Social security by the numbers

[Sytes]

U.S. Federal government for civilian employees contributes a maximum 5% match for employees - that is relatively par for private sector. 3-6% typically. I have 22% of my pay routed + gov 5% for TSP, excluding "catch up" payments on occasion.

Each person holds the skillset, desire to work certain jobs, or just can not land a better job for whatever reason - that is to each his/her own how they manage their financial setting, job selection, retirement intent.

 

[BuzzH]

You do realize that employers are not required to provide any kind of a benefit plan right?

And employers with defined benefit plans can require employees to contribute all or part as well?

The investment vehicle isn’t the issue.

Well I guess it is the issue because defined benefit plans cost so much more to maintain AND generally have much lower returns on investments.

Yes, yes, and you're in denial if you believe the bigger benefit is not with the employer only having to pay half.

 

[Bonasababy]

@npaden

Is the 8% 401k match hypothetical or am I misunderstanding your reference? Best I’ve seen is 100% match on employee 6%. Most companies are matching at a lower rate - 3% or 4% on full employee 6% contribution.

Ditto here.

 

[WyoCoalMiner]

That's really exceptional, all the way around

That's really exceptional, all the way around.

The one thing has changed for us in a good way, is that new employees are auto-enrolled into the full 5% (3% dollar for dollar, another 2% 50 cents on the dollar, and the required 1%).

The one thing I don't like is that our TSP is a little bit too accessible, but I sort of over-look it since we also have a pension.

As far as advisors, we're pretty much relegated to youtube.

When we are not plotting how to destroy global climate we dabble in trying to make our benefits a benefit

 

[npaden]

Yes, yes, and you're in denial if you believe the bigger benefit is not with the employer only having to pay half.

They don’t have to pay half in a 401k plan. They can make the employee pay half in a defined benefit plan.

I know of 401k plans that don’t require any employee contributions and I know of defined benefit plans that require employees to pay half. I guess the defined benefit plans with the employer paying half is better for the employer than the 401k plan with the employer paying 100% because it is a defined benefit plan and costs more to maintain and has a lower return on investment simply because it is a defined benefit plan so it must be better than an evil 401k plan.

I don’t think I am the one in denial.

 

[BuzzH]

U.S. Federal government for civilian employees contributes a maximum 5% match for employees - that is relatively par for private sector. 3-6% typically. I have 22% of my pay routed + gov 5% for TSP, excluding "catch up" payments on occasion.

Each person holds the skillset, desire to work certain jobs, or just can not land a better job for whatever reason - that it to each his/her own.

I've been fortunate because of my age as well, have contributed 20% for my whole career plus the 5% match.

But the problem is, for new employees that's incredibly difficult to do with the monster price increases in homes, vehicles, food, clothing, etc. etc. in the past 10 years. I couldn't afford to live in the house I do if I were forced to buy it today...I just don't make enough to afford an 850K home.

 

[WyoCoalMiner]

That's really exceptional, all the way around.

The one thing has changed for us in a good way, is that new employees are auto-enrolled into the full 5% (3% dollar for dollar, another 2% 50 cents on the dollar, and the required 1%).

The one thing I don't like is that our TSP is a little bit too accessible, but I sort of over-look it since we also have a pension.

As far as advisors, we're pretty much relegated to youtube.

YouTube has been a great source for myself. I even learned a couple of things about pensions from this thread.

Have had many employees tell me how cool it has been for them to see their 401k grow after getting auto enrolled when they typically did nothing.

I find it very gratifying to see folks that have given so much to this mine get to retire in a comfortable financial place. They earned it! It can be done with a 401k.

 

[BuzzH]

They don’t have to pay half in a 401k plan. They can make the employee pay half in a defined benefit plan.

I know of 401k plans that don’t require any employee contributions and I know of defined benefit plans that require employees to pay half. I guess the defined benefit plans with the employer paying half is better for the employer than the 401k plan with the employer paying 100% because it is a defined benefit plan and costs more to maintain and has a lower return on investment simply because it is a defined benefit plan so it must be better than an evil 401k plan.

I don’t think I am the one in denial.

You absolutely are in denial.

The denial is that you wrongly assume people make enough to contribute, and that the average guy is smart enough to manage their own retirement.

You need to get out from behind the desk once in a while and mingle with common folk...

 

[BuzzH]

YouTube has been a great source for myself. I even learned a couple of things about pensions from this thread.

Have had many employees tell me how cool it has been for them to see their 401k grow after getting auto enrolled when they typically did nothing.

I find it very gratifying to see folks that have given so much to this mine get to retire in a comfortable financial place. They earned it! It can be done with a 401k.

Youtube is OK, but being able to sit down with a retirement planner like you offer is much better IMO. I can't ask questions of a youtube video.

Auto-enrolling is a big step forward in the education department for retirement planning. Many times its better if people don't have a choice, just saying.

 

[npaden]

I’ll look at a couple plans tomorrow and let you know how much more expensive the defined benefit plan is to maintain and how much lower the return on investment is than a similar sized 401k plan.

