Social security by the numbers

[406dn]

I hate to bother you guys with facts when you obviously have your minds made up that defined benefit pension plans are some sort of miracle that will solve all the retirement woes but it just isn't true.

401k plans are certainly not a miracle that will solve all of the retirement woes either. There main advantage, from an employer's viewpoint, is the risk is transferred to the employee.

Oh, and it forces the employee to partially fund their retirement. Many defined pensions are entirely funded by the employer.

 

[npaden]

401k plans are certainly not a miracle that will solve all of the retirement woes either. There main advantage, from an employer's viewpoint, is the risk is transferred to the employee.

Oh, and it forces the employee to partially fund their retirement. Many defined pensions are entirely funded by the employer.

Again, this is not true. There are 401k plans out there that do not require any employee contributions. How is that forcing the employee to fund their retirement?

I'm trying to point out that the investment vehicle is not the issue here. Nearly every argument against 401k plans that have been put forward have nothing to do with the plan but how individual employers are choosing to run the plan one way or the other. And the repeated mantra that people are not able to make good choices so we need to make the choices for them.

 

[Dave N]

My pension is set up so that my wife gets 100 percent of my current amount in the event I pass before her. We had to take a reduced amount to do this, but I wanted a higher amount for her if I passed before our kid turns 18 or so, so she can pay the bills and not have to work to take care of our daughter.

<<<currently on disability retirement pension through the state.

One of mine was the same way. When my wife died I was able to change it so I got the full amount.

 

[406dn]

Again, this is not true. There are 401k plans out there that do not require any employee contributions. How is that forcing the employee to fund their retirement?

I'm trying to point out that the investment vehicle is not the issue here. Nearly every argument against 401k plans that have been put forward have nothing to do with the plan but how individual employers are choosing to run the plan one way or the other. And the repeated mantra that people are not able to make good choices so we need to make the choices for them.

You quote my post then don't address the main point. 401k plans shift the risk to the employee. The vast majority of 401k plans DO require an employee contribution. Companies CAN and DO suspend their match, at their discretion.

As I posted earlier, 401k were not an idea coming from employees, to gain a better retirement. They have evolved to be the retirement plan for many people, because companies can limit their risk, and shift it to the employee.

 

[MTGomer]

Stillwater mine used to match me at either 6 or 8

Not sure if it’s that way now, after Sibanye bought them.

I match my employees up to 3% and 50% up to 5%. Not that great but i think it’s pretty standard in the industry for small firms

 

[npaden]

You quote my post then don't address the main point. 401k plans shift the risk to the employee. The vast majority of 401k plans DO require an employee contribution. Companies CAN and DO suspend their match, at their discretion.

As I posted earlier, 401k were not an idea coming from employees, to gain a better retirement. They have evolved to be the retirement plan for many people, because companies can limit their risk, and shift it to the employee.

I quoted your post to point out a factual error.

I didn't know what your main point was. If the main point was that 401k plans shift risk to the employee also note that they shift the reward to the employee as well. Risk = Reward. I would much rather take the money and invest it myself than my employer put it into a big lump with everyone else and earn a lower return on it.

 

[westbranch]

This is probably a dumb question but since I've never had a 401k I've never really had to think about it. 5% is what your taking annually?

Yep, say you retire with $1M in a 401k. Plan on 5% or $50k per year. If market goes down and you're at 900k then you would take $45k. The reality is most people will have fluctuating living expenses, trips, vehicle purchases, etc. so they might range from 3-6% depending on what is going on.

 

[Bonasababy]

One of mine was the same way. When my wife died I was able to change it so I got the full amount.

With mine if my wife dies first mine reverts back to the single, higher amount. If I die first she is guaranteed the 100 percent survivor--lower--benefit that requires agreement at the time of retirement and can't be changed--for the rest of her life.

Lets get specific here--given what is going on with the economy now and i expect will continue for some time, there's no way I would feel comfortable retiring if all I had was a 401 no matter who funds one. Like SS, the pension is a certain benefit and there is huge value in that during times of market troubles!

