401Ks are better than Pensions (annuity, bonds, fund, fees)

[michiganmoon]

Just food for thought about 401Ks vs Pensions from a different point of view, as most people seem to say pensions are better.


#1 At the peak of pensions, pensions only covered ~40% of all workers.

Since the advent of 401Ks more people than ever before have employer sponsored retirement plans in the US. 401Ks offer less risk for the employer, so more employers are willing to start a 401K than a pension. More people with retirement plans are a good thing.


#2 It isn't just 401Ks that carry risk - so do pensions.

Pensions are getting reduced across the country. Some small automobile parts manufacturers were not protected in the GM/Chrysler bailout and had to severely slash their payouts. The city of Detroit's pension payout is taking a hit. Pensions across the country are underfunded and may have to slash payouts or increase employee contributions. Wouldn't it stink to be in retirement counting on a specific pension payout and then to have that slashed with no recourse?

In someways isn't it better to have the money in your investment hands as opposed to the corrupt Detroit Pension board of trustees?


#3 What if you change jobs?

401Ks are more likely to give you vested money and at a higher rate if you only worked there for 5 years or less.

You switch from a 401K job to a 401K job and you can just roll over your balance and not miss a beat.

You switch from a pension to another pension job and you may never have a good retirement pension based on the pension formula and years worked.


#4 Taxes, some 401Ks give you more tax flexibility.

My 401K has a Roth option. I can mix and match between traditional and Roth 401K funds to better prepare for taxes in retirement. Also, I can adjust the amount that I take out of my traditional to adjust for optimal taxes I will owe. A pension has its money come and will be taxed - there is no wiggle room on it.


#5 Emergencies, give 401K an advantage.

You can take an emergency loan out of a 401k, but not a pension. Only recommended in true dire emergencies.


#6 Prefer a pension's set monthly payments?

You can use your 401K in retirement to purchase an annuity, which is like a pension. Some 401K plans like TIAA-CREF offer an annuity option within the 401K plan.


#7 401Ks give employers more flexibility.

I read an article awhile back that since Ford's pension investments had under performed, Ford had to stick $2,000 of every new car sold into its pension plan to pay ALREADY RETIRED workers. While Toyota with a 401K was paying $0 of every new car sold to ALREADY RETIRED workers. Thus the article explained why Toyota was able to invest far more money into research and development and improve their product more so than Ford. If you hold a pension with a company, don't you want that company improving not lagging behind the other companies???


#8 Your heirs.

There is a chance that your 401K will leave something for your heirs...there really isn't that chance with almost all pensions.


#9 Fees.

Wait, I thought most 401Ks had high fees!!??!!?? Most 401Ks offer some options with low fees like index funds... zdon't forget most pensions have management fees around 1.5% eating into the amount invested...well above most 401K fees.


#10 Large purchases.

Say you want to buy a car, buy a summer cottage, pay off your mortgage with a large lump sum. Your 401K can allow you to get the large amount of money to do this and avoid paying the interest. Your pension can't - you are stuck with a loan.

[mathjak107]

postive though for pensions that most 401k's lack is a pretty safe ,secure income that is usually cola adjusted and does not depend on the whims of the markets.

if the pension requires little contribution by the employee or none even better.

having just sold a property which was going to generate a good portion of my retirement income (not by my choice) i am now hard pressed to not only duplicate that return but i am subject to the markets whims to get any return.

nothing beats a 3rd party shouldering risk for you. yeah you may get a reduction if things fail with your pension but so far that has not been much of an issue. certainly no where near the effect of 12 years of stagnant markets and no interest on someone spending down on their own..

[michiganmoon]

Originally Posted by mathjak107

postive though for pensions that most 401k's lack is a pretty safe ,secure income that is usually cola adjusted and does not depend on the whims of the markets.

if the pension requires little contribution by the employee or none even better.

having just sold a property which was going to generate a good portion of nmy retirement income (not by my choice) i am now hard pressed to not only duplicate that return but i am subject to the markets whims to get any return.

nothing beats a 3rd party shouldewring risk for you.

True, but I read an article awhile back that only one state had a properly funded Teacher pension. Many pensioners may find that their payments get cut or they have to contribute more in. Pensions may not be as safe as one thinks, and they are invested in stocks and bonds that the employer may not be able to throw more money into if there is an extended down period.

