savings opportunity
If you are enrolled in a pension plan at work, you can roll over money from your employer’s 401(k) plan into the pension plan, thereby increasing the size of your monthly pension check during retirement. And if the pension goes broke, the Pension Benefit Guaranty Corp.—which is to pensions what the FDIC is to banks—will, thanks to new rules, step in and pay benefits.
So, great, you can now do this. But should you?
mediaphotos | Getty Images
If you’re reading this article, probably not. That’s because you’re the kind of person who pays attention to personal finance issues—and that makes you far more aware of, and involved in, crucial financial planning efforts than most Americans.
That means that while this new opportunity is pretty good, you can do even better. Let me explain.
Read More Will new pension guarantees help you?
There is a real fear among policymakers that Americans are woefully unprepared for retirement. Most workers don’t save enough, and many of those who do save are choosing the wrong investment vehicles.
The result: They won’t amass enough money to support themselves in retirement, and they will spend all their money within the first decade or two of retirement. Being broke is bad enough, but being broke in your 80s is downright horrifying.
So enter PBGC’s new rule: People who transfer their 401(k) balances into a pension plan will get larger monthly pension checks throughout their retirement, no matter how long they live, and PBGC will provide coverage if the pension plan goes broke. No wonder AARP and the AFL-CIO both support the idea.
So do I—for the ignorant masses. And by “ignorant” I don’t mean stupid. I’m simply referring to those who are uneducated about proper investment management strategies.
Read More Govt guarantees 401(k) pension rollovers
Given the choice of letting the uninformed fend for themselves versus offering them the opportunity to place their funds into an account that literally guarantees they will receive a monthly check for life—with that guarantee backed by an agency created by the federal government, no less—I’d encourage them to place their 401(k) funds into their pensions, too.
But if you have a good understanding of personal finance (which is easy to do) and you learn how to manage your money properly (which doesn’t take long), you’ll agree with me that choosing that pension-rollover option is a bad idea. Or, rather, that there is a far better idea than that.
Here are the reasons why educated consumers and their financial advisors will dismiss the “opportunity” created by PBGC’s new rule:
A far better approach than placing 100 percent of your life’s savings into a pension plan—and hoping it all works out—is to do what educated investors do: Create your own monthly income.
All you need to do is create a globally diversified portfolio using exchange-traded funds and low-cost, passively-managed mutual funds. Then, generate monthly income using a “systematic withdrawal plan.”
Read More 4% rule is misunderstood
The SWP lets you decide how much income you want to receive (keeping in mind that the more you withdraw, the greater the risk you’ll run out of money). The good news is that you can change your income at will, increasing it over time to offset inflation, and whatever you don’t spend during your lifetime remains available to your spouse and children.
And best of all, you can probably provide yourself with more income monthly than you would have gotten from an employer’s pension plan.
If you don’t know how to construct the portfolio you need or design it to produce the income you need, just talk with a financial planner—we have the skills and experience to do it for you.
Are there risks of handling your investments on your own? Sure. You might buy unsuitable investments or investments that fall in value—placing at risk your ability to generate the income you want.
Read More Picking the right benefits plan
You might incur commissions, fees and expenses when investing, and these would erode the value of your account or its ability to generate income. And the biggest problem? You might withdraw too much or live too long—and therefore run out of money.
So carefully evaluate your situation and your options. Before you decide to transfer your 401(k) balance to your pension plan, get information from your employer as well as from an independent financial advisor. Consider all the information before you make a decision.
—By Ric Edelman, special to CNBC.com. Edelman is the founder and CEO of Edelman Financial Services.