Not so much that, but the fact that pensions aren’t portable, so working 40 years for four different companies doesn’t provide anything like the pension that working forty years for one company does. For example, my first job I worked 17 years for a company, leaving that job prior to 1990. My entire pension for that 17 years of service is based on my salary in 1988, well, actually the five years prior to that, and is less than $350 a month. If the changing economy forced you to change jobs several times even if your agreed upon pension benefits are paid, and that’s not always the case, it’s a lot less than it would have been if you maintained employment with the same guys.
That still doesn’t answer my confusion about what you’re saying Mama Zappa’s parents’ situation might be. Are you saying they may have failed to save adequately for retirement, because they never really looked into how much these different pensions were actually going to pay them, because they just assumed that if people worked their whole lives they are taken care of in retirement?
Neither of them worked any one place long enough to earn a pension. Publicly, they “weren’t worried” because there was always something that would work out, but I imagine privately they were worried. There were no 401(k)s either.
On a more general note: until the mid 1980s or so, you had to work at any single place for 10 years to be even vested in their pension plan. If you left after 9 years and 10 months, you were out of luck.
By the late 1980s, companies were doing away with defined benefits plans and going to defined contribution plans And even with those, there was a vesting period for anything the company put in. Laws changed so that it could no longer be 10 years - either you had to be fully vested at 5 years, or partially vested starting at 3 years and completely at 7 years (e.g. 20% per year).
Companies love defined contribution because it completely removes them from the burden of having to make sure they have their pension funds adequately funded. 5% (or whatever) right up front and their obligation to you is done. That money grows (you hope), and when you hit 65 you convert it to an annuity. Some are even doing away with a separate plan and basically bumping up their 401(k) matching (if you’re lucky).
And the latest twist: companies are now holding onto 401(k) matching contributions until the end of the year. You leave (or get laid off) 2 weeks before, you lose that entire year’s company contribution.
Companies are also cutting other retirement benefits (where they can) even for current employees - for example, medical coverage.
Pensions are sometimes underfunded despite laws designed to protect them. The Pension Benefit Guaranty Corporation (PBGC) insures pension plans, but it itself is underfunded, and if they have to take over your pension, you will likely not get the full amount you were promised.
Bottom line: even if you work, and the company “takes care of you”, it’s no real guarantee of retirement income.
I’m just counting myself lucky that I will be getting a defined-benefit pension starting at age 65. I’m gonna live high on the hog with that 250 bucks a month :D.
An extra $10,000 isn’t enough to pick up some tattoos?
Plans were frozen, which significantly reduces your actually payout at retirement. In some cases, companies succeeded in moving money in ways that destroyed employees’ savings, but that was harder, due to regulation.
What do you mean by “doing away with a separate plan?” A 401(k) is a defined contribution plan. According to this Investopedia article, it’s the most popular kind. The article also mentions 403(b), 457, and TSP, but those are all basically just 401(k) analogues for non-profit entities or the federal government. What other kind of defined contribution plan is there?
Some companies have (or used to have) a defined contribution plan that was NOT part of the 401(k). They would contribute money - a percentage of salary, usually - and that money would grow based on interest credits or sometimes an employee-directed 401(k)-like investment allocations. It is treated differently from a 401(k) from a legal standpoint: you can’t roll it over to an IRA without spousal consent, for one thing.
My current employer used to do this, as did the company I worked for before we were acquired. They both put aside a sum equal to 5% of my salary. My husband’s company does much the same. That money grows until we retire, then at retirement it will be converted to an annuity and/or lump sum based on its cash value at that time.
These are explicitly separate from the 401(k).They are not based on matching, i.e. they are made even if you don’t participate in the 401(k). Companies that just have a 401(k) require you to put aside money yourself before you get anything (Mine makes an automatic contribution of 1-2% depending on your hire date, then matches your contributions up to a certain percentage).
The main advantage of a plan like that, to my mind, is the protection it offers the spouse. Also whatever it’s worth at retirement, you’re guaranteed that annuity regardless of market ups and downs. The disadvantage is that unless you take a lump sum (which is taxable when you take it) you can’t alter how much you draw down in a particular year - e.g. if you need more money one year you can withdraw more from the 401(k) that year.
$1,000 - would make me smile
$10,000 - smile, boost savings, maybe some upgrades to the sportscar
$100,000 - smile, pay off the house, invest amount equal to mortgage payment from then on
$1 million - All of the above, plus cash gifts to children, spruce up house/yard, upgrade other vehicles
$10 million - all of the above plus retire, set up and run charity
I am retired, the house and cars are paid for, and Miss DrumBum’s education is covered up to her stated goal of a PhD, so I will start at the 1MM level.
