Pension Question

[jIM_Ohio]

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.

Plan design...

if a company matches 50% of first 6%, that is a 9% contribution. Most of here know that is the maximum most will do because it is free money, and we also know a retirement plan based on a 9% savings rate is a plan to fail. Defined benefit plans like pensions contribute more than 9% on behalf of employee.

If same company matched 33% of first 9% that is same cost to employer, with a 12% savings rate...
or match 50% of first 8% and then 25% of next 4% for a total of 15% savings rate. I can see a retirement plan built on a 15% savings rate.

The problem is not the match, it is how employers incentivize participants and still meet all the ERISA laws for compliance, means testing and similar.

[Like2Plan]

Plan design...

if a company matches 50% of first 6%, that is a 9% contribution. Most of here know that is the maximum most will do because it is free money, and we also know a retirement plan based on a 9% savings rate is a plan to fail. Defined benefit plans like pensions contribute more than 9% on behalf of employee.

If same company matched 33% of first 9% that is same cost to employer, with a 12% savings rate...
or match 50% of first 8% and then 25% of next 4% for a total of 15% savings rate. I can see a retirement plan built on a 15% savings rate.

The problem is not the match, it is how employers incentivize participants and still meet all the ERISA laws for compliance, means testing and similar.

I don't think 15% (total) is an adequate savings rate. Ideally a minimum 100% match of the first 10% would give an employee much better odds at meeting retirement goals ( more match would always be good).. .
But my point is you are lucky if you get a match at all--putting more of the heavy lifting on the employee. Employers put much, much more into retirement plans than they do for 401ks.

[KTP]

In all of this discussion have you guys been using real returns for the stock and bond markets? If you invest 60% stocks and 40% bonds in today's market, I do not think you will be getting anywhere close to 8% real return. Unfortunately, when you go to buy the anuity in 25 years, they will want real money in 2037 dollars. They will laugh at you when you try to give them 2012 dollars.

Pensions, especially COLA'd pensions guaranteed by the government, are far far better than a 401K. When the pension doesn't get the high return it was built on, they just increase taxes or cut the current budget in order to fund the gap in the pension plan. When your 401K doesn't get the 8% real return (read up on Japan for the last few decades) who will put money into it to make up the difference so you can buy that annuity???

[LivingAlmostLarge]

jpg my mom retired at 55 so start there, not even 60. It means more payments and longer from an earlier age. Also put in a COLA in the annuity and chose a higher cost of living state. I put in her state and it was $1.2M without COLA increases. I'd have to guess that she's coming way out ahead than people who don't have a pension.

My aunts and uncles who didn't chose to work for the state say they can't retire. They didn't save or invest wisely to have $1M. They made more all those years but the money just didn't get invested at the same rate as the pension. They certainly weren't extravagant and I know one in particular paid her home in 15 years. But I guess their investing wasn't good enough.

[KTP]

jpg my mom retired at 55 so start there, not even 60. It means more payments and longer from an earlier age. Also put in a COLA in the annuity and chose a higher cost of living state. I put in her state and it was $1.2M without COLA increases. I'd have to guess that she's coming way out ahead than people who don't have a pension.

My aunts and uncles who didn't chose to work for the state say they can't retire. They didn't save or invest wisely to have $1M. They made more all those years but the money just didn't get invested at the same rate as the pension. They certainly weren't extravagant and I know one in particular paid her home in 15 years. But I guess their investing wasn't good enough.

If your mom's pension is 60K and is also COLA'd, then there is zero question she came out way ahead vs buying an annuity with 401K money. These other guys defending the 401K are just trying to put lipstick on a pig.

Our 401K, invested in 80% stocks 20% bonds, has earned about 2% real return over the past decade (it had high expenses until recently..most funds were about 1% ER). Our state is cutting services and raising certain taxes in order to fund the public pension that did not earn the 8% they had predicted (it probably earned something around 2% real like we did). Our state is not doing anything to put more money into our 401K to bring it up to a 8% return.

[jpg7n16]

jpg my mom retired at 55 so start there, not even 60. It means more payments and longer from an earlier age. Also put in a COLA in the annuity and chose a higher cost of living state. I put in her state and it was $1.2M without COLA increases. I'd have to guess that she's coming way out ahead than people who don't have a pension.

My aunts and uncles who didn't chose to work for the state say they can't retire. They didn't save or invest wisely to have $1M. They made more all those years but the money just didn't get invested at the same rate as the pension. They certainly weren't extravagant and I know one in particular paid her home in 15 years. But I guess their investing wasn't good enough.

It sounds like your mom got a fantastic deal then. We don't know her average salary, years of employement, or amount she would have been paid w/o the pension. But don't assume that ALL pensions are like your mom's.

http://mlis.state.md.us/other/BenefitsSustainabilityCommission/100710-PensionBenefitComparisons.pdf

Please refer to pages 6 and 15 of that document. Most workers don't get such high benefits. It's usually something like that document shows. 2% or so of income per year of service. (1.8%/year in this case) And when you look at the page 15, an average benefit is like 30-40% of the final salary. Something that can easily be replicated with a 401k.

