Work for a Pension or a Portfolio?

[LateToFIRE]

My in-laws retired from MegaCorp careers with the trifecta of COLA'd DB pensions, vested company stock acquired at a discount, and significant t-401K (Roth did not exist during their working years); plus no mortgage on home and vacation condo. Between SS and pension they did not even need to ever touch the nest-egg. They had a VERY nice retirement. Difficult to replicate these days owing to scarcity of MegaCorp DB plans.

In my MegaCorp sector, DB plans were largely scrapped decades ago. I have a very small one coming my way at age 65. So ret will have to be largely funded by savings - not much choice in the matter.

 

[LateToFIRE]

...Pension plans go away, companies get acquired restructure and fail. Pension plans are are often in the crosshairs.

Nothing like self reliance.

I have witnessed exactly this multiple times in restructurings.

 

[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.

Wait mistakenly wrote 55 but she retired early full benefits at 55.

 

[ncbill]

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.

If I could roll the clock back ~35 years...

I would've done what my kids all did & used the military to pay for college.

Would have been eligible for not only a pension but essentially free health care.

Don't think much of corporate pensions, though:

Last relative I buried saw their corporate pension converted to a cash balance then had their entire department outsourced a decade before their planned retirement age.

Had to cash in that pension to make it to SS at age 62 & had a very modest retirement until their death around a decade later.

 

[Steeler75]

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….

+1

Between DW and I, three pensions (two Cola’d), nest egg and SS when available for me. DW gets the WEP/GPO double whammy so almost no SS for her. Don’t get it, if she never worked and stayed home, would receive half mine but since she did work as a teacher, gets none. Both scenarios not paid into SS but because she had to contributed to her retirement fund, gets nothing from my SS.

Something definitely seems wrong with this…. I understand congress continues to review this but no movement yet to rectify.

 

[friar1610]

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.

I generally enjoyed my military career although there were times I thought about leaving. But I am sooo glad for for the 70% of base pay that I’ve been receiving since I was 50. I never knew how far that pension would take me, so I also invested/saved a fair portion of my military and post-military pay. I’m not so naive as to think the annual inflation adjustments to the pension and SS won’t be cut back in the future, so it’s nice to have the nest egg as insurance. But so far we’ve lived primarily on the pension and SS without feeling at all deprived.

 

[Bigdawg]

+1

Between DW and I, three pensions (two Cola’d), nest egg and SS when available for me. DW gets the WEP/GPO double whammy so almost no SS for her. Don’t get it, if she never worked and stayed home, would receive half mine but since she did work as a teacher, gets none. Both scenarios not paid into SS but because she had to contributed to her retirement fund, gets nothing from my SS.

Something definitely seems wrong with this…. I understand congress continues to review this but no movement yet to rectify.

Most likely not a popular opinion but I want EVERYONE to collect on their own record. No spousal. After higher earner passes? Yes, survivor can collect on deceased spouse's record. I know. Not a popular opinion. Sorry. I'm a "strong women/independent women" kind of guy.

 

[brett]

These are not mutually exclusive.

Who knows what will transpire with an employer benefit program or one's choice of employers over their working lives.

Most financially secure/successful early retirees that I know have a combination of two or more of DB's, DC's, and personal investments.

I certainly did not rely only on my DB pension to fund our retirement. It was one of three retirement sources of income.

 

[bada bing]

I worked for 4 different masters long enough to vest in their respective pension plans. All started out as typical private DB plans - (percentage of pay * years of service) with no COLA. None of these pensions were nearly as lucrative or comparable to most .gov pensions I've seen described. I can say for the money the companies put in, they were underappreciated by workers. The companies weren't getting their money's worth as far as worker retention and morale IMO. Everyone I knew was ambivalent about their pension while working. All of the plans have since terminated. All of the companies also had a pretty good 401K match that was bumped up with the termination of their pension plans, at least temporarily.

My last master converted their DB pension into a cash balance plan, rather than terminate, sometime around 2008. They sold it to employees as revenue neutral, they continued putting similar amounts into the cash balance plan. I can say that this had a much bigger influence on workers attitudes because you could see your balance increase every month, both by company contributions as well as interest credits. Just about everyone would log on monthly to check their balance. As long as the plan's funding level compared to liabilities stays above threshold, the CB pension is available as a lump sum. So far, the pension has stayed comfortably above 100% funded, this year's audit was 121%.

