Consumer Reports Has Advice for Seniors

Sept. 12, 02 - Some 44 million workers in the United States have defined benefit retirement plans, which are the sole responsibility of the employer, but it now appears many of these plans are underfunded.

These plans promise to make a specific monthly payment—or a lump sum—at retirement based on the employee's salary and years of service.

In the past two years pension plans, like other investments, have suffered tremendous losses in the market. As a result, in 2001, many plans, including those from some of the nation's biggest companies—General Motors, Exxon, Mobil, and AMR—were seriously underfunded. And with many investments continuing to yield much lower returns than they did in years past, 2002 threatens to be worse. The October issue of Consumer Reports has expert tips from finance editors on how keep tabs on pension plans.

In a pension plan, the employer contributes to the plan on behalf of all qualified employees and then invests the funds. If the returns are insufficient to pay participants what they would be due, the employer must make up the difference under rules set by the 1974 Employee Retirement Income Security Act (ERISA). And if the employer goes under or can't continue the plan, the Pension Benefit Guaranty Corp. (PBGC), an employer-funded government insurance program, will step in and pay beneficiaries instead. A defined-benefit plan is as close to a sure thing as you can get.

Among CR's suggestions as to what you can do to keep tabs on your pension:

Pay attention to your plan. The Summary Annual Report can alert you to problems such as large investment losses, loans to company officials, and outsize investments in one stock. If you find anything questionable in any plan, contact the Pension Welfare Benefits Administration at 866-275-7922 and ask for contact information on the regional office nearest you.

If you are already retired and your plan is healthy, your benefits are guaranteed.

If your employer changes the pension formula in a way that will reduce your ultimate benefit, consider contributing more to your 401(k).

Here's how to reduce the financial strain of a parent moving in

At least 22 percent of U.S. adults perform care-giving duties for a senior family member. Taking in a parent can add $7,000 or more to a caregiver's expenses each year. This is compounded by the possibility of having to reduce work hours to care for a loved one recent losses in pension plan savings, and draining of Social Security funds because of reduced income. To help consumers reduce the financial strain of taking care of the elderly, Consumer Reports finance editors bring you "When a parent moves in" as part of the October issue. The article is part of Transitions, a series that explores financial issues related to the different stages of life.

Consider the following if you'll be paying your parent's expenses:

Dependent status. Claim your parent as a dependent on your income tax if you provide more than half of his or her total support for the entire year and if your parent had a gross annual income of less than $2,900 for 2001 (not counting Social Security).

Medical-expense tax deduction. If you qualify, you may take a tax deduction for home improvement that provides a medical benefit.

Free or low-cost programs. The National Family Caregiver Program, which is funded by the U.S. Administration on Aging (www.aoa.gov), provides names of programs in your area that offer skilled nursing care, among other things. You may also find less costly help through your place of worship.

Mutual funds: Spiders, Vipers, and tax savings

There are worse things than getting spooked by the market. Like getting spooked by the market and then whipped by taxes. Financial planners and brokers recommend spiders (SPDRs), VIPERs, DIAMONDs, and other exchange-traded funds (ETFs) for year-end tax planning. ETFs, introduced in 1993, are similar to stock-index mutual funds but offer a few extras, among them protection against those unwanted capital-gain distributions.

Here's what CR's finance experts suggest you look for when considering ETFs as part of your investment strategy:

ETFs based on broad market indexes. There are ETFs for any number of industries and sectors, but it's best to stick with those that are broad-based—for example those that track the S&P 500 or the entire market.

Low total expenses. If you're buying an ETF to avoid capital gains taxes, a slightly lower expense ratio is nice but often less crucial than the cost of brokerage commissions, which can range from $29.95 to as much as $150 on 100 shares.

The article features a chart with major equity indexes and their corresponding ETFs. It includes the lowest-cost mutual funds that track the same indexes and accept initial investments of $3,000 or less.

The October issue is available in newsstands. Find the latest recommendations from Consumer Reports' finance experts at: http://finance.consumerreports.org. To Consumer Reports home page - www.ConsumerReports.org.