Poll:Prefer One, Two, or Three Legs?

[Katsmeow]

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Originally Posted by Midpack Seems an odd poll, why would anyone choose other than option A - everything? Soc Sec and pensions (where offered) aren't really optional, IOW who would turn either down if available? And it appears most folks are voting for what they'd like while others are voting what they actually have...

Because the value of each in the poll are the same. Would you rather have $1M in personal savings or would you rather have $333k NPV SS, $333k NPV pension and $333k savings? It seems to me that people could easily choose the first rather than the latter.

[daylatedollarshort]

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Originally Posted by davef When I retired, I had a choice of a flat sum or pension. I decided on the pension. I liked the idea of a reliable income (although as you know it comes with a risk that the pension is not funded). I also remember reading, although I can't remember where, that people with pensions/annuities are healthier in retirement.

We have several pensions, and so far took two as annuities. I do think LOL has a good point about taxes, but we liked the diversification and some steady income along with SS if we ever both get dementia. PLus the ones we took so far are from different companies and under the PBGC limits so they provide a very unique income stream compared to the portfolio savings in our Fidelity / Vanguard type accounts.

The pensions do not cover a large percent of our expenses now, but will cover more as a percent once the kids are out of college, and we downsize and/or move to a lower cost of living area.

We also will keep two lap top hobby businesses going as long as we can. The extra income is nice plus they have great tax deductions (health insurance, computer expenses, business travel that could be a conference in London or Paris, etc. )

And I am learning all the little sign up bonuses / CC rewards / frequent flyer hacks for extra cash and free travel, which I am hoping will add another $5 - $10K a year in cash and travel equivalents.

[anethum]

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Originally Posted by timwalsh300 Then go convert your savings by purchasing one. I guess it wouldn't be "federal," but a contract with a private insurance company for a COLA'd SPIA might actually be safer than what military personnel have, as evidenced by the recent legislative actions. Tim

Right, it wouldn't be federal, and would therefore have potential risks which others have noted above. And of course, it wouldn't come with free health insurance that federal retirement brings.

As for the military pension change, I believe that it reduces the COLA to 1% below inflation until age 62. That's a reasonable change for what is a very generous system. It may very well be restored by Congress, anyway. (I would support restoring it for disability retirements only.) Compare that minor change to what has been happening in private industry for the past 25 years, where pension plans have been completely disappearing overnight, as happened to me.

[Alan]

My preference was to retire in my 50's (made it out at 55) so that actually rules out SS at the beginning.

We have been living with pension and savings for the last 4 years, then we'll add leg number 3 with DW's SS in 3 years.

[karluk]

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Originally Posted by Katsmeow Because the value of each in the poll are the same. Would you rather have $1M in personal savings or would you rather have $333k NPV SS, $333k NPV pension and $333k savings? It seems to me that people could easily choose the first rather than the latter.

The NPV is only the same for each option if the recipient dies exactly on the date predicted by his or her average life expectancy. If that unlikely event fails to transpire, the NPV of savings is better if actual lifespan is shorter than average, while NPV of SS and pensions is better if actual lifespan is longer than average. Unless the recipient is a compulsive gambler and likes to bet just for the sake of betting, the rational choice is to have half of the NPV of one's assets in a combination of SS and pensions and the other half in personal savings. Your suggestion of splitting things up with 1/3 in each is biased towards expecting an unusually long lifespan, so it's not the optimal choice.

Since most people on this forum have considerable savings that is most likely worth more than the NPV of their SS benefits, a pension (if available) is a great way to equalize things so you don't end up unwittingly making bets either for or against your own longevity.

[arky]

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Originally Posted by LOL! Given the same amount of money, I would prefer just SS and personal savings. The reason is that of the 3 only SS and personal savings are tax advantaged. The pension even interferes with the other two and make them more taxable. To be more explicit, 15% of SS income is tax-free for everybody. It could be more if one was lower income. Of personal savings, return of capital is tax-free, Long-term capital gains may be tax-free, and qualified dividends may be tax-free. One can juggle all these to reduce one's income tax burden to essentially zero. However, if you throw in a pension, then it mucks up everything.

This obviously needs to be considered on a case-by-case basis, but in general, if the "safeness" of all income streams is equal, I'll take three streams vs two, even if the total is the same to start with.

[samclem]

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Originally Posted by anethum And of course, it wouldn't come with free health insurance that federal retirement brings.

One of the wonders of the Internet is that it only takes a few seconds to inform ourselves. Federal government retirees receive no free health insurance. And they receive no free insurance while they are employees, either. In all cases they pay premiums.

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Originally Posted by anethum As for the military pension change, I believe that it reduces the COLA to 1% below inflation until age 62. That's a reasonable change for what is a very generous system. . . . Compare that minor change to what has been happening in private industry for the past 25 years, where pension plans have been completely disappearing overnight, as happened to me.

I'm sorry that the promise made to you by your company was not kept. That's hardly a reason to wish the same fate for others.

