Work for a Pension or a Portfolio?

[old medic]

Or both Either way... starting sooner is way better than later .
The Pension/ Net Worth conversation got me to digging back and playing with numbers. Of course, these calculations would apply to someone in a similar position.
Just using my numbers. I had to put 6% into the pension system, matched by the employer. When I retired at 58, my cash-out value was $118000. With 100% survivor benefits, we would get that back in 4 years. But had I put that same money into a 401K/IRA, it would have been about $780,000. giving me close to the same money with a 4% WR.
Now playing with FC it gets interesting.
Just the portfolio gave me 80.5% success with 24 cycles failing, an average of 1.1M. Adding SS at 62, 100% with 2.4M average
With my pension and small investment savings... 100% success, but ending average of $400,000, SS at 62 bumps the average up to $1.1M.
The portfolio would route I would have doubled my average NW, but may have needed to work in retirement to cover 24 of the possible cycles.

 

[Bigdawg]

It depends on the particulars of the pension. Mine for example is military. I knew when I came in that it would be 50% of high three at 20 years plus COLA. I knew it was an additional 2.5% each year past 20. Many pensions (if available) aren't that clear cut. Plus, may company's change the rules on the fly. I did and would suggest everyone invest outside of their pension just in case.

 

[Car-Guy]

Part of my Mega Corps benefit package was a 100% company funded pension plan. (Lump sum or annuity option) They also had a >100% 401k matching plan. Between the two, that's all I needed to retire after ~30 years. Add to that the restricted stock (deferred compensation program for management) and I'm a pretty happy camper.

The way things are going now, if it were not for RMD's, I may never need to touch my 401k.

Never complained about the benefits my Mega Crop offered.

 

[TheWizard]

A few problems with traditional pensions that I see.
First, they can go away in some cases and they tend to restrict your employment mobility, for better or worse.

And then they to be based on your final year's income, maybe 60% of that, or less if you retire early.
For Fat FIRE, you might want more income than a pension would give you.

Putting money in a tax-deferred plan can give you lots more options when retirement comes, but you need to take individual responsibility to make that happen...

 

[old medic]

It depends on the particulars of the pension. I did and would suggest everyone invest outside of their pension just in case.

I totally agree... add a leg to the stool..

 

[brett]

I certainly did not select my vocation or my employer because of the DB plan. It was part of the total compensation plan however when I joined retirement was a long way off and not top of mind. It was the industry, the job, the opportunity, and the gold standard benefits that did it. The plan actually changed and improved six or seven years into my employment. Even at that time the DB plan was not top of mind. I was however well aware that the DB plan would be one component of a retirement cash flow.

Like others I was fortunate to have a DB plan 100 percent funded by the employer paid out as CV or annuity at age 62 (or earlier depending on service)

The icing on the cake for me as I progressed, particularly in my last 8 years was stock options, RSU's and pay for performance bonuses. Stock options turned out to be considerably larger benefit for me than the DB plan. These were not in my line of sight when I first joined the company. Ditto for a golden handshake at 58/59.

DB pension plans are becoming a thing of the past. Partly because it is estimated that most young people today will have 5-7 employers in their working lives. My employer eliminated the DB plan in 2001. I was grandfathered because of my age and service.

 

[athena53]

Unless you're in the military, other government service or in a healthy union plan, Stuff Happens. I was in property-casualty insurance for 38 years and some of those employers still have DB plans, but of the 3 employers I had that offered DB plans:

Company A was acquired after I'd been there 6 years. I left and went to Company B because I was afraid I'd have to relocate to the new owner's HQ and it wasn't feasible. Not vested yet.

Downsized from Company B after 10 years. I get $801/month like clockwork. No COLA but I'll take it.

Company C was acquired after I'd been there 4 years. We were not eligible for the new owner's DB plan but DID get 6% more put into our 401(k) every year, regardless of what we contributed and in addition to the company math, to make up for it. Not sure how, maybe because I was 53 at the time of the acquisition, but I was vested in $833/month. Again, No COLA.

