Pension Question

[Like2Plan]

And I know people who had pensions only, who passed early in the pension stage and left their heirs with nothing.

At least with a 401k, your heirs keep the funds when you pass.

I, too, know someone who did not take a survivor benefit election on the pension and died within months of retiring. It happens. I don't know how anyone could take a chance like that (and the spouse had to sign off on it). AFAIK, the spouse only received the contributions.

The argument for not taking the reduction to fund the survivor benefit is to take the full pension benefit and take out equivalent life ins--which is usually cheaper (if you are still insurable), but in my opinion that is difficult to find life ins that fully covers what the pension provides especially if health insurance is attached to the pension.

This discussion is showing why it's important to have BOTH - guaranteed and growth assets. I think that in your blind love of pensions, you're throwing the baby out with the bath water here. 401k's have some pretty good benefits. Pensions have good benefits too.

I wouldn't call it "blind love". Pensions are not perfect. The larger point I am making is the employee benefits are being greatly eroded when the employer match for the 401K replacement is not on par with what it had been with a pension plan. At the end of the day I would expect the 401K to provide more than a pension in order to consider it a better product.

Except you can use your 457 plan funds to buy an income annuity and create your own pension income stream, and thus have the same guarantees in your investments that the pension provides.

Except when the interest rates are so low, it will take more $$ to achieve the income stream. That's a hard thing to nail down when you are planning how much you need to save for retirement 40 years out.

[jpg7n16]

I, too, know someone who did not take a survivor benefit election on the pension and died within months of retiring. It happens. I don't know how anyone could take a chance like that (and the spouse had to sign off on it). AFAIK, the spouse only received the contributions.

The argument for not taking the reduction to fund the survivor benefit is to take the full pension benefit and take out equivalent life ins--which is usually cheaper (if you are still insurable), but in my opinion that is difficult to find life ins that fully covers what the pension provides especially if health insurance is attached to the pension.

I'm not talking about the reduced survivor spouse benefit, I'm talking about the $0 passed to heirs.

When you have a pension that pays say $1,500/month, your spouse has already passed, and you pass away, your kids get nothing. The income stream stops with you.

When you have a 401k and put money away, you would have about a $450k balance with a 4% withdrawal rate to create an income stream of $1500/month. If your spouse has already passed, and you pass away, your kids get the remaining balance.

I wouldn't call it "blind love". Pensions are not perfect. The larger point I am making is the employee benefits are being greatly eroded when the employer match for the 401K replacement is not on par with what it had been with a pension plan. At the end of the day I would expect the 401K to provide more than a pension in order to consider it a better product.

Better for what? Lifetime income? Or flexibility, potential market growth, and legacy gifting?

In the above example, the 401k clearly provides more than a pension.

If returns in the market are above average, the 401k provides significantly more than an equivalent pension. As the participant takes on the risk of the market, they also get the reward of good market performance.

Except when the interest rates are so low, it will take more $$ to achieve the income stream. That's a hard thing to nail down when you are planning how much you need to save for retirement 40 years out.

Doesn't matter. The point was that pensions are not the only way to get guaranteed lifetime income. And by having a 457 (Greenback's plan), or other defined contribution plan like a 401k or 403b, you do not lose that option. As Greenback was saying that there was no guarantee available with his plan, when that's misleading - there are other ways to create that guarantee with your 457, 401k, 403b balance (rolling a portion to an annuity).

It's not like DB Pension is the only source of lifetime income, and if you have a 401k you're out of luck. There are other ways to get that same lifetime benefit.

Likewise, most pensions have a lump-sum payout option, so if you don't want the lifetime benefit, you have a way out there too - so likewise, 401ks are not the only option with estate/liquidity benefits.


Each has its own advantages/disadvantages - but you can't just blindly say that pensions are good, therefore 401ks are bad. Or pensions were good to society, therefore 401ks are bad to society.

[kv968]

Doesn't matter. The point was that pensions are not the only way to get guaranteed lifetime income. And by having a 457 (Greenback's plan), or other defined contribution plan like a 401k or 403b, you do not lose that option. As Greenback was saying that there was no guarantee available with his plan, when that's misleading - there are other ways to create that guarantee with your 457, 401k, 403b balance (rolling a portion to an annuity).