[youbet]

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Originally Posted by anethum Compare that minor change to what has been happening in private industry for the past 25 years, where pension plans have been completely disappearing overnight, as happened to me.

Did your company go bankrupt? I don't know of any private pension plans that "completely disappeared overnight" in the past 25 years. Some closed to new credits/earnings but I think all still maintained credits already earned or pensions already being paid unless they declared bankruptcy. Even then, the PBGC covered all or most of what the annuitant was to receive.

It's gov't pensions (think Illinois or the military) where the already earned pensions of annuitants are being reduced.

[anethum]

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Originally Posted by samclem One of the wonders of the Internet is that it only takes a few seconds to inform ourselves. Federal government retirees receive no free health insurance. And they receive no free insurance while they are employees, either. In all cases they pay premiums. I'm sorry that the promise made to you by your company was not kept. That's hardly a reason to wish the same fate for others.

Thank you for the correction. However, there are heavy subsidies. Federal workers have had and continue to have access to health insurance plans at out-of-pocket rates which would be the envy of many workers in the private sector. When is the last time anyone heard of a retired federal worker learning that their retiree health insurance is going away? It is increasingly happening with non-federal retirees who were lucky enough to have it provided by their former employer in the first place.

I never said I wished the same fate on others. Please do not put words into my mouth. I do think, however, that a reduction in a COLA for a federal pension is hardly the same thing as the complete and sudden elimination of a pension plan.

I have many friends who are federal employees and a few who are retired federal employees. Most have only worked for the federal government and don't really have an understanding of what the work environment is for everyone else. Many of them have a sense of entitlement concerning their very generous benefits.

[anethum]

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Originally Posted by youbet Did your company go bankrupt? I don't know of any private pension plans that "completely disappeared overnight" in the past 25 years. Some closed to new credits/earnings but I think all still maintained credits already earned or pensions already being paid unless they declared bankruptcy. Even then, the PBGC covered all or most of what the annuitant was to receive.

Megacorps have been converting from defined benefit plans to defined contribution plans for years. (The megacorp that suddenly ended my pension plan already had a defined contribution plan which I participated in, because as I said above, I was diligent about saving for retirement.) Those already retired continued to receive their pensions. Those who were eligible to retire but who hadn't yet retired weren't screwed, but I don't recall the details. I do recall that there was quite an upward cliff for those who were eligible to retire. The rest of us got a fairly paltry payout. I rolled mine over to an IRA. It could have been worse; I could have been much closer to retirement.

[M Paquette]

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Originally Posted by anethum Most have only worked for the federal government and don't really have an understanding of what the work environment is for everyone else. Many of them have a sense of entitlement concerning their very generous benefits.

I think you will find that this is true for most employees at all but the smallest employers. Only a small portion of employees realize that their contribution to medical insurance coverage or pension plans that might exist are only part of the actual cost of those plans, and that employers might be making a significant contribution to those plans.

That said, many employees do recognize that part of the incentive for taking a particular job are the benefits in addition to the salary, as part of the total compensation package that they agree to work for. In general, when one person agrees to perform tasks for another person in exchange for compensation, they are entitled to that compensation upon performance. It is more than a mere sense of entitlement. The employee is legally entitled to that compensation in most jurisdictions.

That's why, when terminating a pension program, a company makes some alternate compensation to employees vested in that pension such as a lump sum distribution. This is also why employees may litigate such changes should the alternate compensation be viewed as inadequate.

[haha]

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Originally Posted by Danmar It is good to have some sort of annuity to mitigate your longevity risk. Otherwise you will tend to leave too much on the table when you die because you will be afraid of running out.

Que horrible!

[youbet]

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Originally Posted by anethum Megacorps have been converting from defined benefit plans to defined contribution plans for years. (The megacorp that suddenly ended my pension plan already had a defined contribution plan which I participated in, because as I said above, I was diligent about saving for retirement.) Those already retired continued to receive their pensions. Those who were eligible to retire but who hadn't yet retired weren't screwed, but I don't recall the details. I do recall that there was quite an upward cliff for those who were eligible to retire. The rest of us got a fairly paltry payout. I rolled mine over to an IRA. It could have been worse; I could have been much closer to retirement.

I understand what Megacorps have been doing with pensions. I was just pointing out that with some gov't pensions now being reduced for those already retired, replacing DBP pensions with DC retirement plans in the private sector doesn't seem so bad........ at least by comparison.

But in either case, those types of actions are good reason to have your personal retirement savings completely under your control and substantial. No one cares about you like you. Not the owners at work, not the polticians you elected, not the public. Watch out for yourself.

[MichaelB]

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Originally Posted by anethum As for the military pension change, I believe that it reduces the COLA to 1% below inflation until age 62. That's a reasonable change for what is a very generous system. It may very well be restored by Congress, anyway. (I would support restoring it for disability retirements only.) Compare that minor change to what has been happening in private industry for the past 25 years, where pension plans have been completely disappearing overnight, as happened to me.

