Longtime friends Brenda Brum and Dolores Townsend have a lot in common. They both like antiquing and poking around flea markets. They both care for an elderly parent. They both taught at the same school. And they both avoided a financial debacle that would have forced them to keep working well past retirement age.
Brum and Townsend live in West Virginia, the state that until a few years ago had the worst-funded pension plan in the entire country. By the early 1990s, the plan was on the verge of collapse with just 14 percent of the money needed to cover the pensions it owed teachers.
In 1990, then-Governor Gaston Caperton signed legislation to pay off the pension liabilities over a 40-year period. But it also changed the plan from a defined benefit (DB) pension to a defined contribution (DC) 401(k)-type plan.
Effective July of 1991, West Virginia’s new teacher hires were placed into the DC plan. Educators hired prior to that date were able to choose to enroll in the new 401(k)-type plan or to stay with the pension. Lured by the possibility of huge investment returns instead of a lower, but steady, pension income, many made the switch.
But not Brenda Brum or Dolores Townsend — they opted to stick with the pension, and now they’re counting their blessings rather than the number of years to retirement.
“I have colleagues who changed to the DC plan and they have to keep on working,” says Townsend, who retired in 2009. “They’ve been ready to retire, but they lost all their 401(k) savings in the crash of 2008, and now they can’t afford to retire.”
Turns out they wouldn’t have been able to afford to retire before the crash either.
By 2008, according to a study done by West Virginia’s Consolidated Public Retirement Board, most teachers age 60 or older who participated in the 401(k) had only $100,000 or less in their accounts – a fraction of what the pension would have provided them, and not nearly enough to retire on and remain self-sufficient.
“In West Virginia, a lot of people think $100,000 is a lot of money. Teacher salaries have always been so low, people have a distorted view about how much is enough to live on,” says Brum, who retired in 2011. “But most people live 18 to 20 years after they retire, and how can you stretch $100,000 over that time? The only option is not to live as long!” <Read more.>