It's not like DB Pension is the only source of lifetime income, and if you have a 401k you're out of luck. There are other ways to get that same lifetime benefit.

Likewise, most pensions have a lump-sum payout option, so if you don't want the lifetime benefit, you have a way out there too - so likewise, 401ks are not the only option with estate/liquidity benefits.


Each has its own advantages/disadvantages - but you can't just blindly say that pensions are good, therefore 401ks are bad. Or pensions were good to society, therefore 401ks are bad to society.

The ability to transfer some (or all) of the 401k, 403b, etc...balances into an annuity is an aspect I don't think many people think of offhand and it may be a good idea to do it with at least a portion of your savings just get that guaranteed income.

However with the current low interest rates, it might be too expensive to get anything that resembles what a pension would pay out. You may end up having to put almost all of your savings in an annuity just to get the equivalent. I think that was a point Like2plan was trying to make.

But, as you've pointed out, you may have to take into consideration how heirs are treated upon your death. With a 401k, IRA, etc...they'll at least get the remaining balances.

To tell you the truth I'm still wondering how I'll take what remains of my pension. It probably won't be worth much since it's not indexed to inflation and I'm quite a ways from retirement, but I'm thinking about it. I'll probably end up going the lump sum route but I'll have to see how things are when retirement approaches.

[LivingAlmostLarge]

Except that you are generating $18k/year from $450k. Fine and dandy but how do you generate $60k year from that? My mom's pension is $60k and her contributions were $212k. Even with a 7% return over the 33 year period it was only $812k about half the amount needed for a portfolio of $1.5M needed to generate her $60k/year pension.

Sure I don't get anything, but she gets $60k/year so if she lives on half of that $30k and saves $30k she'll still come out ahead of the 401k whose living on $18k and trying to pass on $450k. If she lived on $18k she'd save that $450k in 10 years without any interest.

Pensions typically are overly generous. People are living so much longer that they are easily outliving the estimated lifespan like SS. Perhaps you lose out if you die within that span but we calculated my mom would outlive her contributions in 3 years then live off the state. Turns out to be true.

Even better were those who contributed nothing and still got a pension for life. How can you beat that with a 401k? Contribute $0 or 0% for the state pension then when you retire you get 1.25% per year of service for life. It's unbeatable. Getting money from saving nothing.

[jpg7n16]

Except that you are generating $18k/year from $450k. Fine and dandy but how do you generate $60k year from that? My mom's pension is $60k and her contributions were $212k. Even with a 7% return over the 33 year period it was only $812k about half the amount needed for a portfolio of $1.5M needed to generate her $60k/year pension.

You do it by not comparing apples to oranges. The 4% return is how much you can withdraw to reasonably sustain the inflation adjusted income stream for life, and still leave a balance for your heirs. It is not the percentage of withdrawals you can take on a single life annuity.

On her $212k, at 7% returns, with a balance of $812k, right now you could go out and buy a single life annuity that makes about $50-54k/year, and leaves no funds for the surviving heirs (just like her pension). And given that market returns have averaged WELL OVER 7% for the past 33 years, finding an annuity to generate $60k should be no problem with the amount she stood to have if she had invested those funds herself.

Sure I don't get anything, but she gets $60k/year so if she lives on half of that $30k and saves $30k she'll still come out ahead of the 401k whose living on $18k and trying to pass on $450k. If she lived on $18k she'd save that $450k in 10 years without any interest.

But you said your mom would have had about $812k at just 7% returns, based on the amount she contributed. Why are you comparing her pension to an example I gave about an entirely different scenario?? The $450k balance was an example based on a $1500/month pension, not a $60k/year pension.

Pensions typically are overly generous. People are living so much longer that they are easily outliving the estimated lifespan like SS. Perhaps you lose out if you die within that span but we calculated my mom would outlive her contributions in 3 years then live off the state. Turns out to be true.