 

[Bonasababy]

I quoted your post to point out a factual error.

I didn't know what your main point was. If the main point was that 401k plans shift risk to the employee also note that they shift the reward to the employee as well. Risk = Reward. I would much rather take the money and invest it myself than my employer put it into a big lump with everyone else and earn a lower return on it.

And if you invest that lump sum badly and need public help to get by, the rest of us pay for that, whereas a pension together with SS often creates enough to live on without any other savings for many, assuming they work at a career with one for 35 years or more.

 

[SAJ-99]

I didn't know what your main point was. If the main point was that 401k plans shift risk to the employee also note that they shift the reward to the employee as well. Risk = Reward. I would much rather take the money and invest it myself than my employer put it into a big lump with everyone else and earn a lower return on it.

I was with you until this post. I'm not sure I would agree, although I do see where you are coming from. The accounting rules on funding status might drive your perspective. There are different risks, but in this case "risk" is defined as earning lower than the assumed rate of return. The assumption has to hold that the money is managed in a prudent way in a well-diversified portfolio whether the pension does it or the individual does it in a 401K. Sure, a person can take the lump sum, roll it into a 401k, sign some risk disclosures and YOLO it into a triple levered inverse Nvida ETF (ah, such great times we live in), but not investment advice.

Taking the lump sum payout has no affect on the expected rate of return. It eliminates counterparty risk. When you take a buyout from a pension, the pension eliminates the funding risk and you eliminate the risk the company would go belly-up while assuming the investment risk. There should never be an assumption that the pensions "earns a lower return". In fact, the pension ROR could easily be higher if it is still active. It has an infinite duration and positive cash flow from the business as a backstop. A good way to think about it, the individual could take the lump sum and then go shopping for a fixed annuity. In this transaction he assumes counterparty risk with the insurer and gets the stability in cash flow. IT is more a question of cash flows than it is the underlying investments.

 

[Bonasababy]

A good way to think about it, the individual could take the lump sum and then go shopping for a fixed annuity. In this transaction he assumes counterparty risk with the insurer and gets the stability in cash flow. IT is more a question of cash flows than it is the underlying investments.

This is always interesting, in every case of people I have talked to and our own two pensions, there was no possible way to even come close to matching the pension payments with a lump sum rolled into an annuity.

Realize that is a different argument than having the money contributed to the pension all those years and investing it on your own over those years, but it is one way to show the worth of pensions.

 

[kodiakisland]

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

Sure, but that doesn't mean it's the responsibility of those who are good at it to provide for those who aren't.

 

[Wildabeest]

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.

Are pensions guaranteed? The guy I bought my place in WY from told me that he got screwed out of his pension when his employer of 35 years (co-located coal mine and power plant) filed for bankruptcy. Did some quick googling and it appears there’s some federal insurance that perhaps covers some, but not necessarily all, of it. That would suck to work that long expecting that benefit and then have the corporate side screw you by raiding it or not funding it properly.

I only have experience with 401k’s and family members having state & local gov pensions. My current employer matches first 6% in my 401k, so I’m pretty fortunate there. Both of my mid-20’s kids contribute a minimum of the company matches in their 401k’s. I’ve told them any less is stupid and they need to adjust their lifestyle to accommodate it. They don’t always take my advise, but on that they have.

 

[Nick87]

Sure, but that doesn't mean it's the responsibility of those who are good at it to provide for those who aren't.

??. Never said that.

 

[npaden]

I was with you until this post. I'm not sure I would agree, although I do see where you are coming from. The accounting rules on funding status might drive your perspective. There are different risks, but in this case "risk" is defined as earning lower than the assumed rate of return. The assumption has to hold that the money is managed in a prudent way in a well-diversified portfolio whether the pension does it or the individual does it in a 401K. Sure, a person can take the lump sum, roll it into a 401k, sign some risk disclosures and YOLO it into a triple levered inverse Nvida ETF (ah, such great times we live in), but not investment advice.

