It does
What's the Dope's view on the superiority debate re: traditional defined benefit pensions vs. 401ks?
One additional thing to add is if you have a defined benefit plan, check to see if you have a lump sum distribution option. If you do, most likely it may be beneficial to elect the lump sum distribution instead of taking the annuity. It’s a matter of math. Your annuity is a function of the expected long term return on investments (usually the expected corporate bond yield over your expected life span), along with your mortality (expected life span). Today’s expected return, depending upon your plan could range between 3 and 4%. I believe that taking the lump sum, I can invest in a stock index fund and earn greater than 4%.
My DB plan offers the me the ability at age 55 to take a lump sum and roll it into my 401k or IRA account, and continue investing tax deferred. At some point after I reach 65, I will have mandatory minimum distributions that the government will require me to take. This also makes these assets available to my spouse and children, if I were to die prematurely.
I did this exact calculation with an insurance broker I trust – I asked if I were to take the lump sum for a pension that I had vested in a few years prior and roll it into a deferred annuity with the plan of annuitizing as if it were a pension, could he match the promised payment. He said he couldn’t come close to the DB plan and told me to keep it in the pension. So, the lesson is, I guess, be careful with these permanent decisions.
As I said, it’s a math equation. It appears that you have a very rich pension.
To expand on what doreen said, the idea is that assuming that you die at the average age, the amount you get from the time you start SS to the time you die is roughly constant. So you get less if you start getting benefits early, and get more if you take them later.
The increased benefit per year is roughly 8%, which is a good return, so it makes sense to delay if you can afford to and don’t expect to die early.
Given the poor state of American retirement savings, lots of people take SS early, which costs them if they live longer than the average.
65? Isn’t it 70 1/2? I cashed out my pension and put it into an annuity with some survivor benefits, and I haven’t touched it yet at 67, with no problems.
My pension would pay my wife half the benefit if she survives me at the cost of a reduced benefit to me. That didn’t seem like a good deal. Her getting the balance is more useful.
My new job makes me an automatic participant in the CA state government pension system, though I will not be vested for another five years. Even though the system is not as generous as it used to be since the system was reformed in 2013, it’s still a relatively generous retirement plan overall. My view in the OP is still the same: traditional pensions are awesome, & it’s a shame that they are dying a slow death. Their elimination will almost certainly make it much more difficult for the millennial generation to comfortably retire.
I have a huge problem with this statement. I’m not angry that you said it, but the statement itself is very troublesome. The problem with traditional pensions is that they are horrendously unstable, and often unsustainable. Yes, they often look great on paper because all risk factors have been ignored. Taking your specific example of CalPERS, well, that system is in a very dangerous position. For years they’ve been ignoring realistic market returns and assuming they will get above-market percentages back. This behavior, along with occasionally-questionable investing decisions, means that the program is running deeply behind what it needs. This is going to mean very painful political decisions about what gets funded - and the pension program is not guaranteed to win that argument.
Corporate pensions were sometimes run badly; when they broke down people faced hard times. They’re great - as long as nothing goes wrong. But in the long run, something is virtually guaranteed to go wrong, which is why there are many rules about them today (at least some of which are extremely counter-productive). And with corporations often having relatively short lifespans, pensions often don’t make sense at all. The longest I’ve ever been in a job is less than a decade, so whats the point of joining a pension?
But government pensions have much the same problem, except there are almost no legal backstop or regulations. Many governments claim they will 100% always honour their pension obligations, but those promises will look mighty thing once states face tough choices between current operations and pension programs. Government pensions additionally compound the problems by frequently offering wildly-generous terms compared to even the most well-funded private pension programs. Those promises have to be paid eventually, or the program breaks.
The fed has ensured that it doesn’t matter which one you have, both will have virtually no purchasing power whatsoever. Don’t take my word for it, here’s Alan Greenspan talking about Social Security, but the problem is basically the same.
Pensions and Social Security only work if bond yields averaged over 5%. If the fed let bond yields hit 5%, most of the corporations on the S&P500 would go bankrupt overnight. And that’s averaged 5%, so bond yields would have to be larger to catch back up to where they need to be. Not happening. Ever.
401K’s are black boxes. You buy from a selection of mutual funds (whose prospectus you never read) that have to buy investments of a certain category… and the investments in that category include Mortgage Backed Securities (sound familiar? These are the bombs that blew up in 2008), debt to zombie corporations (corporations whose interest payments are greater than their total revenue while interest rates are at all-time lows no less!!), and any number of financial abominations that the credit rating agencies call “good as gold” because credit rating agencies are private institutions that get paid by the zombie corporations they’re rating (conflict of interest much?).
The reason 401K’s are “in vogue” now is because it shifts more risk onto the average pleb and off of the large corporations (if a pension has issues, the corporation is on the hook for it, if a 401k fails… sucks to be you!). So given the choice, I’d prefer a pension… but I am involved with neither because both are ticking time bombs.
