Poll:Prefer One, Two, or Three Legs?

[Live And Learn]

Seems an odd poll, why would anyone choose other than option A - everything? .

Exactly. I suspect that many of us stuck in OMY syndrome is because we don't have the pension. Its our fear or running out of money in old age that keeps us working. A pension goes a long way towards mitigating this risk (as does waiting to age 70 to take SSI as a couple of people have mentioned).

Neither DH or I have a pension, which is why I postponed my ER by 2 years.

As REWahoo mentioned, at some point I might consider a SPIA if it looks like I am likely to run out of funds to maintain a "minimal" lifestyle into old age. That decision is probably 20 to 25 years away.

 

[Live And Learn]

A few people have mentioned that they ER'd and were not yet eligible for SSI, but the poll is asking about the NPV of those income streams so the question is relevant regardless of when one retires

 

[Fermion]

The cost of purchasing a COLA'd pension that kicks in at a reasonable age, like 62, has survivor benefits, and pays a reasonable retirement (say, $50,000 a year) exceeds the amount one can accrue by contributing to a 401K compounded at something like a 2% real rate (which is about what a relatively "safe" portfolio could be expected to yield).

Of course everyone will point out that you can save outside the 401k...but you could also save outside of a pension. The tax deferral value of a pension contribution is probably quite a bit greater than that of the 401K, except in an insane market where we get 30% gains every year.

 

[Chuckanut]

The cost of purchasing a COLA'd pension that kicks in at a reasonable age, like 62, has survivor benefits, and pays a reasonable retirement (say, $50,000 a year) exceeds the amount one can accrue by contributing to a 401K compounded at something like a 2% real rate (which is about what a relatively "safe" portfolio could be expected to yield).

That's a pretty high bar in my experience. Most people I know who have a pension get between 15-30K a year, a partial or no COLA and that's if they take it at 65. At 62, the benefit would be less. Of course, none of them are on the Executive Retirement Pension Plan.

 

[Fermion]

That's a pretty high bar in my experience. Most people I know who have a pension get between 15-30K a year, a partial or no COLA and that's if they take it at 65. At 62, the benefit would be less. Of course, none of them are on the Executive Retirement Pension Plan.

If all pensions were 15k a year with no COLA, we wouldn't even hear about pension funding issues in the news. You could buy that with $300,000 or so. 20 million retirees would only require 6 trillion dollars.

 

[Buddy Love]

Actually, when I said "I wish I had a (COLA'd federal) pension (w/health insurance), I am not saying that I wish I had been paid more and/or saved more for retirement. Rather, I am simply saying that I wish I had the additional security and peace of mind that a pension would provide, especially a federal pension w/COLA. Alas, I don't have a pension (federal or otherwise), and I was quite diligent about saving for retirement. I was diligent even when I was on track to receive a megacorp pension. As it turned out, after I had been working for the megacorp for about 10 years, the megacorp suddenly eliminated their pension plan in one fell swoop.

Lots of passion on this thread. I joined this site to learn so I hope this line of questions will be taken in the spirit of my learning. I have friends that are state and federal workers. I am happy for them but I find a couple of things confusing:
1. When State workers are able to retire after 20 years of service with a pension
2. That politicos vote themselves tax free pensions...for rail workers as well
Can anyone help me understand this...what am I missing...I must be missing something. Can a state or federal worker help me?

I came across this quote the other day and I thought it was worth posting:
To take from one, because it is thought that his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, —the guarantee to every one of a free exercise of his industry, & the fruits acquired by it.' Thomas Jefferson

 

[Fermion]

Having some states treat pensions different from 401k for taxing purposes is a big slap in the face, I will agree with you there. It shouldn't even be legal but all you can do is avoid those states I guess.

 

[haha]

That's a pretty high bar in my experience. Most people I know who have a pension get between 15-30K a year, a partial or no COLA and that's if they take it at 65. At 62, the benefit would be less. Of course, none of them are on the Executive Retirement Pension Plan.

Come on man. My brother worked as a line school teacher in a Midwestern city. No coaching, no principle, no nothing beyond ordinary school teacher. He started work at 22, retired exactly at 52, and when he retired 10 years ago he got $40,000 pa, with a quality COLA and very heavily subsidized health insurance in the same school group plan. My friend worked here in Puget Sound at some sort of administrative municipal job. He retried older at 60, but since he had started at 40 he had only 20 years in. He also gets $40K, +cola but no health insurance.

Ha

 

[Katsmeow]

Exactly. I suspect that many of us stuck in OMY syndrome is because we don't have the pension. Its our fear or running out of money in old age that keeps us working. A pension goes a long way towards mitigating this risk (as does waiting to age 70 to take SSI as a couple of people have mentioned).

