Yes, those minimum terms of service don’t work when so many of us move from employer to employer frequently.
Nevermind, sorry
Lots of people won’t be better off with a traditional pension . A traditional pension was great for me - I worked for a city government and a state government but because most of the provisions are the same I was able to transfer the service time between them so I retired with 33 years of service.
But pensions take between five and seven years to fully vest. The median tenure at an employer is now around four years and workplace advice columns advise changing jobs every 2-3 years. People who work 2 - 4 years at each employer will never fully vest anywhere - and if they contributed to a pension , for the most part, they will simply have their contributions returned to them. There are some exceptions - government plans may allow transfer of service or multiple entities may be part of the same plan ( for example, some plans are operated by unions) but for the most part a person who works at 7 or 8 different companies wouldn’t get much in pension payments - and that’s assuming they all had pensions and I don’t think there was ever a time when that was the case. My understanding is that when 401K came about there were many people who were happy about the “portable pension” because even then, there were fields where changing employers was common.
When i started as a pension actuary, in the mid eighties, ERISA plans were required to vest in 5 years. (And most non-union private pension plans are covered by ERISA.)
It’s not that they are earning more. I meant the % of pay the employer needs to salt away to pay the promised benefits are enormously more for older employees. Compound interest. The plan earns it, just like your 401K. I haven’t done this work in years, and don’t have numbers off the top of my head, (and don’t want to do the math today) but the difference is huge.
I think I just figured out why my pension calculates payments the way it does - if I had less than 20 years of credit, my benefit was 1.6 x yrs x pay so for 10 years, I would have gotten 16% of my pay. For 20-30 years, it was 2% per year, so I would have gotten 40% - more than twice the payment for 10 years. That 8% must have made up for the people who retired relatively soon after they got 10 years in.
I agree. And sometimes not even that much.
That’s why an essential part of any investment strategy is to have a substantial amount of sensible but technically “not absolutely safe” investments – things that have a potential downside but also appreciate well precisely for that reason. In my experience the two best investments in that category are (a) your house, and (b) an index fund tied to a major stock index like the S&P 500.
I did a little financial exercise the other day. I’m very fortunate that the current house I bought a little more than 10 years ago just as a little place to retire has more than tripled in value due to an extraordinary housing boom over that time, particularly just in this immediate area. Just for fun I looked at what my return would have been if instead of buying a house I had put the money into an S&P 500 index fund. I was astounded – it was less, but really not all that much less!
That’s not a contradiction.
Long term inflation is about 3% so yes safe investments earn about 5% a year which is a few points above the average inflation rate.
Exactly - I had referred to that (“30ish years to continue funding”) but didn’t explicitly say “to allow for compounding”.
If the 55 year old is earning 100K a year, and the formula is, say, .02 x average salary x number of years, that.s 100,000 * .02 * 10, or 20,000 a year - payable basically immediately. If the younger employee is earning 50,000 a year, the pension is 10,000 a year, payable in 30 years. They’re on the hook for a lot less in raw dollars, plus putting aside a few grand now will likely fund that in its entirety.
Really, the switch to defined contribution plans makes so much financial sense for employers, it’s amazing they didn’t switch much, much earlier. In this example, they are still putting aside twice as much for the older, higher-paid worker, but then their obligations are DONE.
Employers are generally doing their best to shift risk from their own books onto others. My own employer has made a number of changes along those lines, from going to a defined contribution plan with x % automatic, to a 401(k) matching plan (with a smaller % automatic that earned market-rate interest, but you could do as well if you saved enough of your own, plus the potential to outperform the interest rate), to a defined % that is LESS than the 401(k) amount, and that earns market-rate interest. And for a while there, their 401(k) contributions were “if you quit before December 31, you get nothing”. Grrrr.
Defined benefit plans are not always adequately funded, also; years back, there were loads of stories about plans where they were inadequately funded and wound up being taken over by PBGC. Even public fund plans (such as the federal CSRS / FERS plans) were not actuarially sound (from what I heard working on a system to automate record-keeping for FERS a couple decades ago).
My kids have heard us harping on the topic of SAVE, SAVE, SAVE for years, and we have seen family members beggared due to poor planning. My daughter’s attitute now is “I’ll never be able to retire” and she simply will NOT put money in her IRA, nor look at whether her job has a 401(k). ARGH!!!.
The error is in the user who thinks they can withdraw the whole 5%.
If they do that, their principal and the spending power of next year’s earnings are declining at the rate of inflation. For the first few years the difference is probably invisible. Keep that up for 15 years and your spending power is halved.
A healthy person needs to plan for a 30-year retirement.
The first ~3% of your nominal ROI needs to be left untouched in the account to preserve the real value of your principal.
Leaving you just 1-2% to actually spend.
