Author Topic: Risks of relying on a pension for retirement  (Read 8937 times)

astvilla

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Risks of relying on a pension for retirement
« on: January 14, 2015, 01:16:16 PM »
So my parents are retired and receive a very generous pension from the state government (50k/year) and they haven't collected social security yet which I'm not including here for now.  They were pretty poor investors and knew very little so their 401ks or nowhere near where they should be. They panicked and sold low, buy high so didn't enjoy the nice run we've had since 2009. They have also never invested in bonds and never believed in them until recently.

My concern is that they are very confident that the pension will take care of everything and keep up their standard of living. I don't know much about pensions seeing that I'll never likely get one but am wondering what are the risks of pension funds and is it okay for my parents now retired to just sit back and confidently receive the pension without worries about any potential threat to the pension. Can pension payments change or are they agreements that cannot be broken by the state government? Are there risks of defaults, bankruptcy, inability to pay by state that can threaten this stream of income for them? FWIW, I think my state's credit rating has been downgraded 9 times and the state economy is really bad relative to the average.

Are there risks or worries about just relying on pension and SS to handle everything and not take an active approach towards allocating their other assets and investing in broadly diversified index funds?


(If you guessed NJ then you're right)

I'm trying to get my parents to really think about their retirement (even though they are already retired) and they are now relying on a still relatively new Boglehead child to handle their retirement accounts. I'm worried about their overconfidence on pension payments and want them to realize that they need to listen to what I've read on these forums and Bogleheads but have trouble getting them to take steps though they understand the concepts.

hunniebun

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Re: Risks of relying on a pension for retirement
« Reply #1 on: January 14, 2015, 01:36:00 PM »
I be will interested to hear other's thoughts on this topic. I am a public servant and contribute to the pension plan (in Canada). They have recently changed the plan for new hires, increased the contributions, increased the time they must work etc.. But for people in the plan before, it is the same.  I am a federal employee and when I have mentioned the possibility of default on the pension fund in the future most people just laugh and say that if the federal government defaults on the pension plan we will all be worried about more dire matters than receiving our pension checks (I assume they mean civil unrest, war, complete economic collapse etc.).  But from what I understand many states in the US are dangerously close to bankruptcy.  Presumably they will be bailed out if that were the case, so maybe not a huge concern? 

MrMoogle

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Re: Risks of relying on a pension for retirement
« Reply #2 on: January 14, 2015, 01:52:14 PM »
Detroit is a good example of what can go wrong with pensions:
http://time.com/money/3582218/retirement-detroit-pension-savers-warning/#money/3582218/retirement-detroit-pension-savers-warning/

They've lost part of what they were expecting, and it's likely they will lose more.  States are more robust than some cities, like Detroit, but most pension plans are underfunded, and expect current taxes to help pay for them.  But for Detroit, they've lost half or more of their population, so their taxes have dropped significantly, so they can't afford these pensions. 

I would definitely be concerned that down the road your pension will be less than you get today.  Just like SS will be less down the road.  Will it affect your parents?  Maybe, maybe not.  If they're living pension paycheck to paycheck, and have no other savings, I would work on lowering their expenses, so if it does hit, they can afford it.

Gone Fishing

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Re: Risks of relying on a pension for retirement
« Reply #3 on: January 14, 2015, 02:06:23 PM »
A quick search turned up this: http://www.njspotlight.com/stories/14/12/03/moody-s-new-jersey-s-pension-funds-could-run-dry-in-just-10-years/

Sounds pretty bad. 

Some things they can do:

Hold off on SS as long as possible.
Stay out of their retirement funds as much as possible, or even add to them if able.
At this point, they can not take much risk with their investments.  They would probably be best served by a conservative income fund.  If even that that is too much volitility for them, an annuity may be an option, but they should keep enough liquid for a lifetime of "emergencies".
If they are still able, a little part time work can go a long way to preserving what little savings they have.
Other options may include a reverse mortgage if they have substantial home equity.

sol

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Re: Risks of relying on a pension for retirement
« Reply #4 on: January 14, 2015, 02:15:45 PM »
Despite the dire warnings from conservative think tanks, there has never been a state pension default.  History never predicts the future perfectly, but it's a pretty good place to start.