The reason I specified "healthy" union plans: a few are not. A neighbor had is railroad pension cut twice, ending up with about half what had been promised. They had to sell the house. YRC Trucking is local so I read a lot about their problems; they were in a multi-employer plan and as other employers went bankrupt the remaining employers were left holding the bag when the plan was determined to be badly underfunded, leading to more bankruptcies and fewer viable participants. The Pension Benefit Guarantee Corporation pays only up to a certain amount- not necessarily what you were promised.

So- I'd go for the portfolio but unfortunately it seems the vast majority of the population needs the forced savings aspect of pensions.

 

[Midpack]

I had a pension, Megacorp froze our account values and quit contributing when I was 40 yo - best thing that could have happened to me. [After 17 years the lump sum value of my frozen pension was $205K, but I could not withdraw that until I retired 18 years later] We were saving & investing a decent amount, but once my pension disappeared we went into overdrive saving & investing. As a result, we achieved FI when I was 51 and retired 6 & 10 years later with FAR more in our portfolio than any pension would have been worth. I realize some/many people may be far better off with a pension, but that wasn't the case for us. YMMV

 

[Chuckanut]

A few years after I started teaching the state introduced a new DC/DB pension plan as part of a law that reformed the pension system that state offered. I was grandfathered into the full DB plan.

They offered increasing bonus contributions to those of us in the earlier DB plan to switch to the hybrid, but I did not take them up on it. I figured the chances of anybody in the future offer me a full DB pension with a limited COLA was extremely low. So, I kept the plan I was hired under.

When I retired, I was able to buy five more years of service credit in the plan to boost my monthly check. Many of my peers scoffed at this costly investment, but, IMO, they failed to take into account the COLA which also applied to the purchased years of service credit. They really should have payed more attention in their high school math class.

IMO, if a person can make use of a good pension to help with that three legged retirement stool they should do it. Just make sure the it's well funded. Too many pensions have had their funding raided for all sorts of causes from outright graft and corruption to politicians using pension money to finance some 'good' cause and buy votes

 

[brett]

I very thankful when our DB pension plan hit 70 percent funding because of investment losses. The company made very significant catch up payments over three years to bring it up to 100% funding on go forward basis and on a wind up basis.

A number of my colleagues took moved from DB to DC. Some lost as much as 50 percent and then put the balance in fixed income funds. They failed to catch the rebound wave.

The choices for early retirement savings are not mutually exclusive. In fact, I believe that it is prudent to have several different components.

 

[hopefullyoneday]

DB plan here. I have 12.5 years at 75% of my highest 3 years. The 2nd half of my career will be 62.5% of my Base salary. No cola for either. When they lowered my pension for the 2nd half I started contributing the max to the company sponsored 457b, HSA, and IRA. I will get some SS but about half because of the WEP.

 

[DrRoy]

I had a pension, Megacorp froze our account values and quit contributing when I was 40 yo.

Same thing for me except I was 50. Chose to take the max monthly with no survivorship. There's no COLA so by the time I'm likely gone, the pension would only cover about 10% of spending. Getting more now preserves more of the investments.

 

[jollystomper]

The pension I have from Megacorp is about 2/3 of what it would have been had the same pension rules been in place when I joined Megacorp. I am glad that I eventually listened to older workers when I joined to not depend on it for retirement (which was not even on my mind) and to build up savings, then investments.

When Megacorp modified the rules in the late 90s I was one of the fortunate ones who had enough years to keep my now-reduced pension. They froze it in the mid-2000s, from an earnings standpoint but not from a years of service standpoint). At least, for those of us within 5 years of being eligible for retirement, they gave us a higher match in our 401ks for 10 years. This worked on very well from a timing perspective, as much of the higher match contributions were made during the 2008-2009 recession and the early years of the bull market that followed.