If all your money is outside of a tax-advantaged plan, it’s even worse. Out of the 1-2% you can withdraw, you need to pay taxes on that money, and the 3% you don’t withdraw. That can be 1 to 1.5% right there.
Which leaves a real thin slice to live on.
If I withdraw two percent annually, I would need fifty times my annual income if I expect to withdraw an amount equal to my annual income and that’s a huge amount of money. In reality, I’ll also be getting money from Social Security and I only need to replace my income net of my retirement account contributions, so perhaps 70% or 80% of my gross income?
Well, folk are perfectly free to follow the advice you read in columns. 2 of my 3 kids have changed jobs several times - always waiting until they vested and would not need to repay for advanced degrees. OTOH, I’m looking forward to enjoying the benefits of 41 years w/ my employer when I retire in 3.5 yrs. Most people have plenty of choices.
Sometime I wonder if we overthink this. My retirement plan is to own a home and my car free and clear. Excluding those expenses (and let’s not get too in the weeds right now with taxes, registration, maintenance, &c.) I spend about $3000 per month. Including my pension & social security, what additional money do I need to invest to have an income of $36,000 per year?
Not 50 times, really, because that other 98% is going to grow for another year (ignoring market downturns). Plus, a lot of current expenses (e.g. any 401(k) contributions, as you noted) do not need to be replaced.
The 70-80% is a common rule of thumb, but will depend a lot on your own situation. Some planners suggest 100% is a better target, especially if you plan on expensive hobbies like travelling in the “go-go” years.
And of course you have to account for taxes. If you are spending money from a traditional IRA, that’s all taxable at your regular rate. If you are selling stocks (outside an IRA), you’ll have capital gains (at a lower rate, usually). If you are using Roth money, that’s free(ish). And depending on how much you withdraw, your Social Security may be taxable.
I’m hoping that we can replace about 100% of our NET income, when we retire. This is looking somewhat possible, though I’d like us to have a couple more years of earnings if we can manage it. This does include accounting for our Social Security benefits as part of the new reality; we don’t need our retirement savings to cover the whole amount.
With the value of a dollar today, a million dollars isn’t an unreasonable sum to aim for, especially if you start young.
What galled me were articles 25-30 years ago in USA Today and the like stating that you would need $2-3 million to retire. I suspect it was the financial services industry pushing that baloney, to panic naive investors and drive them into the arms of ‘genius’ wealth managers.
Other scare tactics involved claiming that you would need something like 75% of your income to retire. Which may be true in some cases. But the number depends on how much you need to live in retirement, not how much you are making when working.
Do you know how much either of those income streams will produce annually when you retire? Without those figures, it’s going to be difficult to answer your question.
My pension if I retire at 65 will be at least $57,500 / yr
That’s a fair question. If you are indeed able to own the car and home free and clear (the car will ultimately need to be replaced, so allow for a “car payment” even if you don’t have a loan), then check on your social security statement (ssa.gov; you can get a statement estimating what your benefit will be at various ages). And if you know your pension plan’s formula, you can estimate what that benefit would be. Add those two together, and subtract from 3,000, and there’s the income you need to replace by other means.
“They say” you should be able to withdraw roughly 4% of your retirement savings every year, and not risk running out of money (some versions of “they” tout 3%). That of course means that in a slower year, you withdraw less money. And of course, the RMD exceeds 4% at about age 75, so you WILL be taking that much out unless your money is in Roth or non-retirement accounts.
Hah - seeing your reply re your pension, you should be in fantastic shape given your current spending patterns.. What you cite is quite a bit more than 3,000 a month. You will be in the enviable position of having more income than you need, and more time in which to spend it on enjoyable activities.
It’s still not a bad rule of thumb. I mean, look at how you spend money now, versus how you expect to spend it in retirement. Some expenses (work clothes, lunches, retirement contributions) will go down. Taxes will likely be less. Other expenses will go up - travel (hopefully), medical (almost certainly).
The 2-3 million “scare” may have been just that, but it’s hard to imagine regretting having that much saved, unless you manage it by living a truly wretchedly constrained life in the meantime. If it’s more than you think you need, when push comes to shove, you can have fun with it. Travel. Donate. Put in trust for the grandkids. Or whatever.
I’m confused -
but you say your pension will be at least $57,000 a year. Are you trying to figure out how to end up with $36K in addition to your pension and SS?
Anyway, do you have a 401K/403B/457 ? If so, that company might have a planner on its website. On mine, I can plug in pension income, expected SS for me and my husband , how much I expect to need compared to current income , and retirement account balances and it will tell me year by year how much I will need to take out of savings each year until I am 82 to have the income for my chosen spending level (assuming 2.25 yearly inflation)
Nope. I need $36,000 per year if my plan works out meaning I’m covered.