1MM
We have quite a bit in our existing 401K's and other investments so we put 30% in travel and invest the rest.
10MM
Miss DrumBum is an equestrian and those familiar with this sort of recreation are well aware of the costs involved, so 10MM would finance a suitably sized stable. :eek:
Making 50k net is only about 70-75k gross, depending on where you live, what your taxes are, etc…
Decent money to be sure, but not enough to want to live on perpetually, especially if you have a family.
You did see that I have never grossed $50? “Only” grossing $70-75k is almost a fortune to me, and I do not expect to ever make that much in a year. $50k a year net would be increasing my take home by about a third. After paying off my mortgage and other debts. So yeah, I could live on that.
[ul]
[li]$1000: Nothing[/li][li]$10,000: Still nothing[/li][li]$100,000: A new kitchen and maybe a nice new car.[/li][li]$1,000,000 Probably just a whole new house and car on the west coast[/li][li]$10 million: Moving to an island somewhere off Vancouver.[/li][/ul]
Before 401Ks the biggest complaint in ACM and IEEE benefits type articles was the lack of the portable pension, since people typically changed jobs a lot. The old pension system would have been awful in Silicon Valley. But pensions were great in the Bell System where you didn’t even start being a veteran until you had worked 20 years.
$1,000 —could be convenient since I just lost my fucking wallet.
$10,000 —exactly the size of the loan I took out to publicize my book. I could pay off the bank or just double the publicity budget 
$100,000 — I’m out of my league but I’d ask around for who could get me onto what mainsteam talk shows for how much of 100K. I’d totally hire an agent to help me identify the best bang for the buck.
$1,000,000 —For this amount of money I’d be starting to think “indie movie financing” and go looking around for cutting-edge creatives who would be interested in turning my book into a movie.
$10 million —Buy a stake in a movie production company? or dump it all into publicity for the movie?
Sure, but if you had a million a year, would you retire on that 50k a year of interest, or would you keep working and have two income streams, perhaps making somewhere in the ballpark of 90-100k net?
That’s what I was getting at- 50k net isn’t so much money that too many people would choose to retire early on it. It’s a solid salary otherwise, but not so much that it’s sufficient for retirement.
Not to be a broken record, but a young person could not withdraw anywhere near $50k 5%, on a million, with growth of the $50k for inflation, and have a high likelihood of never running out. It can be debated endlessly what the number would be, I think I gave a reasonable quantitative analysis for $10mil it would be more like 1-2%, would be slightly more for $1mil because the taxes on investment returns would be lower. The only counters were ‘that’s too low’, or comparisons to nominal (not after inflation) returns in tax deferred 401k’s, probably assuming a high % stocks, not ‘interest’. I’m not even assuming ‘interest’, but 60% stock, 40% bond. If you put all the money in safe govt backed bank CD’s the interest now would be more like 2% gross, before tax and inflation. It would zeroish after inflation even with almost no tax. IOW you’d have to spend the principal down gradually to take out anything, if you limited yourself to low risk investments.
I’m not opining on whether $50k/yr is ‘enough’ money to live without working. Some people stop working (at working age) for less than that (disability etc). But $1mil does not safely support $50k/yr ‘indefinitely’ or ‘perpetually’. $20k would be more like it if young, maybe $40k if already near normal retirement age, both plausible but not particularly conservative. Assuming sitting on one’s butt collecting paper asset returns. If one has the skill to invest it in their own business, etc more risk but could be far higher return, obviously.
$1,000 - savings (no real impact)
$10,000 - savings (no real impact)
$100,000 - pay remainder of student loans, pay off both cars, savings / invest
$1,000,000 - buy nicer house, new car, invest
$10,000,000 - same as above, care a little less about what I buy in a given day
I agree with this. One million isn’t enough to be fuck you money. I disagree with Corry El’s 1-2% number, and 40% bonds is crazy high in bonds, I’m well over sixty and have maybe 20% bonds. That’s my retirement portfolio, 2 years expenses in cash equivalents, 40% domestic stocks, 20% international stocks, 20% bonds, 20% in REIT index. All capital gains and dividends are directed to the cash equivalents. Once a year, rebalance. That’s 4% as easy as easy can be.
Anyway, with one million the smart thing to do is work for a few years to let it grow for a while. You’re already living on what you make, keep doing that, and let the income pile up. within a decade that million will be two, probably two and a half, and that’s close to fuck you money.