Most of the chatter about how horrible pensions are is just thinly veiled attempts to discredit unions, because unions are the only big money bundler for the democratic party.  You may notice it is only ever republicans who complain about how pensions are supposedly ruining America.

Read up if you're interested: http://ourfuture.org/20120813/discover-the-network-out-to-crush-our-public-workers

MrsPete

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Re: Risks of relying on a pension for retirement
« Reply #5 on: January 14, 2015, 03:40:35 PM »
Things I'd want to know before venturing an opinion:

- How secure is their pension?  You say it's a state pension; that is probably more secure than a private company's pension. 

- Do they EACH have a pension?  And did your parents retire from the same system or different workplaces?  Two separate pensions are more secure than two pensions that dip from the same well. 

- Does their pension include cost-of-living increases?  How are these determined? 

- Do they have a paid-for house?  Knocking off the cost of housing makes a huge difference in a couple's cost of living.

- You say their pension is "very generous".  Does that mean they can live off less than they're receiving?  If so, what are they doing with the excess?  I'd suggest that you try to convince them that living off a pension alone is a little risky; if something should change, they could be "without"; convince them that they should put aside a bit each month so that they're safe from inflation or changes in the pension. 

- How is their health?  The real question, of course, is how long are they likely to live?  I'd consider that before deciding whether to jump in and collect Social Security right away . . . or wait.

- Does their pension include health care?

Without having this information, I'd say they're probably okay.  They've already put in their years to qualify for their pension, and they're already in the system.  It's harder to cut someone off (or reduce his benefits) if he's already a pensioner.  It's easier to hurt a younger employee who isn't yet retired. 

Cassie

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Re: Risks of relying on a pension for retirement
« Reply #6 on: January 14, 2015, 04:50:12 PM »
I really would not worry about state pensions.  I think it is the new hires that will be offered less in the future but they will take that job with that understanding.

beltim

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Re: Risks of relying on a pension for retirement
« Reply #7 on: January 14, 2015, 05:01:15 PM »
My concern is that they are very confident that the pension will take care of everything and keep up their standard of living. I don't know much about pensions seeing that I'll never likely get one but am wondering what are the risks of pension funds and is it okay for my parents now retired to just sit back and confidently receive the pension without worries about any potential threat to the pension. Can pension payments change or are they agreements that cannot be broken by the state government? Are there risks of defaults, bankruptcy, inability to pay by state that can threaten this stream of income for them? FWIW, I think my state's credit rating has been downgraded 9 times and the state economy is really bad relative to the average.
...

I'm trying to get my parents to really think about their retirement (even though they are already retired) and they are now relying on a still relatively new Boglehead child to handle their retirement accounts. I'm worried about their overconfidence on pension payments and want them to realize that they need to listen to what I've read on these forums and Bogleheads but have trouble getting them to take steps though they understand the concepts.

If you want them to take steps, you need to outline why their current strategy is a problem.  Considering that you admit that you don't know about pensions or how well funded their pension plan is, I'd suggest that you need to do a whole lot more research before you try to convince your parents of anything (what are you actually suggesting they do, by the way?  other than "Bogleheads" blah blah blah you don't actually say what they should be doing).

New Jersey's pension system is in relatively bad shape, but as Sol points out, no state has ever defaulted on its pension benefits.  There's a lot of interesting reading out there about the different factors that go into whether it's even legal to reduce pension benefits in New Jersey (for example http://www.njlawjournal.com/cle-and-events/id=1202713770229/NJ-Pension-Restructuring-Will-Be-Messy?mcode=1202619276103&curindex=0&slreturn=20150014155213).  Even in the worst city bankruptcy that I can think of in terms of how the pensions were affected (Detroit), city retirees saw their pensions reduced by 4.5% and the loss of cost of living increases (http://money.cnn.com/2014/04/17/retirement/detroit-pension-cuts/index.html).