Pensions have actuaries that calculate the amounts needed to fund the plan based on expected life span, just like any other annuity.

Certain pensions have more favorable charts than others and can be a great deal, others may have worse charts and you could even do better by taking the lump sum payout and buying the same annuity in the market.

Any time an individual outlives the life expectancy, an annuity will pay off. (Pension purchased, or self-purchased)

Even better were those who contributed nothing and still got a pension for life. How can you beat that with a 401k? Contribute $0 or 0% for the state pension then when you retire you get 1.25% per year of service for life. It's unbeatable. Getting money from saving nothing.

That's misleading to say that they contributed "nothing." Sure, they didn't see a line item on their paychecks go to "Pension," but they still received smaller paychecks in order to provide that benefit. Pensions aren't cheap to run, and take a large amount of contributions to fund each year. Because of that, the firm that provides a pension cannot pay as high a salary as they otherwise would have been able to. If the exact same firm did not offer a pension, they could afford higher salaries.

Another way to think about it is that your pension contribution is part of your income (as it is part of your benefit package, that's very true). If you make $50k/year and your employer makes additional contributions of say $10k to a pension plan on your behalf, you are really making $60k and being forced to save $10k of it.

If you make $60k/year and don't have a pension, but contribute $10k to your 401k, you're doing the same as someone who makes $50k whose employer contributes $10k on their behalf to a pension. So if you're that $50k person, are you really contributing "nothing"?

[jIM_Ohio]

401ks and pensions are used for the same reasons, but they are not the same in design, law or similar from where I sit.

Focus on the risks, benefits and pitfalls

Pensions- they have the pension company bear the longevity risk of the person/ family receiving the pension. These is a cost to this which could be measured, on average. Pensions have inflation risk- even a COLA pension is subject to the index used, and last I checked, there is not a good inflation index, just an average one. Lastly, pensions are the opposite of retirement spending patterns that studies show...

I have read numerous studies which suggest retirement spending happens in 3 phases, initially spending is high while retiree is young, starting hobbies and traveling. At some point this levels off for phase 2. Phase 3 shows a decrease sometime later in life when a person cannot be as physically active.


401ks- this has the participant bear the risk of investing and making money last. This higher risk gives a higher reward (higher payout when retired). This option is also more flexible- with the right plan the age limits written in tax code could be modified, spending can fluctuate based on the person, and inflation is based on individual, not the average or government.

A 401k is portable- a person does not need to be locked in for 30 years to receive it. A 401k is optional, a person could choose to spend all the money and not use it (meaning their wages are higher).


Pensions are also "back loaded". This means the defined contribution is higher in year 30 than it was in year 10. This also means the people which receive pension buyouts at Ford (for example) have a decision to make because the best years to have a pension are years 25-30, not 1-25. I have a power point I have designed which walks people through this.

[LivingAlmostLarge]

Perhaps but typically they have other benefits like more vacation, sick time, etc than private companies. Plus have you looked into how much you have to put into an annuity to get $60k/year? I plugged it into calculators, it should be $1.2M for my mom for life without anything going to me except if she dies I get it back. If she outlives it then nada. To get the $1.2M from her $212 I think she'd have needed much higher returns than 7%.

[jIM_Ohio]

Perhaps but typically they have other benefits like more vacation, sick time, etc than private companies. Plus have you looked into how much you have to put into an annuity to get $60k/year? I plugged it into calculators, it should be $1.2M for my mom for life without anything going to me except if she dies I get it back. If she outlives it then nada. To get the $1.2M from her $212 I think she'd have needed much higher returns than 7%.

compare apples to apples

look at an immediate annuity with no death benefit and compare to a pension and compare to SS (12.4% contribution) in a 3 way comparison.

As soon as the insurance company adds a death benefit, there is a "cost of insurance" which would need an actuary to show us the math on.

In addition "rates of return" with an annuity are misleading, because some of the payment each month is "return of principal", and would show up on tax return that way too.

