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Why Pensions Rock

by Ouida on April 17, 2010


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Okay, so like I am middle-aged and I have a high-stress job.  I am also a perpetual planner, so I have been sitting down, looking over the books and planning my exit strategy.

The traditional retirement plan that my company offered was a pension.  In the early 90’s my company did away with its traditional pension in favor of a hybrid, fractional pay pension coupled with a 401K.  I got in early enough though that I could have chosen the traditional all-or-none pension, which would have required at least 25 years of service.  There was a time when I couldn’t even imagine being 25 much less staying in the same place for 25 years. I opted for the hybrid system.

I finally sat down to figure out what my income will be at age 60 provided I don’t play with the money prior to that time.  Here is what I found:

1)   Continuing to contribute to my 401K after age 51 will only result in modest gains to my portfolio.  Why?  Because the bulk of gains occur with time, new contributions made after age 51 will not have had sufficient time to grow.

2)   Even if I hit my “number” and begin distributions at age 60, the monthly income result will be modest.  Remember this rule: Even if you manage to accumulate one million dollars in a 401K, that sum translates into roughly $4000 per month

3)   The pension component will be a larger contributor to my income at age 60 than my 401K!

Something has been bothering me.  Current retirement planning is based on planning for markedly reduced resources and reduced standards of living.  The rule of thumb is that people should set themselves up to live on 75-80% of their pre-retirement income.  That theory breaks down at the lower levels of income.  Should we tell a person making $30K that they should plan to live on $24K in retirement?  Current estimates are that it will take $250K to cover retirement costs alone in retirement.

In the Time Magazine article:  Why It’s Time to Retire the 401K, the author concludes that each of the people interviewed would have been better served by a pension plan.

Pensions cost the companies who run them a ton of money, but they are a great employee perk and from, where I sit today, they should be part of all retirement packages. I have already written about the perils of Social Security in an earlier post. Social Security is insolvent. Current payroll taxes intended to fund the program are being spent as part of general revenues.  Makes me wonder about the future of this social safety net.  Bottom line is pensions rock.  401Ks don’t.  The market boom of the 1990s that made so much 401K wealth possible is not likely to be repeated in our lifetimes.  The inflation-adjusted compound annual growth rate for stocks from January 1, 1989 to December 31, 2009 was 6.26%.  That assumes the investor was able to take full advantage of the 1990s market boom.  The inflation-adjusted return for the last decade? -3.42%.  It is hard for me to see how anyone with a family especially can hope to save enough to fund anything other than a meager retirement and after 30 years of working and “doing the right things”.  That truly sucks.

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