Given that states can't enter bankruptcy, it's unlikely that public employee pensions will be reduced.  Even in the worst case where pensions are reduced, it's unlikely to be drastic (at first, at least – the loss of cost of living increases can add up to a lot over 30 years).  And given that your parents aren't even getting Social Security yet, they have a really nice backup that provides inflation protection.


astvilla

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Re: Risks of relying on a pension for retirement
« Reply #8 on: January 14, 2015, 06:28:58 PM »
Things I'd want to know before venturing an opinion:

- How secure is their pension?  You say it's a state pension; that is probably more secure than a private company's pension.  yes one state, one private

- Do they EACH have a pension?  And did your parents retire from the same system or different workplaces?  Two separate pensions are more secure than two pensions that dip from the same well.  yes, different work places, one state, one private, private of course is much less

- Does their pension include cost-of-living increases?  How are these determined?  they say no but i'm not sure they actually know a whole lot about it.

- Do they have a paid-for house?  Knocking off the cost of housing makes a huge difference in a couple's cost of living. they do, this is 1 good thing they did, no mortgage. problem is property tax is 14,000/yr. i've talked downsizing to them and they say they will but don't seem to make any progress to it. in the process of some remodeling to make it more sellable but im not sure. can easily move to smaller home and save 10K on property tax/yr if they actually mean to, they want the high life though, it's not very mustachian

- You say their pension is "very generous".  Does that mean they can live off less than they're receiving?  If so, what are they doing with the excess?  I'd suggest that you try to convince them that living off a pension alone is a little risky; if something should change, they could be "without"; convince them that they should put aside a bit each month so that they're safe from inflation or changes in the pension.  they can live off what receiving. they haven't touched their SS, they want to put it off to collect more later. not sure what a MMM would recommend. money now or money later? it's not as generous as i'd imagine for a teacher or police office but it's not bad, it's an average salary for some in a year

- How is their health?  The real question, of course, is how long are they likely to live?  I'd consider that before deciding whether to jump in and collect Social Security right away . . . or wait. thankfully pretty healthy so far. i'm trying to get them to eat more healthy and they know it's important but they like to buy a lot of junk food (cookies, chocolate), my suggestions on health are pretty much on deaf ears

- Does their pension include health care? no

Without having this information, I'd say they're probably okay.  They've already put in their years to qualify for their pension, and they're already in the system.  It's harder to cut someone off (or reduce his benefits) if he's already a pensioner.  It's easier to hurt a younger employee who isn't yet retired.

i think they're okay but i'm just worried about over reliance on a pension to provide main source of income and have poor savings rate and poor investment choices. one parent likes to gamble, lost a lot of money on HAL, bought it right before it tanked and I mean a good chunk. also advised me to buy IBM right before it tanked. i don't want them to take it so easy and gamble their other assets like 401k away because they think they are safe in a pension fund and SS. from what i'm seeing, pensions and SS make people really lazy about retirement planning and it could potentially cost them but it's not as drastic as it seems for now.

this is a real terrible motive and it probably makes me a terrible person but i also don't want inheritance to be gambled away either for no real good reason. imo, i'm not planning on relying or inheriting it for another 20 years maybe. i'm aiming for my own financial independence by myself but it would be sad to see them waste everything away. it would also not bother me if they spent all their money for their own leisures like eating, traveling, activities, etc. it would bother me if they spent it all wasted on stocks. (they are your typical buy high sell low type of investor)

while NJ's pension system is in bad shape, i'm more concerned that pensions give them a secure blanket to throw the other money like in their 401ks (not a lot relative to others but a decent amount) away while also keeping a high cost lifestyle (pretty high for their age). if they don't throw money away on stock picks, and instead follow the advice here, i feel they can have a better retirement, go out and travel, really enjoy life which would be achievable by not gambling and not paying such a high property tax. i want them to travel, see the world or enjoy their retirement however they want. i just didn't think that enjoying retirement was about stock picking and looking at day to day events in the economy. at the same time it also means the inheritance is gambled away but to be honest if things go well i can reach FI on my own at 45-55 and my parents will hopefully be around then too.

sol

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Re: Risks of relying on a pension for retirement
« Reply #9 on: January 14, 2015, 07:44:06 PM »
I think that spending all of your money gambling and spending all of your money travelling the world are both valid choices for adults to make with their own dollars.  And these are their own dollars, not yours, so maybe Back That Ass Up?