Taking the lump sum payout has no affect on the expected rate of return. It eliminates counterparty risk. When you take a buyout from a pension, the pension eliminates the funding risk and you eliminate the risk the company would go belly-up while assuming the investment risk. There should never be an assumption that the pensions "earns a lower return". In fact, the pension ROR could easily be higher if it is still active. It has an infinite duration and positive cash flow from the business as a backstop. A good way to think about it, the individual could take the lump sum and then go shopping for a fixed annuity. In this transaction he assumes counterparty risk with the insurer and gets the stability in cash flow. IT is more a question of cash flows than it is the underlying investments.

I guess I chose a poor analogy. I said "big lump" not "lump sum". I am saying that if I got to invest the money myself I feel than I could do better than the pension plan that is managing the investments for the entire workforce at the same time (hence the "big lump").

I'm saying that during the course of your life you could assume higher risk early on in your timeline and probably earn an overall higher rate of return, not that you could take a "lump sum" at retirement and invest it better. At retirement you should have moved to a less risky portfolio that would be earning about the same as the pension plan would be.

 

[406dn]

I quoted your post to point out a factual error.

I didn't know what your main point was. If the main point was that 401k plans shift risk to the employee also note that they shift the reward to the employee as well. Risk = Reward. I would much rather take the money and invest it myself than my employer put it into a big lump with everyone else and earn a lower return on it.

I got it.

For every one who beats the market, there is one who doesn't. In reality it is not easy to beat the market.

Back in my working days, I was the Union chairman for wage employees, at the refinery, where I worked. A refinery in the same valley, terminated their defined benefit pension, and went to a 401k. It was not the Union's idea, it was a company decision. They made that decision to benefit the COMPANY. If a few employees turn out to be winners, they don't care. They also don't care if someone exhausts the 401k and ends up old and broke. When the person leaves employment, the company knows with certainty that their obligation is done, no matter what.

The genesis of 401k plans was as a tax shelter (dodge), take your pick, for deferred bonuses to executives, at a time when the marginal rate at the top was 70%. Obviously the original benefactors of 401k's were people at the top of the income scale. They are the one's who can afford to max out the allowed contributions. They were originally thought to be an augmentation to defined benefit plans. That is not how it has worked out, as more and more companies are using them solely for a retirement benefit.

The median 401k balance for a 65 year old person is $88,500. So, half of them have less than that. The average balance for a 65 year old is around $426000. So, a few winners and many losers.

I get it, you are in a situation to be a winner with them. Most people aren't. An $88k nest egg makes for a very meager retirement.

 

[CPAjeff]

A couple thoughts:

1. I wish SS contributions were optional. I'd gladly stop contributing, with the full understanding that I'm not eligible to receive any SS benefits later in life.
2. Financial independence/financial health is not the responsibility of anyone but the individual person. It's not the government's role, the employer's role, etc. Individuals who don't have enough discipline, hustle, work ethic, etc. will continually have their income ceiling defined for them. Those with a little hustle can define their own income ceiling.

My wife and I have been extremely blessed when it comes to schooling, careers, quality investments at the right time, and a host of other things. Both she and I are first generation college grads - while I know that college isn't for everyone, it's made a world of difference for both her and I. I've never worked for an employer with a pension, but if I could go back 20ish years, I would have went into education administration, moved to Wyoming, became a high school principal, and jumped on the pension train! 100k a year pension wouldn't be too shabby.

 

[SAJ-99]

This is always interesting, in every case of people I have talked to and our own two pensions, there was no possible way to even come close to matching the pension payments with a lump sum rolled into an annuity.

Realize that is a different argument than having the money contributed to the pension all those years and investing it on your own over those years, but it is one way to show the worth of pensions.

True, because the annuity provider needs to make a profit.

