Freezing Your Pension: Making up the value

By Scot Herrick | Personal Finance

Feb 06

To become a Cubicle Warrior, it is important to have your finances in order. Yet, those of us who are hanging on by a thread to our corporate pension (how many of you still have a corporate pension as part of your benefit package?? Fortunately, I still do) are often finding that the benefits of the pension are being frozen in place.

It’s a concern.

The risk is tangible. Eighteen percent of the 1,000 big companies with defined benefit plans had, as of last December, frozen at least one of their plans, with the majority of those freezes occurring in 2004 or 2005, according to consultants Watson Wyatt Worldwide. Another survey, by sei Global Institutional Group, recently found the freezes more extensive when midsize companies are factored in. This poll of 139 pension sponsors (both large and midsize businesses) showed that 40% had frozen or closed their plans, up from 30% in January.

The problem with counting on pensions is they often get very big at the last years of employment, nearing the age of 65. Freezing them at, say at your age 50, has a dramatic effect on your ability to retire well.

Upon freezing a pension, the savings differential to achieve the same dollars at your retirement fall completely…on you.

The results are dramatic. Forbes offers a nice little chart that tells you with a 6% and 8% return, how much you need to increase your savings rate to achieve the loss of a frozen pension. How would you like to increase your savings rate by 11% to 20% in one single change? After tax?

Yup. And delaying the savings change only makes things worse.

Moral of the story: be prepared to significantly increase your savings if your company freezes your pension plan. How much? Here’s the chart.