Yes, of course having a pension makes people lazy about their own retirement planning.  That's the whole point of a pension.  It's designed to take care of people so they can focus their life energy on other pursuits instead of becoming senior members of the mustache or bogleheads forums.  Why are you trying to change that?

I'm pretty sure that if I went to my parents and told them to change how they spend their money they would laugh at me.   Then one of them would say something about how "I brought you into this world..." while feigning a backhand to the face, and then they would secretly discuss what an ass I am after I'd gone home for the night.

chasesfish

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Re: Risks of relying on a pension for retirement
« Reply #10 on: January 15, 2015, 04:59:34 AM »
Despite the dire warnings from conservative think tanks, there has never been a state pension default.  History never predicts the future perfectly, but it's a pretty good place to start.

Most of the chatter about how horrible pensions are is just thinly veiled attempts to discredit unions, because unions are the only big money bundler for the democratic party.  You may notice it is only ever republicans who complain about how pensions are supposedly ruining America.

Read up if you're interested: http://ourfuture.org/20120813/discover-the-network-out-to-crush-our-public-workers

I'm pretty sure Sol and I lean differently in our Libertarian views, but he's spot on with his comments.

I think a STATE pension plan will be okay.  The STATE plans have full taxing authority against their residents to make up for any differences.  I'm in finance and think the math works okay for every state.  They will have to make some painful changes in either reforming future benefits for people working today or increase taxes to supplement these state pension promises, but overall there is still enough money there.  California and Illinois have issues, but they also have two of the three largest metropolitan areas in the country.  NJ has a huge chunk of New York City and Philadelphia. 

There are issues, but there's also capacity to fix them.

If we were discussing a municipal pension or private sector pension, there is more risk.  Detroit is small enough for everyone with capacity to leave.  The same is true for other cities/counties.

The debate gets politically charged because the changes to future retirees and current taxpayers is painful, but the math is what it is.  Its about capacity and every state has the capacity to deal with their pension issues.

LalsConstant

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Re: Risks of relying on a pension for retirement
« Reply #11 on: January 15, 2015, 07:01:26 AM »
Someone should be auditing the pension every year.  Get that report.  Some kind of information in there should tell you how long the fund will be solvent (become insolvent).  Plan like there will be no more payments made after that date.  That date is going to keep moving as political and economic winds blow.

Find out if they make any increase in payments over time.  Probably not.  The one I'm a member of hasn't increased payouts for inflation in over 20 years.

They're going to have to be nimble in their lifestyle.  But honestly they are better off than a great many people, I don't mean to sound so dour.  Can they get some menial part time job?  Even if it's just minimum wage, even if it's just a few hundred a month for the next few years, that can matter a great deal even at their age.

But honestly unless it's a situation where you have guardianship and/or POA to make decisions here, the best you will probably be able to do is encourage them to think about these things.

The debate gets politically charged because the changes to future retirees and current taxpayers is painful, but the math is what it is.  Its about capacity and every state has the capacity to deal with their pension issues.

But bear in mind that government employees are often seen as lazy, incompetent do nothings working unnecessary jobs that shouldn't exist in the first place.  Oh there certainly is plenty of waste in government, but I know very well there's no "typical" government worker!  That doesn't matter though, the perception is reality.

The 2008 recession is still being felt by most people.  Suddenly what used to be widely recognized as low paying and lackluster but steady work (not necessarily true either) suddenly looks like Fat City to more and more people.  It's an easily identifiable group that's easy to demonize, and no, it doesn't all come from one side of the political aisle either.