Neither DH or I have a pension, which is why I postponed my ER by 2 years.

Well, in the OP's poll he was made the value of each choice the same so it isn't a poll about how much to have just how you want to have it. I don't see that having a pension instead of having the equivalent value in personal savings would necessarily make someone more likely to retire. If the pension was in addition to savings, well, sure because there would be more money. But, that isn't what is being asking about.

 

[seraphim]

The more the better, I think, for diversification. One leg goes bad, there's two more.

 

[Buddy Love]

Having some states treat pensions different from 401k for taxing purposes is a big slap in the face, I will agree with you there. It shouldn't even be legal but all you can do is avoid those states I guess.

You guys are much smarter than me on this stuff so you likely all know about this sight but I found it very interesting. State-by-State Guide to Taxes on Retirees-Kiplinger

An excerpt regarding taxes in Delaware:
Railroad Retirement benefits are exempt. Taxpayers 60 and older can exclude $12,500 of investment and qualified pension income. Out-of-state government pensions qualify for the pension and retirement exemption. For those younger than age 60, $2,000 of investment and qualified pension income is exempt. If you are 65 or older on December 31, you are eligible for an additional standard deduction of $2,500 (if you do not itemize).
Read more at State-by-State Guide to Taxes on Retirees - Delaware -Kiplinger

 

[seraphim]

Prefer One, Two, or Three Legs?

As for the state pensions, it will depend on the state and other factors. Even comparing teachers in the same district, a masters degree will earn a higher base than a bachelors degree, so a higher retirement amount. Most state pensions I'm familiar with require 25 years and a minimum age of 48, at a reduced percentage. In Ohio, that minimum age is changing to 53 in my former occupation. Teachers here can take early retirement at 25 years at a much reduced percentage of income. With them the pay is determined by the district, so all other things considered, a teacher working in a poorer district will can make much less than one in a wealthy district. Take this into account when you read of a teacher with a doctorate retiring at $90k - that's a a rarity.

I'm out of date, but when in the military, one could take an early retirement at 20 years at a reduced rate. Don't know if that's still true. $ amount would depend on if one retired as a SSGT or a light colonel...

DW retired as a teacher with a 40% pension. My pension was at 60%. Neither of us paid into SS due to our occupations - due to date-of-hire time frames I never paid into MediCare, but DW did.

 

[Fermion]

Take Hawaii for an example. This would be a fun place to retire, except:

"Qualifying distributions from an employer-funded pension plan are not subject to Hawaii state income tax if you did not contribute to the plan. If you contributed to the plan, distributions are partially taxable in Hawaii. Pensions from a government retirement system, including federal civil service, military pensions, and state and county government pensions are not taxable in Hawaii. You can also exclude any social security or railroad retirement benefits you have to include on your federal income tax return."

So if you get a $40,000 federal pension, you pay no Hawaii state income tax, but if you pull $40,000 out of your 401K, you will pay 2% to 8%, depending on your deductions and other income. That is $800 to $3200 that the 401k sucker has to pay that the FERS pensioner doesn't.

 

[seraphim]

Prefer One, Two, or Three Legs?

Fermion - not just federal pensions exempt, it also seems government pensions at ANY level are exempt in Hawaii. Each state makes it's own rules...

...it also stated partially taxable. Need to dig further and find out what the limit is.

 

[Fermion]

Fermion - not just federal pensions exempt, it also seems government pensions at ANY level are exempt in Hawaii. Each state makes it's own rules...

And people wonder why those of us without pensions are a bit jealous....

 

[sengsational]

Well said; this sums up my argument for voting #4: personal savings. Retain the option to invest, withdraw, or annuitize as much as you want. I struggle to understand why so many people are voting otherwise, unless they are interpreting the question differently.

A majority of people here would actually prefer to have a large portion of their savings managed by politicians or executives at a previous employer, rather than managing it for themselves?

There is something to be said about having an annuity with an entity that can print money That being said, though, I still picked #4.

The question leaves out a lot. I presume that the NPV takes into consideration taxes? So if you get your personal savings component as traditional IRA funds, you'd need a load more money to make that equal to if those funds came as after tax. With after tax funds, you could control your income by putting it in tax efficient instruments.

I think the reason I picked #4 was that I presumed the "equal NPV" in the question was for someone who wasn't going to be very creative in controlling income, getting income related benefits, and saving taxes. But I would, so my NPV would be higher

 

[seraphim]

Prefer One, Two, or Three Legs?

Fermion

I don't wonder. I chose my occupation largely on the benefits offered, not because I enjoyed the field. The pension was a requirement for me. Main reason I also got my teaching certificate, as a backup.

