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Don’t Play Pension Roulette - Alternative Retirement Strategies for Pilots

Part 1 - Pension Plan Problems

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Many pilots worked their entire careers, contributing faithfully to their pension and expecting to receive a payout. These pilots retired expecting a sizable nest egg based on the pension’s guaranteed benefits. However, the plans didn’t perform as anticipated.

I was asked to speak to a group of pilots about saving for retirement. This article is taken from that material and specifically references that industry and situation. However, there are other industries and job types that also offer pension plans. Those employees should be aware of how pensions work and how they can impact their retirement. Even if you aren't a pilot, I believe that the information in this article can help you. I share it in the hopes that you will become more aware of the details of your retirement and take control of your future.

Pension Basics - What Is a Pension?

Pensions are retirement plans designed to provide individuals with steady income during their post-employment years, offering financial security and stability after they stop working. These employer-sponsored programs involve regular contributions made by both the employee and the employer, which are then invested to generate income and build a retirement fund. Pensions typically guarantee a specific amount of income to retirees based on factors such as years of service, salary history, and contribution levels, with the goal of ensuring a reliable source of income for retirement.

Pension Plan Risks

Pensions aren’t immune to market volatility. One of the main risks with pension retirement plans is the potential for funding shortfalls, where the assets in the plan are insufficient to meet the promised benefit obligations to retirees. Economic downturns and market volatility can significantly impact the value of pension fund investments, leading to reduced returns and financial strain on the plan. Changing demographics, such as an aging population and longer life expectancies, can also pose risks. Providing benefits for a longer duration than initially anticipated puts additional strain on the plan's resources.

Pilot Pension Math

An individual must be 16 years of age to solo fly an aircraft, 17 years to obtain a Private Pilot Certificate, 18 years to obtain a Commercial Pilot Certificate, and 23 years to receive an Airline Transport Certificate.

According to Harvard Health, the average life expectancy is 76 years for males and 80 years for females. If Federal Aviation Regulations require pilots to retire at 65, that leaves an 11 to 15-year gap where retired pilots will depend on pension plan benefits.

Many pilots worked their entire careers, contributing faithfully to their pension and expecting to receive a payout of 60% of their annual salary during this gap. At a salary of $200,000 per year, this payout would equate to an individual retirement fund of $1.32 million dollars ($200,000 x 60% = $120,000 x 11 years = $1.32 million). These pilots retired expecting a sizable nest egg based on the pension’s guaranteed benefits.

However, the plans didn’t perform as anticipated, leaving the pilots with far less than their guaranteed benefits. Devastated by the loss of their financial stability and security, thousands of retired pilots returned to the workforce, faced with the possibility of not retiring in their lifetime.

How A Pension Fund Can Fail

The pilot pension fund failed due to a variety of factors. First, there was no plan to backfill the large, predominantly aging workforce with a younger generation of pilots. As the older group began to age out and withdraw benefits, there were no younger workers contributing to offset the payouts. Next, an economic meltdown affected the assets in the fund, profoundly reducing the overall value. Combined with the fast pace and high volume of outgoing payments, the money in the fund was quickly depleted, closing the fund and ending any future benefits.

Here are some additional pension plan risks that affected thousands of pilots throughout the country:

  • Employers can receive IRS exemptions and deductions for providing pension plans. However, the US government relies on tax dollars, so there are limits to how much an employer can put into their pension plan.

  • Pension plans are analyzed by statisticians called actuaries, who verify the plans are viable based on stock market performance. This analysis is often based on relatively short-term analysis; if there are extended down-market conditions that exceed these projections, pension plans can be depleted.

  • If the actuaries predict too high, the IRS may step in to forbid tax avoidance with fines and penalties. Employers cannot effectively protect employees from IRS rules and market pullbacks impacting a pension plan.

  • Pension plans are designed to pay the same monthly amounts, regardless of market conditions or performance. A pension will be depleted by extended market corrections.

  • If a US bankruptcy court deems a pension insolvent without hope of recovery, your retirement is gone.

In the next blog post we will share the new retirement plan options.

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