[Like2Plan]

It sounds like your mom got a fantastic deal then. We don't know her average salary, years of employement, or amount she would have been paid w/o the pension. But don't assume that ALL pensions are like your mom's.

http://mlis.state.md.us/other/BenefitsSustainabilityCommission/100710-PensionBenefitComparisons.pdf

Please refer to pages 6 and 15 of that document. Most workers don't get such high benefits. It's usually something like that document shows. 2% or so of income per year of service. (1.8%/year in this case) And when you look at the page 15, an average benefit is like 30-40% of the final salary. Something that can easily be replicated with a 401k.

It looks like the average contribution is 5% of salary, but the benefit is based on average final salary- I didn't see what that figure was (typically it is high 3 or high 5). Anyway, my point is that the salary the benefit is based on is typically higher than the contribution basis because of salary increases over a career.

I noticed that the average length of service on page 15 ranged from 19.2 to 27.5 years of service.

Perhaps you have some computations which model a 401k based on a 5% contribution rate (and no match) with 8 % ROR based on 19.2 to 27.5 years of contributions?

[KTP]

It is dismal. I ran the numbers (had to guess a lot) at MyCalculators.com |- 401(k) Calculator and came up with this:

Starting salary (25 years ago): $25,000
Annual raise: 4%
Employee contribution: 5%
Employer match: 0%
Annual return on investment: 8%

After 25 years you end up with a 401K balance of $135,433.48

What kind of annuity will that buy? $10,000 a year single payer? With no COLA?

What a joke. To add salt to the wound, isn't it true that in some states pensions are treated a little better tax wise (as in not taxed on state income taxes)?

[Joan.of.the.Arch]

Our 401K, invested in 80% stocks 20% bonds, has earned about 2% real return over the past decade (it had high expenses until recently..most funds were about 1% ER). Our state is cutting services and raising certain taxes in order to fund the public pension that did not earn the 8% they had predicted (it probably earned something around 2% real like we did). Our state is not doing anything to put more money into our 401K to bring it up to a 8% return.

By comparison my state's Employee's Retirement System earned 7.1% annualized over the last ten years.

http://www.pionline.com/article/20120628/DAILYREG/120629869/missouri-state-employees-return-tops-for-decade-cliffwater-says

[jpg7n16]

It looks like the average contribution is 5% of salary, but the benefit is based on average final salary- I didn't see what that figure was (typically it is high 3 or high 5). Anyway, my point is that the salary the benefit is based on is typically higher than the contribution basis because of salary increases over a career.

I noticed that the average length of service on page 15 ranged from 19.2 to 27.5 years of service.

Perhaps you have some computations which model a 401k based on a 5% contribution rate (and no match) with 8 % ROR based on 19.2 to 27.5 years of contributions?

You are entirely ignoring the employer contribution made to the plan, instead of paid to the worker as salary.

[KTP]

You are entirely ignoring the employer contribution made to the plan, instead of paid to the worker as salary.

But then on the other hand, everyone is ignoring the fact that if the person had been payed more in lieu of the employer contributing to the pension plan, that money would have been heavily taxed via SS, Medicare, Federal and possibly State.

What is better?

Person A is making $60,000, contributing 5% ($3,000) to a great, guaranteed pension plan where the employer makes up the rest.

Person B is making $70,000 (but actually only $66,000 compared to person A because of SS, Medicare, Fed, State taxes on that extra $10K). Person B can indeed fund a 401K with $9,000, but this will still not get anywhere close to buying an annuity with COLA that matches the pension of person A.

There could even be other triggers (ineligibility for certain deductions because of income limits) that make the increased salary even more insignificant vs the untaxed pension contribution.

Edit: Well, perhaps state and federal would not be charged in the case where the person funded a 401K with the extra salary, but SS and medicare use the gross figure. So it is a little better, but then again my example was pretty drastic with a $10,000 salary difference too.

[jpg7n16]

But then on the other hand, everyone is ignoring the fact that if the person had been payed more in lieu of the employer contributing to the pension plan, that money would have been heavily taxed via SS, Medicare, Federal and possibly State.

What is better?

Person A is making $60,000, contributing 5% ($3,000) to a great, guaranteed pension plan where the employer makes up the rest.

Person B is making $70,000 (but actually only $66,000 compared to person A because of SS, Medicare, Fed, State taxes on that extra $10K). Person B can indeed fund a 401K with $9,000, but this will still not get anywhere close to buying an annuity with COLA that matches the pension of person A.

There could even be other triggers (ineligibility for certain deductions because of income limits) that make the increased salary even more insignificant vs the untaxed pension contribution.

401k contributions are PRETAX money, but subject to SS and Medicare tax. Unless you are claiming that SS and Medicare are charging 40% these days.

