Pension or 401(k)?????

[Art G]

You're just smiling because you know I'm about to get bombarded by hate posts.

 

[ziggy29]

5k extra in 401k, compounded at 8% for 25 years is $690,000/quote]

Where do you get your 8% figure? Our 401k's results for the past year show every single investment in our company's JP Morgan account, except fixed income and a bond fund, are down 5 - 15% for the year.

8% is commonly used as a relatively conservative LONG TERM estimate (think 20-30+ years) of expected market-level returns.

I know it feels like 8% sounds like ridiculously optimistic thinking right now as most everything is hemorrhaging red numbers and down arrows, but they also said that in 1932 and in 1981 and 2002...

 

[jIMOh]

I think the 27k I estimated has inflation factored in.

The 8% return used for estimating (long term) is before inflation. So the 27k (in todays dollars) is accurate, IMO.

I want someone to show me how the 27k (4% of $690k) could be higher in 25 years. Return in todays dollars, so list income in todays dollars and that keeps everything on level playing field.

I made all decisions based on todays dollars- that 27k in 30 years will not buy what 27k would today... so if the pension is factored off of ending salary, it is probably a better deal.

Other issues- if a higher SWR is used, the 401k gets more favorable treatment
if you cannot access the pension until a given age, and retire early, the 401k option gets more favorable treatment.

What happens if you switch employers between now and then?

 

[jIMOh]

5k extra in 401k, compounded at 8% for 25 years is $690,000/quote]

Where do you get your 8% figure? Our 401k's results for the past year show every single investment in our company's JP Morgan account, except fixed income and a bond fund, are down 5 - 15% for the year.

8% is long term return. Over 10-20-30 years.

I have some money in PRPFX and I am up for the year in that fund nearly 6%.

 

[pie2008]

As my husband and I often remark, "It looks good on paper."

 

[RonBoyd]

The company just announced it's providing employees 40 and over with the option of remaining in the pension, with the company continuing contributions, or we can roll the vested amount over to our 401(k) savings plan, to which the company will match up to 6%. I already use the 401 at over 6% on my own. Question is, is it best to keep the pension, or roll it over to the 401? It's a one time, non-revocable decision.

This sounds suspiciously like the IBM "Cash Balance" thing. That battle went on for many years before being settled (if it, in fact, has been). You may Google that to get some additional insight.

(BTW, I have no problem with the theory behind this move -- companies trying to shift responsibility for future investment earnings to the individual -- but would prefer to see a little more transparency when enacted.)

 

[growing_older]

I was involved in one of these buyouts years ago. The company formula for figuring the buyout amount was very dependent on age, so folks almost at retirement age got a fairly large amount roughly equivalent to their pension and if they annuitized came out nearly whole. The younger you were, the more the formula worked against you. I suspect they came up with this formula by assuming very high appreciation rates for money in the plan. Workers under 40 got almost nothing, so maybe that's why they limit it to 40 and older. At younger ages the bias becomes too obvious.

To really decide you'll have to estimate the chance you will actually get this pension and what the payout would be (retire early? leave company? possible future changes?) which is very hard.

The benefit to taking the lump sum is you are in control (somewhat, subject to 401k limitations) and no longer vulnerable to some of the worst company scenarios. The downside is you are almost certainly getting a fairly small amount compared to the actual value of the pension - assuming they really do pay it out as promised. As an employee perhaps you have a better estimate of the likelihood of that. Perhaps not.

Personally I think these kinds of changes are really breach of the implied contract under which you took the job and worked all these years, but I know management (and courts) don't really agree with me on this. Unless they propose a manifestly unfair buyout they are legally okay (morally not so IMHO) and likely making a killing on the company books by eliminating that large future liability for a cheap current payout.

 

[jazz4cash]

Depends on your age, but Genworth, for example, will pay up to 9% (over age 75) income for life.
There are quite a few companies that will pay from 4 to 7% income for life depending on your age. Considering the GM thread and concerns of failing pensions, perhaps VA's will be viewed differently in the future?

Im beginning to think the whole 401k phenomena has been subverted into a gigantic scheme to sell VAs......How many times a week do I see or hear the term "INCOME FOR LIFE!".......... Nauseating.