I’m glad you are so smart you can decide who is smart enough to manage their own retirement and who isn’t. Is it worth as much as double the cost to manage it for them? That’s about what I think the numbers will say the defined benefit plan cost is over the 401k. That’s not what % is going into the plan, that’s how much more money it takes to get the same amount available to the employee at retirement.

 

[BuzzH]

I’ll look at a couple plans tomorrow and let you know how much more expensive the defined benefit plan is to maintain and how much lower the return on investment is than a similar sized 401k plan.

I’m glad you are so smart you can decide who is smart enough to manage their own retirement and who isn’t. Is it worth as much as double the cost to manage it for them? That’s about what I think the numbers will say the defined benefit plan cost is over the 401k. That’s not what % is going into the plan, that’s how much more money it takes to get the same amount available to the employee at retirement.

Let me know how much return they get when they can't afford to contribute while you're at it. Or how much they get when they take money out of it like a savings account when they hit a rough patch, or need__________(fill in the blank).

If you think the average 50K a year wage earner is smart enough to understand how the markets work, how investing works, well...again, you need to get out more.

I would argue for the type of worker that has that kind of position, probably didn't/doesn't spend a lot of time trying to understand investing. That's not a "guess" because I work with people with college degrees that don't get it. That's not a slight on anyone without a college degree, you don't need one to understand investing. However, if you think a majority of people entering the workforce (degree or not), or those that will never do better than a 50K a year job, understand it, well, I'll have to disagree.

Again, you're not looking at it from the lens of the average 50K a year employee, you're looking at it through YOUR lens, in a field you work in everyday.

Yes, I would argue in many cases it would be well worth it for employees that don't understand how finances, investing, etc. work to have DBP's even if they got lower rates of return. For Christ sake, I know wealthy college educated people that pay financial advisors what I consider stupid money to manage it for them. Yet, you expect a high school educated person to know how to maximize returns in their 401?

Come on dude, jump into reality.

 

[npaden]

They have these things called target date funds. You select the fund based on your anticipated retirement date and that’s it. The rest is taken care of. I would guess 80% of the employees of the 401k audits we do select those as their investment choice. It takes the management out of it. The only thing you have to worry about then is getting them to keep the money invested. Like wycoalminer mentioned, you can make it harder for people to pull money out of the plan but not impossible.

Education is the key, instead of paying double the cost to get the same benefit maybe spend some on education and getting people to understand how things work. It’s difficult, but most companies I audit have at least an annual meeting where it is discussed and people can meet with an advisor.

 

[BuzzH]

They have these things called target date funds. You select the fund based on your anticipated retirement date and that’s it. The rest is taken care of. I would guess 80% of the employees of the 401k audits we do select those as their investment choice. It takes the management out of it. The only thing you have to worry about then is getting them to keep the money invested. Like wycoalminer mentioned, you can make it harder for people to pull money out of the plan but not impossible.

Education is the key, instead of paying double the cost to get the same benefit maybe spend some on education and getting people to understand how things work. It’s difficult, but most companies I audit have at least an annual meeting where it is discussed and people can meet with an advisor.

Still doesn't solve the problem of lower wage earners not being able to afford to contribute and/or rob from their accounts, but I agree with the rest.

More fun facts, only 3% of people have a million or more in retirement savings, 50% have nothing, and the averages are pretty dismal too.

Average Retirement Savings by Age - NerdWallet

The average retirement savings for all families was $333,940. Balances vary by age, with those 55-plus having the most in their accounts.

www.nerdwallet.com

Not exactly a strong case to be made that 401's are knocking it out of the park.

 

[Pucky Freak]

Not sure if all plans are like this or just the ones I am involved with but all of the ones I'm aware of allow a lump sum distribution option. They calculate out what you would get paid monthly and your life expectancy and then the compute the net present value of those projected payments. When the discount rate is low the net present value calculation is higher so the lump sum payout is higher.

Example: You retire at 65, life expectancy is 83 and your projected pension is going to be $5,000 per month. At a 5% discount rate (about where we are right now) the net present value of those payments would be $686,196. You can take that in one payment now and be responsible for investing it on your own or you can take the $5,000 per month until you die. Based on your life expectancy that will be $1,020,000 over those 17 years.

If the discount rate is extremely low (it got under 3% for a while) that lump sum payment goes up. At 3% the lump sum would be $798,244. And you get that no matter what. If you die in 5 years your beneficiaries would still have the money, if you were being paid monthly that would stop (unless you had spouse coverage, etc.)

At a discount rate of 7% (which is around where it was when most of these pension plans were started), the lump sum would be $595,479 which is less than half of the expected monthly payments and would be a much harder decision.

Starting in 2008 the discount rate dropped under 5% and stayed there until 2022. Some of those years it was under 3%. To put extra pressure on the pension plans that also corresponds with times where at least the bond market is depressed and for some of that time the equity markets were depressed. So the rates drop low, and the pension plan has to sell assets at low prices to get the cash to pay out the lump sum payments. It's a double whammy. They had planned on those funds being invested over the next 17 years to help pay for some of those payments but instead they are being cashed out.