While I did not retire as early as I could have, I did retire when the 3 financial legs of my retirement (pension, portfolio income, future SS) reached the point where the loss of any one of them would have a minimal impact on retirement.

 

[pacergal]

When I left hospital nursing to go to public health in 1980, I knew "the benefits were good" and there was a pension plan, I just was too young to really get into the details. Then life happened and retirement was a long ways away. There was no other retirement plan offered until late 1980s, when they started a 457b deferred comp plan. I had a co worker who convinced me to participate (thanks, Joe!).
The pension plan was changed in the 1990s for new workers, but I was grandfathered in with the old system. I didn't really pay attention to the potential retirement income from pension and def comp until in my 50's. DH and I had just been plugging along, raising our kids and our set budget, LBYM. DH also was in the same govt system.
Planned to retire at 65, started going to retirement planning seminars put on by our pension plan and realized with a happy heart we could retire earlier. Planned 62, but left at 60, recently rolled def comp to IRAs.
We are so blessed with two pensions, SS and two IRAs.

 

[W2R]

When planning my retirement, I decided that I liked the idea of setting up income streams from as many different sources, as possible. Then if one fails, I still have income from the others.

So, I'd say my preference would be to work for the maximum pension you can get, and meanwhile build your portfolio until the yield provides an income stream of about the same magnitude as the pension.

Meanwhile build up those quarters for Social Security to provide another income stream.

I also have RMD's from my TSP account as another income stream. When it comes to income streams, the more the merrier IMO.

 

[athena53]

One thought on a disadvantage of pensions: if you're in a position to "manage" your income in retirement to get ACA subsidies, avoid taxes on SS or avoid IRMAA surcharges, you can't make the pensions go away. My pension from Giant Enterprise started at age 60, whether I wanted it to or not. At the time I had no plans to retire in the near future.

Still not complaining.

 

[jollystomper]

One thought on a disadvantage of pensions: if you're in a position to "manage" your income in retirement to get ACA subsidies, avoid taxes on SS or avoid IRMAA surcharges, you can't make the pensions go away. My pension from Giant Enterprise started at age 60, whether I wanted it to or not. At the time I had no plans to retire in the near future.

Still not complaining.

I do not necessarily see that as a disadvantage, but more as an opportunity.

Knowing that I would not be eligible for ACA subsidies, SS would be taxed, and at RMD time IRMAA might be a factor (to say nothing of RMD), my approach was to instead build a buffer to account for those situations. For example, knowing that I would not get ACA subsidies meant I built money to cover ACA level premiums and deductibles into my retirement plan. As it turns out, I was off, but in a good way. The same for SS and IRMAA - I can cover those without impacting our desired retirement lifestyle.

 

[TheWizard]

When planning my retirement, I decided that I liked the idea of setting up income streams from as many different sources, as possible. Then if one fails, I still have income from the others.

So, I'd say my preference would be to work for the maximum pension you can get, and meanwhile build your portfolio until the yield provides an income stream of about the same magnitude as the pension.

Meanwhile build up those quarters for Social Security to provide another income stream.

I also have RMD's from my TSP account as another income stream. When it comes to income streams, the more the merrier IMO.

How can an income stream "fail"?
Very unlikely.
It might not keep up with inflation, I understand that.

So anyway...

 

[livingalmostlarge]

If given a choice a defined benefit pension from a state or government like my mom. 2% per year of service vesting after 10 years, started at age 55. She had 32 years plus sick leave equalling 35 years and 70% for life. Now at 71 she's outstripped her contributions of 7.5%. I believe at 55 her lump sum was $220k in 2007. She's sitting on $60k/year with increases.

This pension is also why she saved almost nothing for retirement. She had maybe $200k in a 401k and a paid for house. That's it. Pension plus SS (which she took early because she's not good with investments, but an excellent LBYM) means she's set.

