I was just talking to a friend who has a pension through work. My comment was something along the lines of:
"I have my 401(k), SepIRA, Roths, but using the 4% rule, it takes a significant nest egg to replace a salary. Each million at 4% is only $40,000 annually. Meaning, I need $2.5M invested to replace each $100,000 in salary."
This got me thinking. My friend makes 6 figures, and I have worked as an outside consultant with government entities where a large number of the employees make 6 figure salaries. We have all heard the news stories about people working overtime, or gaming the system during their last few years of service, so they vest with VERY handsome 6-figure pension salaries for life.
Using the 4% rule that all of us in the private sector face in providing for our own retirements, how in the world do pension administrators do it? Are they not subject to the same math and finance rules that us in the investment market face?
Using the Social Security retirement system as an example (which we all know is not funded by interest coming off of an investment secured in a lock box), at least the SS Administration has enough sense not to promise people lifetime pay based on what they were earning. Even a person who made $1M a year during his working years (you contribute based on your first $142,000 of earnings) is only entitled to receive a maximum SS payment at retirement in the mid 5-figures.
Yet pensioners will get a retirement benefit based on their last few years of salary. How do the pension administrators pull this off? How do they steer clear of the laws of math and reality that the rest of us face?
"I have my 401(k), SepIRA, Roths, but using the 4% rule, it takes a significant nest egg to replace a salary. Each million at 4% is only $40,000 annually. Meaning, I need $2.5M invested to replace each $100,000 in salary."
This got me thinking. My friend makes 6 figures, and I have worked as an outside consultant with government entities where a large number of the employees make 6 figure salaries. We have all heard the news stories about people working overtime, or gaming the system during their last few years of service, so they vest with VERY handsome 6-figure pension salaries for life.
Using the 4% rule that all of us in the private sector face in providing for our own retirements, how in the world do pension administrators do it? Are they not subject to the same math and finance rules that us in the investment market face?
Using the Social Security retirement system as an example (which we all know is not funded by interest coming off of an investment secured in a lock box), at least the SS Administration has enough sense not to promise people lifetime pay based on what they were earning. Even a person who made $1M a year during his working years (you contribute based on your first $142,000 of earnings) is only entitled to receive a maximum SS payment at retirement in the mid 5-figures.
Yet pensioners will get a retirement benefit based on their last few years of salary. How do the pension administrators pull this off? How do they steer clear of the laws of math and reality that the rest of us face?
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