I've run some numbers because I'm trying to figure out how much better of a deal a DB plan is over a DC plan. The salary numbers are approximate, but they are pretty close to what a 25 year police officer might make in my city depending on his rank.
Assumptions:
Officer makes $35K for 5 years, $45K for 5 years, $60K for 5 years, $70K for 5 years and then $80K for his last 5 years.
Officer contributes 8.5% of his salary. City contributes 27.5%
Officer invests his money and obtains an annualized return of 8.5% over the 25 years. (My pension fund has returned exactly 9.14% over that time frame but they assume 8.5% so that's what I used).
This comes out to a total of $1,450,000. At a 4% withdrawal rate from this DC plan, he would receive $58,000 per year.
If this person was in my pension fund, he would receive 3% per year times 25 years or 75% of the avg of his final 3 years of salary....or $60,000 per year.
I realize that the pension is a guaranteed income and that is pretty valuable, but in terms of dollars alone, they are almost the same. This tells me three things.
#1) These pension plans that are in trouble have either promised benefits that aren't possible based on the amount of money going in.
#2) These pension plans that are in trouble have squandered their money and are mismanaged.
#3) For the avg. Joe, other than the security of knowing your retirement income is guaranteed if you have a pension, its not as big of a deal as people think to have a DB over a DC plan if you are money savvy and can choose your own investments wisely from within your 401k.
PS..None of this accounts for the fact that with the DC plan, the money will be left to your heirs when you die. With the DB plan, my wife will get only half of my pension benefit, and when she dies, my heirs get nothing.
Assumptions:
Officer makes $35K for 5 years, $45K for 5 years, $60K for 5 years, $70K for 5 years and then $80K for his last 5 years.
Officer contributes 8.5% of his salary. City contributes 27.5%
Officer invests his money and obtains an annualized return of 8.5% over the 25 years. (My pension fund has returned exactly 9.14% over that time frame but they assume 8.5% so that's what I used).
This comes out to a total of $1,450,000. At a 4% withdrawal rate from this DC plan, he would receive $58,000 per year.
If this person was in my pension fund, he would receive 3% per year times 25 years or 75% of the avg of his final 3 years of salary....or $60,000 per year.
I realize that the pension is a guaranteed income and that is pretty valuable, but in terms of dollars alone, they are almost the same. This tells me three things.
#1) These pension plans that are in trouble have either promised benefits that aren't possible based on the amount of money going in.
#2) These pension plans that are in trouble have squandered their money and are mismanaged.
#3) For the avg. Joe, other than the security of knowing your retirement income is guaranteed if you have a pension, its not as big of a deal as people think to have a DB over a DC plan if you are money savvy and can choose your own investments wisely from within your 401k.
PS..None of this accounts for the fact that with the DC plan, the money will be left to your heirs when you die. With the DB plan, my wife will get only half of my pension benefit, and when she dies, my heirs get nothing.