Everyone I know except for myself took the pension lump sum as soon as they separated from service. So this kind of indicates that in my world, my peers all greatly preferred retirement cash to pension.

 

[Jimonlimon]

Pensions usually are best if you retire directly from the company funding the pension. Investment portfolios are usually more portable allowing you to change employment.

I'm about to retire with a state government pension that is fantastic, but the tradeoff is that I've spent 25 years of my 32 years at the state topped out in the same classification. Meaning the only pay increases were cost of living adjustments. Not a penny of overtime, no bonus or performance-based raise, no free coffee, not even employer-provided filtered drinking water. If I had left before retirement age I would have lost the generous retiree health benefits and the pension would have paid less due to lack of inflation adjustment between separation and draw dates. That's why government pensions are called the "Golden Albatross"

If I could do it again I would. I love my field of work, appreciate our mission, and like my boss and most of my staff and colleagues. The feeling of being trapped is real though.

 

[Chuckanut]

+1

Between DW and I, three pensions (two Cola’d), nest egg and SS when available for me. DW gets the WEP/GPO double whammy so almost no SS for her. Don’t get it, if she never worked and stayed home, would receive half mine but since she did work as a teacher, gets none. Both scenarios not paid into SS but because she had to contributed to her retirement fund, gets nothing from my SS.

Something definitely seems wrong with this…. I understand congress continues to review this but no movement yet to rectify.

All I can say is that as a person who has paid SS tax on every dollar I have earned in my entire working life, I would be very upset if WEP/GPO went away. That would be grossly unfair to those who have paid into SS for a lifetime. Every month deductions for SS and the pension came out of my paycheck.

 

[Gumby]

All I can say is that as a person who has paid SS tax on every dollar I have earned in my entire working life, I would be very upset if WEP/GPO went away. That would be grossly unfair to those who have paid into SS for a lifetime. Every month deductions for SS and the pension came out of my paycheck.

Assume that my neighbor and I had the exact same job and paid the exact same amount into social security. My wife was a school teacher and did not participate in social security. His wife was a trust fund baby and never worked. So neither of our wives paid into social security.

Now, when he and I take social security, we will each get X social security. His wife will get an additional 1/2 of that as a spousal benefit, so their total household benefit is 1.5 X. And when he dies before her, she will get his full social security of X as a survivor benefit. By contrast, because of the GPO, my wife will get ZERO spousal benefit and our total household benefit is just X. And when I die before her, she will get ZERO survivor benefit.

So there you have the exact same amount taken out of his and my paycheck every payday for social security, yet he and his wife will get at least 50% more than my wife and I, and that percentage will increase the longer our wives survive us.

Forget whether it's fair to the wives, I think it is unfair to me to pay the same into SS and get so much less for my money than he does. I had to buy a whole life insurance policy to make up for the fact that when I go away, so does the social security. And, believe me, it cost real money to do that. He didn't have to pay for that.

 

[pb4uski]

^^^ and all that was a public policy decision, right or wrong, made long before most of us were born that it was good for the country to have SAHMs which is why there is a spousal benefit.

I presume that your teacher wife that did not pay into SS has a teacher's pension instead of SS.

Life isn't fair sometimes.

 

[Gumby]

^^^ and all that was a public policy decision, right or wrong, made long before most of us were born that it was good for the country to have SAHMs which is why there is a spousal benefit.

I presume that your teacher wife that did not pay into SS has a teacher's pension instead of SS.

Life isn't fair sometimes.

Yes, she does, and it's a good one. But that is irrelevant to the question of whether he and I have been accorded equal treatment under the law. We have not. And lest you think this is hypothetical, it is almost exactly the case with respect to my former neighbor and me. We both hit the Social Security income limit every year and paid the max taxes, but his wife never worked because she didn't need to.

Yes, I know life isn't fair, and we live with it. But comments like Chuckanut's get my dander up.

 

[SnowballCamper]

I would have needed a little over $800,000 to get an immediate annuity for my military pension amount at retirement. Yes this is a poor comparison because immediate annuities generally don't get COLAs. I went ahead to try to figure out how much I would have to have saved to fund my own pension through a SPIA purchase (level payments).