But I get a pension in lieu of SS. I paid a higher percentage of my income into the pension than others do into SS. As a result, I got a higher percentage in return.

 

[aim-high]

Many comments about the original question in the poll. Unfortunately I didn't word it the right way and I'm limited in the number of words in the question and options in the poll are basically a check or not.

Here is what I was thinking in regards to the question.

The three legged stool is Social Security, Pension, and Personal Savings.

Social Security is a federally backed pension with COLA, more or less. They won't change the terms for current holders (only future ones) and even at that they do so with plenty of notice. Any monetary policies that affects $$$'s affects them in the other two legs also.

Pension are usually corporate or local government backed and seem to change or be done away with more easily.

Personal Savings gives an individual the most control. For the purposes of this, I was considering IRAs, ROTHs and 401Ks as personal savings.

Even for early retirees, their SS has an NPV as well as any future pensions. Suppose you have 25x your annual expenses after any taxes (a 4% WR,) how would you want your money divided between the legs of the stool?

People early in their career can choose to work with a company with a pension or choose one that has a defined contribution plan instead. They can also save personally and rely on social security.

At this stage I don't have much of a choice. If I were at 25x, it looks like I'll have 6-7x from SSA and 18-19x from personal savings.

At some point if I prefer I can take some of my 18-19x and buy an SPIA to round out the stool.

So I guess what I was trying to ask is what is your situation and what would prefer?

 

[seraphim]

Prefer One, Two, or Three Legs?

I think I answered that, aim-high. I'd like to have SS as well, because my state pension is open to change, probably more vulnerable than SS due to fewer people enrolled. If I had SS, there'd be more income protection for me should my state pension get into difficulty (more than it currently is). But I also think defined benefit pensions will be a thing of the past, except of SS and government positions not eligible for SS.

 

[Fermion]

Fermion

I don't wonder. I chose my occupation largely on the benefits offered, not because I enjoyed the field. The pension was a requirement for me. Main reason I also got my teaching certificate, as a backup.

But I get a pension in lieu of SS. I paid a higher percentage of my income into the pension than others do into SS. As a result, I got a higher percentage in return.

You were a LEO and I would gladly give you a pension for the risk you took protecting us. I don't feel exactly the same for the person who works at the IRS or water dept. and takes little risk.

But it is what it is and we can vote by not moving to those states that tax 401k but not pensions.

BTW, how was Alaska? Have fun?

 

[seraphim]

Prefer One, Two, or Three Legs?

Alaska was a blast. Glad I'm not there now, though lol.

I'm curious, though if there are any government employees who get SS AND a pension? I don't know the answer, there. I don't believe I contributed to SS when in the military. I think everyone deserves a defined benefit plan, whether SS, state level, or privately sponsored.

 

[sengsational]

P.e.r.k.s.

In the book "What Color is Your Parachute for Retirement", they throw out the old stool and go with PERKS:

Personal Savings
Employer Plans (401k as well as pensions)
Real Estate
Keep Working
Social Security

I'm not sure this fits with the existing definitions since at least I consider 401k personal savings. The "K" recognizes that there's potential assets inside the person, even though it uses the "w" word. And the "R" is a nice addition since some folks have used their own house or rental properties as savings vehicles and intent to liquidate as needed.

 

[Dawg52]

There has been a lot of discussion about those of us without an employer pension creating that third leg on the stool by purchasing a SPIA. It is something I'm considering at some point in the future.

This.

 

[aim-high]

Real Estate
Keep Working

I'm not sure this fits with the existing definitions since at least I consider 401k personal savings.

I'm with you on 401k as personal savings. I like the idea that Real Estate or other income generating Passive Investments could be considered differently. If those are not passive, then it's possible they count as work.

I agree with the idea of Keep working if it's needed but the idea for FIRE is to have all income needs covered passively and work is only done if desired not from need.

 

[Theseus]

Personal Savings
Employer Plans (401k as well as pensions)
Real Estate
Keep Working
Social Security

This seems to fit how I was thinking of this today, while updating spreadsheets trying to calculate SWR with pension and SS NPV (for sake of putting a present day value on them). While doing that I realized my plan calls for more of a chair with 4 legs - Non-COLA pensions for both myself and DW (16% of NW), SS for both of us (31% of NW), 401/457/403 savings (37% of NW), and real estate (16% of NW). Not realistic to dismiss value of any of them, but of course assigning "value" of each for plan has its pros and cons.

My sense of value of the keep working option is rather low these days, although mathematically OMY calculates to 7% of NW, aided by accruing higher pension payments by waiting, more savings added to the stash, oh and of course - less time left on this earth to enjoy it all.