There are, every year, legislative proposals, serious ones, to eliminate incentives, pay, benefits, etc.  Different advocacy groups track them.  They play games with the livelihoods of state employees on a whim.  In my home state of Texas, there was even a year they opted to shift the pay date for state employees forward to make the budget balance one year.  That's not even counting all the cuckoo bird stuff I hear like paying female and minority employees bonuses because... genitalia and skin tone?  Or to cut out all health benefits and throw us on the Obamacare exchanges (I don't think you can even do that but whole different can of worms there).  To be fair that stuff is probably all just talk and nonsense (no actual proposed legislation ever seems to come from it), but it's the tip of the political iceberg.

So far the response in Texas to fixing insolvency has been to penalize the current employees more to try to fix the gap rather than making enough appropriations to the pension fund (though some have been made).  The point being, while there are some forward thinking people in every state who want to run an efficient, responsible and sustainable government who will try to fix it, but the push to not fix it to give "lazy wasteful" people "what they deserve" is pretty strong too.

I fear even if the more forward thinking people win out, the political albatross around their neck may slow their efforts too much.

MrsPete

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Re: Risks of relying on a pension for retirement
« Reply #12 on: January 15, 2015, 08:35:30 AM »
And these are their own dollars, not yours, so maybe Back That Ass Up?
Unless the possibility exists that the parents will spend all of their own dollars . . . and then expect the children to toss their dollars to the parents.  Does this expectation exist within the family?  You and I don't know.

Señora Savings

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Re: Risks of relying on a pension for retirement
« Reply #13 on: January 15, 2015, 09:03:46 AM »
this is a real terrible motive and it probably makes me a terrible person but i also don't want inheritance to be gambled away either for no real good reason. imo, i'm not planning on relying or inheriting it for another 20 years maybe. i'm aiming for my own financial independence by myself but it would be sad to see them waste everything away. it would also not bother me if they spent all their money for their own leisures like eating, traveling, activities, etc. it would bother me if they spent it all wasted on stocks. (they are your typical buy high sell low type of investor)

I would approach them with this.  Phrase it to emphasis that you want them to spend their money taking care of themselves and enjoying their old age.  Maybe say that you want them to have the money to fly out to visit their grandkids.  But don't try to scare your parents with the prospect of bankruptcy to ensure an inheritance.  It really isn't realistic and the more dumb advice you give them the less they'll listen to your good advice.

Siobhan

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Re: Risks of relying on a pension for retirement
« Reply #14 on: January 15, 2015, 09:44:41 AM »
My father has been retired from the State of NJ for almost 15 years now.  You know what's happened in that time?  His health insurance OOP rates have quadrupled (and Christie is currently trying to take away ALL retiree health insurance) so that's what you really have to worry about.  Even under the current plan, if my father dies, my mothers monthly premium will be close to 2k a month...essentially the entire part of the pension she'd be entitled to after his death. 

The COLA's haven't kept up with standard rates, so their paycheck is less and less.   The state didn't fund it's portion of the pension plan for many years, and it's now coming down the pipe that it could be insolvent in the near future, they still aren't meeting current funding obligations. My parents cannot move out of the state because the health insurance ONLY covers the state of NJ, and FL for an added premium.  To top it, their property taxes on a house that hasn't been re assessed since 1980 are up to 9k a year since they did away with the senior homestead exemption.  Not to mention that glorious penalty that NJ has if you sell your house and move out of state...the so called "exit tax" that no one really understands.

That state is a seething cesspool essentially.  Everyone is right, it probably won't go bankrupt, but they have been, and will continue to trim the benefits and increase the cost of the health insurance etc while making moving to a more affordable area next to impossible..eventually squeezing people like our parents to the point of near breaking.  My parents can't even move to a smaller house IN state, because the property taxes would double and a smaller house would only be about 50k less then the selling price of their mid size one...which the realtors fees and additional taxes would take care of those savings in no time.