Not sure I'm doing a good job of explaining it but trust me, it was a bad deal for the plans paying out those lump sums. You used to have to really make a tough decision on whether to take the lump sum or the monthly payout but with the low discount rates EVERYONE took the lump sum. It would have been crazy not to.

Got it. After reading up some, I found my pension’s discount rate (3.75). It is not tied to the lump sum option though - hardly anyone ever takes the lump some because it is fixed at the total value of lifetime contributions + 2% annual interest. For most employees this adds up to approximately $500,000 in your example, or about a 9% discount rate, so you really get hosed.

 

[Keep on]

My company does 100% match for 4% and an additional 3% with no match, so 7% all together. We lost our pension 7 years ago. It's frozen, so not growing anymore. The wife is on a pension plan, and even though it's a great plan, it still won't come up to what she could do if able to invest the 8% that comes out of her check along with the employer 8% over time.
I made sure both my sons started putting in at least the match percent to their 401k's as soon as they started working.
It blows my mind that people won't at least put enough into a 401k to get the company match.

 

[406dn]

They have $10,000 more than the guy with the defined benefit pension plan. They could put $4,000 of that into the 401k and have $6,000 left over to pay for groceries.

Seems way better than taking a job paying $10,000 less and having the company put in a bunch of money into a pension plan for them.

In my example the employer is out the same amount either way but the employee is better off with the 401k.

I think you proved my point.

I am in a fortunate situation in that my employer offered a defined benefit pension and a savings plan, with a 401k option. So, I have both, side by side.

The 401k requires both discipline and some investing savvy during your working years, to make it equal to a defined benefit pension. With the pension, you know from the get go, what it is going to be, and your part it earning it. All it takes is years of doing your job.

I made good money better than many. The company match was 7% on the first 6% contributed from the employee. From the day I could, I participated. When I retired, the pension lump sum was over 50% greater than the balance in my savings plan. Yes, I could have invested more aggressively, and had more. But that just proves that making a 401k really work, it takes knowledge from the employee. Most young adults, starting a family, aren't aware of how important time is, when compounding earnings.

The shift to 401k plans is pretty much complete. It is going to prove to be very lacking in providing a decent retirement for the general public.

 

[Mallardsx2]

The shift to 401k plans is pretty much complete. It is going to prove to have been very lacking in providing a decent retirement for the general public.

Oh man I don't know what you are worried about. Everything is going to be ok. The government will step in and help the people who blew their money (ya know, the money that just maybe should have saved for retirement) on campers, side by sides, new trucks, ski boats, snowmobiles, hunting trips, and expensive lavish vacations to the Bahamas. Right? Right? Live that awesome life of "living for now not the future bra!" for Gram and Facebook likes! I see it on all the forums. I know damn well most guys tooting their horns on the forums are in way over their heads. Got guys talking about cashing in their 401k's to go sheep hunting for God sakes. lol

Yet, MANY folks continue to vote for that government support system ideology to reward and rescue financially incompetent idiots and then complain when the "freedom of choice" 401K system that everyone pushed for still isn't good enough.

Truthfully, the real enemy in America is credit cards and bank loans and their abuse and ease of availability to the masses.

Unsecured debt will be the bane of this country.

 

[Pucky Freak]

It blows my mind that people won't at least put enough into a 401k to get the company match.

I can wrap my head around someone opting out in order to pay their bills. It is harder for me to swallow just how common cashing them out is, penalty and all.

The New Urgency for Mitigating 401(k) Account Cash-Outs

The New Urgency for Mitigating 401(k) Account Cash-Outs

rch1.com

The mathematical soundness of 401(k) is spot on. The psychology/human behavior of the program is flawed almost beyond hope. Getting your money out at the wrong time is far too easy, the financial literacy required to participate is greatly deficient among the human population as a whole, precious few workers who do not have access to one actually seek out a third party to set up a SEP/IRA or equivalent, they overwhelmingly accelerate the wealth distribution gap instead of closing it, it is a fantastic tax cut to millionaires who didn’t need it, and you are also forced to give a cut of your profits to some goober investment institution that just 10-15 years ago reaped some 30-35% of employees gains through highly aggressive fee structures.

So can we stop pretending like this was some kind of great program, when the whole thing has been an epic train wreck?

Meaningful reforms have trickled in, such as fee disclosures, fiduciary requirements, target-date funds, and automatic enrollment. That is just a start though. Portability remains a gaping problem. Swiss-cheese access to funds needs fixed. Basic affordability is a huge issue w/ non-living wages.

 

[The_Jim]

@npaden you seem like a smart guy. Figured you would know by now that @BuzzH is the final authority on everything. I wouldn’t waste your time looking anything up, because it’s actually wrong.

 

[Nick87]

The point is many can but choose otherwise and a lot of their choices are the reason they are barely afloat. I make way above that and drive a 2012 truck.
Had a discussion this week with one of those $50K/yr workers about how she doesn't eat leftovers. Ever. Tonight's meal for me is day 3 of the same leftovers. Her and her husband have a 2021 and 2023 vehicle both in payments. Choices. She couldn't afford that contribution, but not because there's not enough money to begin with.

There's plenty of people who are terrible with their money regardless of income.