Using a mortgage calculator to reverse engineer how much I would have to be saving back in the 1990's, I come up with first year savings of about $10,950, assuming a constant 7% interest rate. That glides up to about $38,000 annual savings in the mid 2010's. This is obviously a very rough (back of the envelope) estimate.

For reference the pay for an E-3 private (typical rank for first two years of service) was $12,600 per year in 1995. That's a savings rate of 86%. Even adding in the housing, medical, etc. benefits the savings rate is well over 50% of compensation.

I see it mostly as a trade off in commitment...but there is certainly an element of luck to make it to the 20 year cliff vesting.

 

[pb4uski]

Yes, she does, and it's a good one. But that is irrelevant to the question of whether he and I have been accorded equal treatment under the law. We have not. And lest you think this is hypothetical, it is almost exactly the case with respect to my former neighbor and me. We both hit the Social Security income limit every year and paid the max taxes, but his wife never worked because she didn't need to.

Yes, I know life isn't fair, and we live with it. But comments like Chuckanut's get my dander up.

I agree with both of you. I would be unhappy if WEP/GPO went away. At the same time, if the 50% spousal benefit was phased out, I think that would be fairer (even though we will benefit from the 50% spousal benefit since DW was a SAHM but she does have some benefits based on her own work record).

 

[Gumby]

I think the fairest thing all around, including for single people, is that you only get social security on your own record. No spousal benefit, no survivor benefit. If you didn't personally pay in, you don't get anything.

 

[pb4uski]

Agreed, hence supporting the phase out of spousal benefit.

 

[hopefullyoneday]

I just went through a retirement seminar at work. My work does not pay into SS and I get a pension. I did contribute and have my 40 credits though from previous employment. I will fall under the WEP provision but as the SS advisor who was in the seminar stated I will still benefit from the reduced payout. The example from him was that even though i will only get about half of the SS estimate I will get all the money I contributed twice as fast as those that get the Full benefit. He showed the math as he explained it. At first I thought it was unfair but after he explained it I now realize it is not unfair at all and I am still making out better.

 

[Gumby]

The WEP makes sense to me. The GPO does not.

 

[Jimonlimon]

I think the fairest thing all around, including for single people, is that you only get social security on your own record. No spousal benefit, no survivor benefit. If you didn't personally pay in, you don't get anything.

As a person with a stay at home spouse who worked hard to raise our kids, I disagree. For a married couple half of the contribution should be credited to each partner. The FICA cap should be double for a couple also.

 

[Gumby]

As a person with a stay at home spouse who worked hard to raise our kids, I disagree. For a married couple half of the contribution should be credited to each partner. The FICA cap should be double for a couple also.

Intriguing ideas. I will have to think about that for a bit.

 

[athena53]

Most likely not a popular opinion but I want EVERYONE to collect on their own record. No spousal. After higher earner passes? Yes, survivor can collect on deceased spouse's record. I know. Not a popular opinion. Sorry. I'm a "strong women/independent women" kind of guy.

I think this would have disastrous implications and I say that as a woman collecting on my own record whose spouses (both deceased) never collected on mine. Yes, women have options and opportunities they never had when SS was built, but they are still disproportionately in lower- paying jobs and a higher % of them leave or dial back their careers to raise children or care for elderly parents. My DDIL home- schools 3 kids. That's priceless.

 

[Chuckanut]

I agree with both of you. I would be unhappy if WEP/GPO went away. At the same time, if the 50% spousal benefit was phased out, I think that would be fairer (even though we will benefit from the 50% spousal benefit since DW was a SAHM but she does have some benefits based on her own work record).

IMHO the fairest way would be to eliminate the SS exemptions and put us all on an even playing field. Obviously that would need to be phased in.

 

[rwdflynavy]

Another military retiree here. We saved for retirement, especially ramping up TSP (401K equivalent) my last few years on active duty.

When we FIREd 5 years ago (age 49), we moved to a MCOL area and we live on my pension and VA disability (which is tax free). Both of those are COLAd.

This, combined with a medium sized inheritance allows us to live well without touching our investments.

My spouse will receive 55% of my pension if I pass first, but no more VA disability.

Assuming we make it long enough, intend for her to take SS at 62 (she was primarily a stay at home mom) and I'll delay til 70 to max it out.