TrMama

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Re: Risks of relying on a pension for retirement
« Reply #15 on: January 15, 2015, 12:36:30 PM »
Our retirement planning is based heavily on DH's pension. Like a PP, his pension will be from the government of Canada and I'm not worried about it disappearing. However, I am concerned about my survivor's benefits if he dies before I do. Since he's older than I am and hasn't always led a healthy life, I'm actually quite concerned about the issue. Being a widow would suck. Being a broke widow would really, really suck. In your case, I'd find out about what happens if the pensioner dies before his/her spouse.

astvilla

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Re: Risks of relying on a pension for retirement
« Reply #16 on: January 15, 2015, 01:01:53 PM »
And these are their own dollars, not yours, so maybe Back That Ass Up?
Unless the possibility exists that the parents will spend all of their own dollars . . . and then expect the children to toss their dollars to the parents.  Does this expectation exist within the family?  You and I don't know.

Possibly, they've jokingly asked me for loans on things. They aren't the type to spend a lot, just one really likes gambling on stocks and frequently makes many poor choices.

I know my parents have it pretty bad. My parents don't seem concerned as they should be, I don't know much about NJ's pension system other than knowing there is a lot more bad to it than good.

They say they will downsize (adding 10K/yr potentially, very big). Downsizing also will mean less cleaning, less utilities, less maintenance, less stress. Also they want to save half of SS when they do collect, when that is I think it's sooner than later.

But it is possible though remote IMO that I will have to start providing for them when I'm barely keeping up (though I am doing much better than others for my age group, in NJ it doesn't feel that way at all). They verbally at least said they expect me to take care of them financially if anything ever happens. I'm not really rich either in absolute terms though relative to other young people I'm doing well. I'm trying to make my own retirement too, I can't honestly be expected to take care of 2 pensioners, myself, kids/future family (unless I can't afford because of parents) all at the same time? I wonder if I'm the only one realizing that young people are really getting screwed here on so many fronts. At least they had me late so I won't be entering retirement as they are hitting 80-90. I know it's better to have a bigger age gap between kids and parents so when parents hit 80-90, kids aren't hitting 55-70 because they have to take care of parent's health problems and their own which further wears and breaks them down which I've seen.

It seems to vary state by state, NJ for being notable as far as I know, not sure if there are others that are doing bad, some mentioned CA and IL. What advice would you give my parents (more targeted for NJ) to fix their spending habits and too relaxed IMO approach towards their retirement?
My father has been retired from the State of NJ for almost 15 years now.  You know what's happened in that time?  His health insurance OOP rates have quadrupled (and Christie is currently trying to take away ALL retiree health insurance) so that's what you really have to worry about.  Even under the current plan, if my father dies, my mothers monthly premium will be close to 2k a month...essentially the entire part of the pension she'd be entitled to after his death. 

The COLA's haven't kept up with standard rates, so their paycheck is less and less.   The state didn't fund it's portion of the pension plan for many years, and it's now coming down the pipe that it could be insolvent in the near future, they still aren't meeting current funding obligations. My parents cannot move out of the state because the health insurance ONLY covers the state of NJ, and FL for an added premium.  To top it, their property taxes on a house that hasn't been re assessed since 1980 are up to 9k a year since they did away with the senior homestead exemption.  Not to mention that glorious penalty that NJ has if you sell your house and move out of state...the so called "exit tax" that no one really understands.

That state is a seething cesspool essentially.  Everyone is right, it probably won't go bankrupt, but they have been, and will continue to trim the benefits and increase the cost of the health insurance etc while making moving to a more affordable area next to impossible..eventually squeezing people like our parents to the point of near breaking.  My parents can't even move to a smaller house IN state, because the property taxes would double and a smaller house would only be about 50k less then the selling price of their mid size one...which the realtors fees and additional taxes would take care of those savings in no time.

Wow never knew I lived in such a bad state for so long. How did it end up like this? I didn't vote for Christie and I'm wondering how it ended up like this. My mom said though that governors Whitman and McGreevey (probably less him) did dip into the pension funds for state budgets when they weren't supposed to because they said there's too much in it. Then moved them to 401ks instead. At first when my parents told me how much they were getting for their pension I thought it was criminal and could understand Christie wanting to cut it, even I supported it, but now, I think it's maybe a bit more dire situation for my parents than I thought and they need to be much more careful managing their retirement money.
« Last Edit: January 15, 2015, 01:18:52 PM by fewaopi »

Siobhan

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Re: Risks of relying on a pension for retirement
« Reply #17 on: January 15, 2015, 03:31:45 PM »
Yea Whitman was TERRIBLE for the pensions, didn't fund jack crap for years, essentially used what was supposed to be the states contribution to the pension funds to balance the budget every year.  If I recall there were also a few top officials during that time that were investigated for embezzlement.  They also had massive downsizings and if you were 'lucky' enough to keep your job like my dad was, they bumped you down a couple of pay grades and expected you to do that job, and the one you just got bumped from.