Wow. My company started shifting away from pensions in the 1990s and into a 401k plan. They held all kinds of meetings and had tons of communications telling employees that they should start getting more conservative in their investments the closer they got to retirement. Which I did. As a result, I took only a minor, recoverable, hit from the 2008 crash. I told my money guy to keep with the conservative investments with only a small percentage in stocks. Even with being that conservative I was able for the first five years of my retirement to not touch my principal (and I wasn’t taking SS yet).
I can’t imagine blowing through my entire “bucket” of money in just a few years. Although I know people who did. One of my co-workers got divorced, and her ex was also an employee of our company. He took the lump sum distribution and decided to play day trader (he was in his early 40s). He lost it all. Ha. He ended up being a “kept” man of his new wife. Gave my friend a bit of schadenfreude.
Pensions are invested a lot more widely than just bonds. You might have seen stories where state pension agencies try to influence companies thanks to their large investments in them. So while pensions have problems due to underfunding, this isn’t one of them.
The drop in my 401K value in 2008 wasn’t due to this, but due to the market as a whole dropping. I didn’t make the mistake of moving my money to cash, and wound up in good shape.
While being in the market is dangerous, especially if you need money during a crash or invest badly, not being in the market is also dangerous, since you’ll never keep up with inflation. I don’t know if your employer does 401K matching, but if it does not taking advantage is shooting yourself in the foot. A plus, even if your 401K options are limited is that if you leave a job you can roll it over to an IRA and have a lot more options.
The real problem with 401Ks is that not all that many companies offer them, and that many people choose not to take advantage needing the money now, which is why people over 60 on the average have miserable amounts of money.
I was very good at investing and now I’m retired I’m seeing the advantage of doing so.
IMO disqualification based on *assets *would be far less likely than disqualification based on income. And I agree that even that is unlikely.
If they did decide to test income, a person could simply draw less money out (assuming they could afford to). Such testing might also be likely to sunset out with age, allowing a person to avoid penalties by drawing their 401(k) money out later.
Not always. Many include straightfoward index funds. The Thrift Savings Plan (for federal employees) has the C fund, which mirrors the S&P 500. It took a big hit in 2008, but it didn’t literally go away (like some of those byzantine bets-on-bets-on-bets did) and it came back robustly.
Read whatever materials you can, and rebalance periodically.
The required minimum distributions can trip you up there. A 72 year old man with 1.5 million in a conventional IRA needs to take out and pay tax on nearly $60,000 a year just to avoid penalties. Add in your social security payments and any pensions coming in and all of a sudden you’re up over six figures adjusted gross income and I could see a cash strapped government eyeing your 1040 and wondering if you really need to collect all of that social security.
Again, probably not, because we old people have mad voting skills, but a lot of unlikely things have happened.
I’m not 72 yet, and I mix taking money from post-tax and pre-tax investments to keep my income relatively low. I still get taxed on some social security, but that’s okay. Taxing someone with enough to have to take $60K out doesn’t bother me a lot.
It probably should. $60k annually may sound like a lot, but it’s not necessarily a fortune especially if you have to take care of some family. But the longer-term problem is that the people who have that much likely deferred a great deal of consumption and made serious plans based around it, and tearing chunks out of their nest egg could functionally wreck the finances of many people who can’t reposition themselves financially.
Most of these people won’t have pensions, and the amounts under discussions are not excessively high for someone who regularly contributed for his or her entire working life. That is, having, say, a million-five in retirement savings should ideally be normal, not something for “rich people”. It’s an achievable sum, and should be a goal, for many people trying to plan.
I’m confused. When you take the $60K out, you still have it - you just have to pay tax on it. And never again if you put it into a Roth IRA.
Now, I think the stimulus bill deferred the withdrawal requirement for a while, and I’m fine with that, since some people might have to sell holdings to pay the tax. If you just transfer them you don’t have actual losses.
I don’t understand the point about deferring consumption. If you defer until you are 72, you are likely to defer until the money winds up in your estate.
$1.5 million is quite achievable if you start early. I beat that number. But it helps to never get laid off, which isn’t that easy these days.
The point is that you can take out the $60K and still be in a quite low tax bracket, depending on how much you are making in interest and dividends in post-tax investments.
True, but as I said, I think that such a change might phase out as a person gets older, similarly to how social security deals with reductions due to too much earned income.
Pardon, I may have misunderstood what you were discussing. I though you were talking about the idea of doing a wealth tax, especially on retirement savings, which has recently been floated around some of the Twitterati. Of course, the political challenges of doing this are immense but on paper it looks like an easy way to get more government income.
Ahh. I was referring to mandatory withdrawals from IRAs. Though any reasonable wealth tax would start at an amount where a $60K withdrawal would be trivial.