Plus the pension? Comes with free medical for life. Not just free blue cross blue shield supplemental but she gets the subsidy for the medicare premium as well. Every 3 months the state gives her $1000+ for her AND my dad.
Also drug and dental. So medical costs? big fat $0. Nothing. No co pays, no deductibles, nada.

Gotta love state work. She's likely to live longer (based on family history) than she worked for the state.

 

[latexman]

Working for both, so we have the traditional three-legged stool - MegaCorp pension (100% J&S), SS, and nest egg. Our plan will have income streams that replace the currect paycheck and bonus 100%, or better. And, we'll be debt-free! We are almost there.

 

[street]

I worked for a pension and 401K for 35 years and investing in mutual funds and other financial avenues through those years compensating my portfolio.

I took the lump which was a low 7 figure number. As of a few days ago it has grown by 265%. The 401K now in a roll over Tira is still in the growing status and also has done very well since I retired 7 years ago.

Working for both gives you a very high percentage of winning the game. Then with a frugal saving characteristic and some planning mixed in sets you in the right direction.

I also took full advantage of ACA with pauper status till age 65. Living off of SS and a savings account for major purchases.

 

[athena53]

If given a choice a defined benefit pension from a state or government like my mom. 2% per year of service vesting after 10 years, started at age 55. She had 32 years plus sick leave equalling 35 years and 70% for life.

Gotta love state work. She's likely to live longer (based on family history) than she worked for the state.

That's an inspiration- I see SO many retirement-related posts from women who were out of the workforce for years to raise children or for other reasons and are struggling. Some are left destitute by divorce or early widowhood. Whatever her reason for starting this job at age 55, she built an excellent future for herself.

And another thought on pension vs. portfolio: if you hope to "manage" your income for ACA subsidies or minimize IRMAA or taxes on your SS, pensions can't be managed other than start date and one of mine, from Giant Enterprise, started at age 60. No choice.

Still, I can't complain.

 

[old medic]

If given a choice a defined benefit pension from a state or government like my mom.
This pension is also why she saved almost nothing for retirement. She had maybe $200k in a 401k and a paid for house.
Comes with free medical for life. Gotta love state work.

This is exactly like us. DW will have insurance, I don't, playing the ACA game.
Our Daughter followed Mama's footsteps and building in the state pension, got in just under the wire before they dropped the insurance benefit. She also will have her student debit paid off in 2 more years by the state for her service. Not bad for a 33 YO with a Masters degree. They already have a paid off home. We keep on her about saving, investing more.

My point to the Young Dreamers is that getting into a field that provides a pension is a viable option, but make sure to add another leg.

 

[Montecfo]

Overwhelmingly US workers do not have access to pension plans. So for most of us the question is purely academic.

I was under a pension plan briefly after the company I worked for was purchased by a large telecom. The plan was phased out a couple of years later. I think they put about a thousand bucks into my 401k.

The new 401k was pretty generous with a company contribution and a very attractive match and a profit sharing component. But I left as I did not want to work for a huge company.

My 401k was never that generous subsequently. In fact for most of my career there was no company contribution or match at all.

So it was definitely saving/investing-mostly tax deferred. I did make some nice scores on options and company stock early in my career which helped. And flipped about 10-15 houses after the financial crisis that made a difference.

Assuming SS would be zero kept things conservative as far as FIRE plan.

But most folks have little choice but to save and invest or take whatever SS gives them.

If I had a choice I would do both. Pension plans go away, companies get acquired restructure and fail. Pension plans are are often in the crosshairs.

Nothing like self reliance.

 

[molly312]

A pension is a very nice income stream, especially when the market is down and/or interest rates stink. However, it is not the whole ballgame. Our pension was frozen at 62 (we were lucky) - no cola. However, it was only one leg of our planning. 401/IRA and Roth are our other legs. Looking back, though time wasn't on our side soon enough, ROTH was best thing ever! Put as much as you can in your ROTH. SS, IRA-RMD, and pension can throw you into very painful IRMA territory. Do as much Roth as you can.