[mathjak107]

all things being equal if i had to do it again i would have went for that nice juicy pension instead of now being left to my own devices. far less risk with that pension then markets on your own..

while anything can fail pension defaults are very low to date. any market conditions that destroys a pension will likely devastate your own portfolio as well .

[michiganmoon]

Originally Posted by mathjak107

all things being equal if i had to do it again i would have went for that nice juicy pension instead of now being left to my own devices. far less risk with that pension then markets on your own..

To each their own and I may regret these words...but I am young and very glad that I went from an underfunded and poorly managed Michigan Teacher pension to a public charter with a 401K.

The Michigan Teacher pension has just taken a hit to payments - so much for safe and secure payments? They are reducing future payments by a whopping 16.7% for years worked from I believe 2012 forward - unless you pay in extra money to fund that gap. There are city of Detroit workers already retired, just finding out that their pension in retirement will be reduced between 4.5 and 26%. Ouch. Hard to plan for that when you are already retired.

Whereas my 401K has many investment options and a double match up to 5%...so that if I put in 5%, they put in 10% and my total is 15%.

[mathjak107]

you really need both. having an income base is very important even when investing on your own in retirement . it should not be a question of either or. a pension is an excellent income base and it can let you invest more into better growing assets since you do not need to keep so much powder dry.

sequence risk is the greatest threat to anyone generating their own income , with a pension that is reduced greatly if the pension can cover 1-2% of withdrawals.

[zugor]

I took early retirement at age 55 in Jan 2005 with a very substantial defined benefit pension from a job that I'd worked for 28 years. Now that pension fund is in the red and just the other day I once again got the annual letter of how bad things are. The first time I got such a letter they stated that they expected to be back in the black by 2014. They outlined all the changes that had been made in order to try and keep the fund going, upping the penalty for early retirement,raising the regular retirement age from 62 to 65, etc.

The latest letter now says they will continue to be in the red through 2022. If the fund goes belly up and the PBGC steps in I would get just 16.7% of what I currently receive. That amount, combined with social security would leave me about $1,000 to $1,200 short of my current monthly expenses pared to the bone. I continue to save as much as possible and currently have enough to supplement my income for about 3 years. I would have to sell my home and downsize considerably or sell off about 20 of the 28 acres that I have but would at least have ample time to find a buyer for this rural property.

Based on what I know now I am inclined to think that a 401K would have been a better option, had we had such a thing available. However, the youngster who began that job in 1977 did not even expect to stay the required 10 years to vest that pension and probably would not have contributed much, if anything, to a 401K and was not giving much (any?) thought to long term finances.

For several years the fund was so flush that all of the then current retirees got a 13th check at the end of the year.

[mathjak107]

Thats why you need both. Nothing is ever 100%.

[michiganmoon]

Originally Posted by zugor

I took early retirement at age 55 in Jan 2005 with a very substantial defined benefit pension from a job that I'd worked for 28 years. Now that pension fund is in the red and just the other day I once again got the annual letter of how bad things are. The first time I got such a letter they stated that they expected to be back in the black by 2014. They outlined all the changes that had been made in order to try and keep the fund going, upping the penalty for early retirement,raising the regular retirement age from 62 to 65, etc.

The latest letter now says they will continue to be in the red through 2022. If the fund goes belly up and the PBGC steps in I would get just 16.7% of what I currently receive. That amount, combined with social security would leave me about $1,000 to $1,200 short of my current monthly expenses pared to the bone. I continue to save as much as possible and currently have enough to supplement my income for about 3 years. I would have to sell my home and downsize considerably or sell off about 20 of the 28 acres that I have but would at least have ample time to find a buyer for this rural property.

Based on what I know now I am inclined to think that a 401K would have been a better option, had we had such a thing available. However, the youngster who began that job in 1977 did not even expect to stay the required 10 years to vest that pension and probably would not have contributed much, if anything, to a 401K and was not giving much (any?) thought to long term finances.

Sorry to hear that.

I know a few people stressed here in Michigan that had the pensions take big hits too.

I hope it goes alright for you.

[zugor]

Originally Posted by michiganmoon

Sorry to hear that.

I know a few people stressed here in Michigan that had the pensions take big hits too.

I hope it goes alright for you.

Thanks, moon. One thing that has helped tremendously is that under Obamacare I have been able to obtain different medical insurance and the cost my premiums went from $1,535 to $630, a savings of $905 per month. Come Sept I will be 65 and perhaps my costs will drop a smidge more. All of it goes towards saving for the future.