Sure, but my ultimate point was that nobody’s going to deliberately choose to retire early on that kind of money, even if 50k is a high-end estimate for the investment income on 1 million dollars. It’s good money, but not retirement kind of money.
It seems like you’re assuming that the person in this scenario wants, or needs, to withdraw a constant amount, or a constant percentage, each year. I can only speak for myself, but I would not really consider myself to possess independent means unless I had enough cash reserves to weather several down years. If you’re in that situation, you can keep a greater percentage in stocks. According to this chart, the greatest number of consecutive years the S&P 500 has gone down was 3, during the Great Depression.
Also, I think all the “don’t forget about the taxes” warnings are a little overdone. When I speculate about a having a certain annual income, say $100k per year, I’m thinking about it as though I had a job that paid a $100k per year salary, meaning my take-home is less because of taxes. The vast majority of working people are in that situation. I’m not suddenly assuming my investment income, unlike my salary, is all mine to spend.
On inflation, that’s a valid point, because you will have to reinvest some in order to make your investment earnings keep pace with inflation, but you never really know how much. Obviously this is not a big deal for someone with max 20 years life expectancy left, but for someone in their twenties or thirties contemplating being independently wealthy for the rest of their life, it’s a big deal.
I agree with these, and that was the point of my initial comment about $50k. Obviously if someone’s 65 years old and retiring, and they’ve made $50/year their whole life, $50k is great as a retirement income. I just would be very surprised if many people in the socioeconomic stratum of the typical SDMB poster (I don’t think we have too many beach bums around here) would really want to permanently quit their jobs at 30 knowing that $50k/year would be their income for the rest of their life, as opposed to continuing to work and live off their employment income, while socking this hypothetical money away in investments and using it to enjoy a more comfortable (but still early) retirement later on.
- I’m making the standard assumption of professional adviser/academic discussions: you withdraw an initial %. You adjust that number of $'s up by inflation. For example $10mil, you withdraw $200k in year one, $204k in year two if inflation was 2%, 208 in year three if inflation was again 2%, and so on for 80 yrs perhaps if you get this windfall when 25 yrs old and a medical breakthrough sometime in the next several decades makes a 105 yr lifespan fairly likely, a ‘risk’ you can’t rule out as a young person.
It’s hard to argue that amount could be more 2% given what expected returns are now (not past historical performance, bond and stock earnings yields are lower now), considering taxes and the inflation correction, and if the horizon is so long. And there isn’t a Returns Guarantee Bureau to pay you the difference if stocks perform like sh8t for decades, like they have in Japan and in various other cases outside the US over the past few centuries. ‘This can never happen’ type optimism about future stock returns is based on US only historical results over only ~a century.
If the person is with 20-30 yrs of expected death, some proportion of the (inflation adjusted) principal can be spend down each year. But 4% is still too high, again given expected returns now. It proved OK historically when realized returns were higher than expected returns are now. Even 60% stocks for people in their 60’s can be dangerous if there isn’t significant SS/pension and/or home equity to fall back on, not going to get into an individual discussion about that because this is a general discussion.
Now, X% year 1 and adjust by inflation thereafter is not what everyone does or anyone has to do in real life. But once you start coming up with all kinds of ad hoc outcomes, ‘I’d do this if X, I’d do that if Y’ the discussion becomes intractable quantitatively. If in ‘bad years’ mean the person withdraws less…then the windfall is generating less. Saying ‘I’d withdraw $400k, but cut it back it I have to’ means it doesn’t reliably generate $400k. I’m saying what it would reliably generate, around 2% is not really a conservative estimate, if keeping ‘up your sleeve’ any drawdown of principal.
- and 3. interact. Part of the return you need to keep the principal constant after inflation (let’s assume the very long possible life case) gets taken away by taxes. This is illustrated in the limit by the naive, with due respect, comments by some about the ‘interest’ on the money. The best 5 yr CD’s only pay around 2% now, $10mil worth would be 40 of them (FDIC gteed up to $250k per name per bank) so a lot of paperwork or going quite far down the list of best rates. Or in govt bond you have to go out to around 20yrs to get 2%. But inflation might well be 2%, the long term historical average is 3%, though market expectation now might be read as slightly below 2%. Anyway, in that case you need basically all the interest just to offset inflation, but have to pay ordinary income tax on that 2% first, so actually you don’t maintain the principal after inflation even if withdrawing nothing, playing it totally safe.
It’s simpler if someone can just think of what they spend now after tax, rather than a pre tax salary, and compare to that the after tax amount they can take from the portfolio, apples to apples. But you definitely have to consider taxes on the investment returns.