[snafu]

Going back to the original question...I see several problems with defined pensions. Many gov't pensions are under funded and the state is likewise in debt. Employer pensions are notoriously conservative with pension funds with the majority of the money in Gov't debt which pays extremely low interest in the present economy. The individual contributor has no input in how their money is invested. At retirement, the individual likewise has no control over distribution, the sum is based on a table of years of service and age. Unless there is a spousal benefit, pension disbursement ends on the death of the recipient even if there was less distributed than was paid in.

While I don't recommend it, 401 funds can be accessed before retirement once tax and penalties have been paid. The individual can be as aggressive or conservative with their retirement holdings as they wish. Changing jobs allows you to move 401s. Meeting age qualifications, the individual can withdraw monthly, bi annually or annually as wanted and the sum wanted as long as it meets the minimum criteria. If value remains, it goes to who ever is named beneficiary.

[jpg7n16]

Perhaps but typically they have other benefits like more vacation, sick time, etc than private companies. Plus have you looked into how much you have to put into an annuity to get $60k/year? I plugged it into calculators, it should be $1.2M for my mom for life without anything going to me except if she dies I get it back. If she outlives it then nada. To get the $1.2M from her $212 I think she'd have needed much higher returns than 7%.

Immediate Annuities - Instant Annuity Quote Calculator.

For a 65 year old female in Texas to get $5000/month, works out to $926,750. Not significantly different than your $812k example (from an annualized rate of return perspective). You may even be able to find a better deal by doing additional shopping around.

If 7% got $812k, 8% would probably get $900k+

And since the 30 year period of the stock market ending 2011 averaged 11.03%, I don't think 8% is far out of the question.

[kv968]

That's misleading to say that they contributed "nothing." Sure, they didn't see a line item on their paychecks go to "Pension," but they still received smaller paychecks in order to provide that benefit. Pensions aren't cheap to run, and take a large amount of contributions to fund each year. Because of that, the firm that provides a pension cannot pay as high a salary as they otherwise would have been able to. If the exact same firm did not offer a pension, they could afford higher salaries.

Another way to think about it is that your pension contribution is part of your income (as it is part of your benefit package, that's very true). If you make $50k/year and your employer makes additional contributions of say $10k to a pension plan on your behalf, you are really making $60k and being forced to save $10k of it.

Agreed, pensions are part of the overall benefit's package, but they don't always factor dollar-to-dollar (or even close in my instance, imo) with what your income reduction would be had they not provided one.

I got to see firsthand how much my company "valued" their contributions to my pension when they froze them. The "compensation" for them not adding to the pension any more was to raise their matching on our 401k's and no increase in pay. When all said and done, I get about $275/yr more in employer 401k contributions and no more increase in my pension amount. I can't say for certain what the company really paid for my pension since I didn't contribute anything to it but I have a feeling it was more than $275/yr.

The bottom line is private companies are getting out of the "pension business" because they can and they don't want the risk. They'd rather give a little more in 401k contributions and have the employee take the risk than themselves. I'd say many can afford to continue, but why should they if they don't have to? It's just a drain on their financials. Not that I agree with it but if no one in your business sector is providing pensions there's no need for them to either to remain competative benefits-wise.

Public pensions, for the most part, were way too generous in their benefits in the good times and don't have the income (i.e. taxes) to fund them any more. And seeing as many were underfunded to begin with, the recent stock hit didn't help and now they're scrambling on how to fix it as people start retiring and living longer.

[Like2Plan]

Agreed, pensions are part of the overall benefit's package, but they don't always factor dollar-to-dollar (or even close in my instance, imo) with what your income reduction would be had they not provided one.

I got to see firsthand how much my company "valued" their contributions to my pension when they froze them. The "compensation" for them not adding to the pension any more was to raise their matching on our 401k's and no increase in pay. When all said and done, I get about $275/yr more in employer 401k contributions and no more increase in my pension amount. I can't say for certain what the company really paid for my pension since I didn't contribute anything to it but I have a feeling it was more than $275/yr.

The bottom line is private companies are getting out of the "pension business" because they can and they don't want the risk. They'd rather give a little more in 401k contributions and have the employee take the risk than themselves. I'd say many can afford to continue, but should they if they don't have to? It's just a drain on their financials. Not that I agree with it but if no one in your business sector is providing pensions there's no need for them to either to remain competative benefits-wise.