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Originally Posted by samclem One of the wonders of the Internet is that it only takes a few seconds to inform ourselves. Federal government retirees receive no free health insurance. And they receive no free insurance while they are employees, either. In all cases they pay premiums. I'm sorry that the promise made to you by your company was not kept. That's hardly a reason to wish the same fate for others.

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Originally Posted by youbet Did your company go bankrupt? I don't know of any private pension plans that "completely disappeared overnight" in the past 25 years. Some closed to new credits/earnings but I think all still maintained credits already earned or pensions already being paid unless they declared bankruptcy. Even then, the PBGC covered all or most of what the annuitant was to receive. It's gov't pensions (think Illinois or the military) where the already earned pensions of annuitants are being reduced.

I'll not pass up an opportunity to say +1 @ samclem and youbet

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Originally Posted by anethum I never said I wished the same fate on others. Please do not put words into my mouth. I do think, however, that a reduction in a COLA for a federal pension is hardly the same thing as the complete and sudden elimination of a pension plan.

The two are not comparable. The COLA reduction one party has the resources to pay but breaks the contract after the other has fulfilled the conditions. Private pensions go broke but none to my knowledge have done this.

[audreyh1]

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Originally Posted by Bestwifeever Although ds just started a private sector job that still offers a pension, it wasn't one of his search criteria. I wonder how many pensionless people really would buy an annuity to create the third leg.

Not me.

I was in a high growth modern industry that didn't pay pensions - at lest not the newer high tech companies.

I believe in my industry there was a tradeoff - if you worked for one of the older more established companies you might be able to earn a pension, although even that was an ongoing battle for many employees as many plans were frozen of the years. But a lot of the non-pension companies granted compensation in the manner of stock options which in some cases really paid off big time and allowed early retirement for those who were lucky and had good timing.

So, in my case focusing on path D meant early retirement and a healthy investment portfolio (i.e. personal savings), whereas relying on a pension available at retirement would have mean't working another 15 years (say until age 55 at least), and SS available at retirement until age 62 minimum.

[anethum]

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Originally Posted by youbet It's gov't pensions (think Illinois or the military) where the already earned pensions of annuitants are being reduced.

I think there is a very big difference between getting a reduced cost-of-living increase in the future, versus an actual reduction in an annuity now. Or a private sector retiree suddenly being told that they will no longer be getting health insurance as part of their retirement benefits. That has happened to plenty of people.

I don't know the details of pension changes in Illinois, but I would not want to be a Detroit, Michigan retiree right now.

[Walt34]

The elder law attorney we are dealing with for FIl's issues and now the estate referred to me as a "financial dinosaur" because we do have that 3-legged stool of a COLA'd pension, SS in the near future, and savings/investments. The county government I retired from is financially stable, the pension is fully funded, but my crystal ball is as cloudy as the next guy's. Nothing is guaranteed.

While the savings/investments are decent, it certainly is not enough to support us in retirement unless we suddenly developed an affection for cave-dwelling, noodles and rice. While I would like to see more there, I also had to start over from scratch at age 35 because of the divorce.

And while we do have HI through them (I pay 30% of the premium) they have always maintained that while they intend to keep it, they can and may eliminate that in the future for retirees so we don't take that for granted. So there's that sword hanging overhead too.

But this was the deal they made when I started there in 1973.

[Spanky]

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Originally Posted by Katsmeow For some people we had a choice on this in our actual situation. That is, when DH retired he had the choice of receiving a pension or have receiving actuarily same lump sum which basically becomes like personal savings. In his case, he took the lump sum. (One problem I had with the poll was that it talks about a pension, but doesn't address the situation where one could take a lump sum).

We were in a similar situation. I pick c (SS-> savings).

[Danmar]

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Originally Posted by haha Que horrible!

Yes, if I leave anything I would rather it be a conscious decision (before I die) and spend while I am alive accordingly.

[youbet]

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Originally Posted by anethum I think there is a very big difference between getting a reduced cost-of-living increase in the future, versus an actual reduction in an annuity now.

Not as much as you're implying. If one's retirement was based on having a COLA'd pension and that COLA is reneged on, the prudent annuitant begins spending less of his pension now in order to have a larger portfolio to use for withdrawals to offset inflation later. If the annuity monthly payment is reduced now, the annuitant spends less now. Either way, the annuitant spends less now.

In any case, the point is that the annutant worked X years under a contractual relationship that called for some value of pension. After retiring, the employer said "oh sorry, I was just kidding" and reneged.

I experienced the same situation as you. I worked for a MegaCorp which froze the DBP pension and transitioned to a 401k only situation. I didn't like it but at least the situation didn't effect the the pension I had already earned up to that point and I had my remaining years until retirement to react. It would have been worse for them to not announce a change and then, after I retired, told me I'd be getting less than expected.

This "who's getting screwed worse" can be batted back and forth all day long. The fact is that change, especially near or during retirement, makes it hard to plan and can make a good decision into a bad one. I don't wish it on anyone.