The actual SS and Medicare tax rates are 4.2% + 1.45% = 5.65%

Meaning Person B can actually fund his acct with $12,435, or 17.76% of income - and have the same after-tax lifestyle of Person A.

Try re-running your calculator with 17.76% and you'll see that things will be a little different after 25-30 years, than just 5%. And you'd be able to find a great lifetime income solution - plus have full access to your account balance if needed for legacy goals and inflation protection.

http://www.mycalculators.com/ca/401kcalcm.html

[KTP]

401k contributions are PRETAX money, but subject to SS and Medicare tax. Unless you are claiming that SS and Medicare are charging 40% these days.

The actual SS and Medicare tax rates are 4.2% + 1.45% = 5.65%

Meaning Person B can actually fund his acct with $12,435, or 17.76% of income - and have the same after-tax lifestyle of Person A.

Try re-running your calculator with 17.76% and you'll see that things will be a little different after 25-30 years, than just 5%. And you'd be able to find a great lifetime income solution - plus have full access to your account balance if needed for legacy goals and inflation protection.

MyCalculators.com |- 401(k) Calculator

Well, it is only recently and temporary that SS is 4.2%. If we compromise and use 16% in the calculator, with a starting salary of $35K vs the pensioner $25K (which is even more drastic) and a 4% annual raise, then after 25 years with a 5% real return you would have today a 401K balance of $412,000.

Now trotting over to the annuity calculator and I find this will get a single payer NON COLA annuity of about $2,133 a month, or $25,596 a year.

I think I will take the reduced salary and the guaranteed COLA pension of $60,000 a year, k thks bai.

[LivingAlmostLarge]

She got 2% per year of service, worked 33 years + 2 years of accrued sick leave. She got 21 days of sick leave and 21 vacation days a year. She was allowed to accrue unlimited sick leave and 90 days of vacation paid out. My mom cashed out 90 days of vacation when she left. Crazy. Now she also got at age 55 free medical premiums from the state for her and my dad for LIFE. $1k/month. Ridiculous benefits.

Now I told you she was offered $212k back from her contributions to the pension of 7.5% over her 33 years working. Or she could use that and maximize her benefit. I told her live 4 years and she would be using that up and living off the state. Not hard to live from 55 to 59, most people aren't even retired at 59!

I have yet to meet someone around my moms age who did better than she did without a pension. Nor has she. Most people I know do better with a pension than on their own investing the "difference" from the "higher" salary. Most people who don't have pensions in private sector jobs don't have that much better salary or benefits to make up for it.

[jpg7n16]

Well, it is only recently and temporary that SS is 4.2%. If we compromise and use 16% in the calculator, with a starting salary of $35K vs the pensioner $25K (which is even more drastic) and a 4% annual raise, then after 25 years with a 5% real return you would have today a 401K balance of $412,000.

Now trotting over to the annuity calculator and I find this will get a single payer NON COLA annuity of about $2,133 a month, or $25,596 a year.

Why are you only getting half the returns you should be? And no match, like you should be? Market returns AVERAGE 9.4%, so use a reasonable figure like 7 or 8% and err on the conservative side.

Let's use 7.5%, and a 3% match (standard).

25 years = 694,441.80

Trot that on over to an annuity calculator for a 65 year old Female, and you'll get $3,747/month (aka $45k/year)
Immediate Annuities - Instant Annuity Quote Calculator.

Or a COLA annuity calculator, with 3% COLA adjustment and get $2,719/month. (aka $32,600/year)

https://www.newretirement.com/services/annuity_calculator.aspx

FWIW - don't enter an email, and click "no" don't contact me. The calculator will still work without an email address.

I think I will take the reduced salary and the guaranteed COLA pension of $60,000 a year, k thks bai.

If I were only making $25k/year, I'd take a COLA pension of $60k too. But the firm wouldn't offer it.

Let's see...

$25k, 4% raise per year, 25 yos, final salary = $66k

25 yos * 1.8% credit per yos = 45% replacement rate

$66k * 45% = $30k/year (2500/month), plus 2.9% COLA adjustment


Hmmm... $32k COLA at 3% vs $30k COLA at 2.9%. 10% higher salary inflation adjusted for the rest of my life. Pretty comparable, but just a bit better.


My point is, you can go into the market and replicate most pension benefits if that's what you really want. And by properly funding a 401k, you'll have enough funds to do so.

The examples above are over 25 years. The longer the timeframe, the more amplified the difference of the excess market returns. The shorter the timeframe, the better the pension picture looks.

Over 35 years, the self-funded 401k (same terms as above) would build roughly $1.8M, and could turn around today and buy an income of $7,005/month (3% COLA adjusting), when the pension benefit would provide $5,200/month (2.9% COLA adjusting).

I think I'll take the extra 40% inflation adjusted salary each year for the rest of my life. k thks bai.