My DH's company froze his pension a few years ago. (granted this is one of the pitfalls to a being in a pension. )
His company also had a 401k plan. As a result, they increased the maximum company match in the 401k from 3% to 4.5%
.... No way does the 1.5% extra come close to the company's previous participation in the pension plan. If they brought the match up to 10 or 15% then I believe I could be more enthusiastic about the change.

[jpg7n16]

I got to see firsthand how much my company "valued" their contributions to my pension when they froze them. The "compensation" for them not adding to the pension any more was to raise their matching on our 401k's and no increase in pay. When all said and done, I get about $275/yr more in employer 401k contributions and no more increase in my pension amount. I can't say for certain what the company really paid for my pension since I didn't contribute anything to it but I have a feeling it was more than $275/yr.

My DH's company froze his pension a few years ago. (granted this is one of the pitfalls to a being in a pension. )
His company also had a 401k plan. As a result, they increased the maximum company match in the 401k from 3% to 4.5%
.... No way does the 1.5% extra come close to the company's previous participation in the pension plan. If they brought the match up to 10 or 15% then I believe I could be more enthusiastic about the change.

And did you guys stop to think about why your pensions were "frozen"? Because your company could no longer afford to make that size of contribution.

In other words, they needed to reduce salary costs to stay in business. This is an impossible comparison, because you don't know what your true no pension salary would have been. But whatever it was, you just took a paycut to stay employed there.


Don't get me wrong, I personally feel that a job paying $60k with a pension, is legitimately paying more than a $60k job with a 401k (unless theres an incredible matching/employer contribution program) Because you're getting paid $60k + retirement contribution. My contention is that if your job is paying $60k with a 401k right now, they could not afford to add a pension without reducing your salary. (effectively forcing you to contribute to the new plan)

There's no question that a 1.5% match increase does not make up for the loss of a pension plan. Just as there is no question that a paycut to $50k does not make up for the former $60k salary.

But consider the other common option to reduce salary costs: layoffs.

[kv968]

And did you guys stop to think about why your pensions were "frozen"? Because your company could no longer afford to make that size of contribution.

In other words, they needed to reduce salary costs to stay in business. This is an impossible comparison, because you don't know what your true no pension salary would have been. But whatever it was, you just took a paycut to stay employed there.

All companies would like to reduce costs and now it just seems that pensions are the easiest way to do it because, like I said, almost everyone is doing it. With that there's no reason for them to continue funding one because if everything else is somewhat competitive, why are you going to go anywhere else? Plus, in these times, where can you go?

And it's not so much that some companies don't have the money as it is they don't want to spend the money nor take the risk. When my company froze our pensions, the pensions were funded, it had $8.5 BILLION in cash and about $14 billion in current assets. So I don't think they were too worried that they'd miss the next pension payment. I'm sure they were looking longer term and trying to do better things with the money but they weren't and still aren't hurting for money.

Like you said, I basically took a paycut to work there. And unfortunately with the way things are, more and more companies can do it since there's no where for anyone to go.

[Like2Plan]

And did you guys stop to think about why your pensions were "frozen"? Because your company could no longer afford to make that size of contribution.

In other words, they needed to reduce salary costs to stay in business. This is an impossible comparison, because you don't know what your true no pension salary would have been. But whatever it was, you just took a paycut to stay employed there.


Don't get me wrong, I personally feel that a job paying $60k with a pension, is legitimately paying more than a $60k job with a 401k (unless theres an incredible matching/employer contributions program) Because you're getting paid $60k + retirement contribution. My contention is that if your job is paying $60k with a 401k right now, they could not afford to add a pension without reducing your salary. (effectively forcing you to contribute to the new plan)

There's no question that a 1.5% match increase does not make up for the loss of a pension plan. Just as there is no question that a paycut to $50k does not make up for the former $60k salary.

.

My point is if more companies provided a decent match, the 401k could provide benefits on par with what the pension provides (without having the long term liability).. But, they don't.