Retirements are about cash flows and stability. There are different ways to get there. The 4% rule was inflation adjusted cash flow and off the starting base. It wasn’t meant to be 4% of the portfolio value each year. Sometimes you see it done different ways.

At retirement you should have moved to a less risky portfolio that would be earning about the same as the pension plan would be.

I agree. I think this sentence is key, and pretty much the point everyone is trying to make. The individual is not as good at investing as the pension board. Anything not following a fiduciary duty opens the pension to a lawsuit. The individual can do some stupid stuff.

Are pensions guaranteed? The guy I bought my place in WY from told me that he got screwed out of his pension when his employer of 35 years (co-located coal mine and power plant) filed for bankruptcy. Did some quick googling and it appears there’s some federal insurance that perhaps covers some, but not necessarily all, of it.

They are a contractual obligation. The PBGC is a government agency that manages pensions from bankrupt companies. The example that comes to mind is Delta bankruptcy. The pensioners got a significant cut in payments. Someone would argue that some of these bankruptcies are often driven by pension expenses that are so large the company can’t fund them.

 

[npaden]

I got it.

For every one who beats the market, there is one who doesn't. In reality it is not easy to beat the market.

Back in my working days, I was the Union chairman for wage employees, at the refinery, where I worked. A refinery in the same valley, terminated their defined benefit pension, and went to a 401k. It was not the Union's idea, it was a company decision. They made that decision to benefit the COMPANY. If a few employees turn out to be winners, they don't care. They also don't care if someone exhausts the 401k and ends up old and broke. When the person leaves employment, the company knows with certainty that their obligation is done, no matter what.

The genesis of 401k plans was as a tax shelter (dodge), take your pick, for deferred bonuses to executives, at a time when the marginal rate at the top was 70%. Obviously the original benefactors of 401k's were people at the top of the income scale. They are the one's who can afford to max out the allowed contributions. They were originally thought to be an augmentation to defined benefit plans. That is not how it has worked out, as more and more companies are using them solely for a retirement benefit.

The median 401k balance for a 65 year old person is $88,500. So, half of them have less than that. The average balance for a 65 year old is around $426000. So, a few winners and many losers.

I get it, you are in a situation to be a winner with them. Most people aren't. An $88k nest egg makes for a very meager retirement.

Again, argue that employers should be contributing more into 401k plans. Argue that employers should not require as much of a match. Argue that at termination employees are required to put any 401k amounts into an IRA and can't spend it on a boat. I agree with a lot of what you guys are saying. Blaming the issue on the investment vehicle is the fallacy.

Also, there are compensation limits on 401k plans for contributions for both the employer and employee so people up in the top tax brackets can't put enough away to really help them very much on their taxes. The max in 2024 was $345,000 and the most an employee can contribute and deduct was $23,000 unless you are over 50 and then you can contribute an additional $7,500. The C-suite folks at big companies have other deferred compensation plans in addition to 401ks to allow them to defer more of their income. The 401k is barely enough to sneeze at for some of them.

 

[406dn]

Again, argue that employers should be contributing more into 401k plans. Argue that employers should not require as much of a match. Argue that at termination employees are required to put any 401k amounts into an IRA and can't spend it on a boat. I agree with a lot of what you guys are saying. Blaming the issue on the investment vehicle is the fallacy.

Also, there are compensation limits on 401k plans for contributions for both the employer and employee so people up in the top tax brackets can't put enough away to really help them very much. The max in 2024 was $345,000 and the most an employee can contribute and deduct was $23,000 unless you are over 50 and then you can contribute an additional $7,500. The C-suite folks at big companies have other deferred compensation plans in addition to 401ks to allow them to defer more of their income. The 401k is barely enough to sneeze at for some of them.

Yep, and their huge balances skew the average balance tremendously. The median balance is far more representative of how adequate the program is.

Most people can't swing a $23k annual contribution to a 401k.

The plan works GREAT for the top earners, it is the bottom...maybe 70% where it comes up lacking. The further down you are on the earnings scale, the lousier deal it is.