Also not sure it was mentioned that the 4-9% returns being mentioned may include return of principal (right?), so not exactly apples to apples with a SWR strategy.

 

[Delawaredave5]

I work for Megacorp with traditional DB plan. Few years back, I was considering small company job. Small company agreed to add to their proposed salary the "annual value" of Megacorps DB plan.

The Hay Group was consulted and said the "value" of Megacorps traditional plan to employee was about 7-8% of salary.

So if they are offering you 6% addition to your 401K - that's pretty close - usually companies offer less anyhow and get a cost savings.

Benefit of 401K addtion is the "portability" - what are the odds of you staying with Megacorp until 58 AND Megacorp still being around AND Megacorp continuing DB plan ?

If you switch, I didn't understand what happens to your 12 years - does that stay in DB plan ? Is it "cashed out" and transferred to 401 K ?

"Bird in hand is worth 2 in bush" -with DB pensions "melting" everywhere, I'd strongly consider the "bird in hand" (401K).

Good luck and let me know what you do.

 

[rs0460a]

I understand the pension is insured by PBGC, but what if, for some reason, the company decided to stop funding the pension? What if we are bought-out and the new suitor decides not to fund it? Can a purchaser totally eliminate the existing pension plan? The company I work for is a Fortune 500 and, like many stock companies right now, is taking a beating in the market.

I'll add my own "history" as related to pension programs, based upon just under 40 years of "service" for the last two companies I wor*ed for before I retired.

Company #1 had a pension program when I was there (1971-79), with the then current federal rule of 10 years of service before you were vested. Since I had "only" 8 years in when I left (for a better opportunity), I "lost" that pension (back to square one).

Company #2 had a pension program. This was before 401k's were available. They did have an opportunity to buy "credits" by additional contributions (something like a 401k) for the base pension, which was payable at (then) age 65, considered your "normal retirement date". Two things changed here. First of all, the normal retirement date was moved up to match SS (based upon my age) of 66. Additionally, when the 401k program was started, the base pension program was retained, but any money contributed under the "supplemental contributions" was returned. That money could not be "rolled over" to the new 401k, so we lost those "extra credits".

When the 401k program started, the company match was 100% up to 8% of contributions. This went on for a few years until the rules were changed, to only 4% (still 100% match).

Fast forward 28+ years (I was there 1979-2007, when I retired).

The 401k program was again changed - 50% match on the 4%. Additonally, the pension program was eliminated and a "cash balance" program was put into place, primarily to help in "portability" of the younger employees that now don't stay at a place longer than a few years. Good for them - bad for the "old folks ". The "settlement" I received could not purchase a "guaranteed instrument" (e.g. annuity) that would have paid as much as the pension program was to pay, on a monthly basis. There are plus/minus considerations to a cash balance vs. pension program, but that's not part of the discussion.

The company that I started with was also a "Fortune 500" company when I started, only to go through great changes over the years, including being bought sold four times, the last two by two European concerns (no - I didn't get paid in Euro's ).

My point is that regardless of what is proposed today, there is a good chance that it will be changed in the future if you actually stay with the company as you intend. You may not change - the company may. However like me, you may get a better opportunity and decide to leave. In that case, your current benefits should be looked at with a short-term view.

"The only thing consistant in life is change". But of course, you knew that ...

- Ron

 

[Art G]

Im beginning to think the whole 401k phenomena has been subverted into a gigantic scheme to sell VAs......How many times a week do I see or hear the term "INCOME FOR LIFE!".......... Nauseating.

Also not sure it was mentioned that the 4-9% returns being mentioned may include return of principal (right?), so not exactly apples to apples with a SWR strategy.

Income for life is income for life. You've paid money into social security over the years and they're not even giving you the option to take a lump sum out, or to increase the income, or to invest it as you wish. Not quite sure what you're nauseated about?

 

[FinanceDude]

Income for life is income for life. You've paid money into social security over the years and they're not even giving you the option to take a lump sum out, or to increase the income, or to invest it as you wish. Not quite sure what you're nauseated about?