My dads pension is about the same as what yours will be (slightly less at around 42k)...and I can tell you they are BARELY keeping their heads above water with that and their social security, and they aren't super spendy.  A part of that is my dads medical, his copays and premiums totaled out to 14k alone last year.  Plus property taxes are 9k so that's 23 grand right there. We will essentially have to support my mother when my father dies (*SHUDDER* because my mother takes crazy manipulative to a whole new level)

You may also want to look into estate taxes in the state, they can be a little crazy too.


Cassie

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Re: Risks of relying on a pension for retirement
« Reply #18 on: January 15, 2015, 03:59:15 PM »
What about selling the house & renting an apartment? My parents did that & it helped them stretch their $ for a long time & funded some nice travel.  Many states have low income nice senior housing once the $ is gone also.

Gin1984

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Re: Risks of relying on a pension for retirement
« Reply #19 on: January 15, 2015, 04:13:06 PM »
And these are their own dollars, not yours, so maybe Back That Ass Up?
Unless the possibility exists that the parents will spend all of their own dollars . . . and then expect the children to toss their dollars to the parents.  Does this expectation exist within the family?  You and I don't know.
And some states children can have a fiscal responsibility to their parents.  I have read about nursing homes that have sued children of patients, and winning.

wardkf

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Re: Risks of relying on a pension for retirement
« Reply #20 on: January 15, 2015, 08:08:48 PM »
Many state pension systems are substantially underfunded, are eating up increasing shares of state operating budgets, have overly optimistic estimates of investment returns, and are up against bad demographic realities, even before considering taxpayers leaving the state because they don't want to support six-figure public retirees when they're barely making median incomes.

http://pensiontsunami.com is a good round-up of public pension-related news, coming from a particular point of view (with which I generally agree).

The most likely outcome is continued lengthening of vesting periods for new employees, increasing contributions for existing employees, reductions in future benefits for existing employees, increasing health care costs for retirees (generally a separate issue), and, in the worst states (Illinois, California, and a few others) reductions in benefits for current retirees.

The Titanic never sank until it did. 

Villanelle

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Re: Risks of relying on a pension for retirement
« Reply #21 on: January 16, 2015, 06:45:42 AM »
We are relying heavily on DH's pension, but his is a bit different as it is (will be) military.

I think for the most part, changes will affect new employees, or if things get really bad, there will be changes for retirees but the pension won't go away entirely. 

astvilla

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Re: Risks of relying on a pension for retirement
« Reply #22 on: January 16, 2015, 07:17:27 AM »
I think you need to talk to my parents, they seem way to relaxed. They pay 14K in property tax, not too spendy, house paid off, no car loans or other loans, but I don't think their medical is so high. maybe some got hike and some didn't? They are pretty healthy though, only on 1 medication each.

i've heard about estate taxes in NJ are pretty bad. apparently the only one with inheritance and estate tax together. i've talked to them about this and while not to concerned because it's not immediate, i think they need to learn more about it. any idea on resources about learning nj estate tax law and rates? personal stories?

wish i could get you to talk to my parents and tell them that not everything will be okay and they need to be a bit more careful.

What about selling the house & renting an apartment? My parents did that & it helped them stretch their $ for a long time & funded some nice travel.  Many states have low income nice senior housing once the $ is gone also.

my parents want to live the "good" life so they won't rent. they will downsize though which should help save at least 10K/year but no moves have been made to downsize except for spending more on remodeling the house to make it better for selling. the issue with real estate in NJ is some of the higher end homes with high property taxes are listed for months to years. one house i know has been on off the market for about 7 years, hasn't found a buyer. maybe the seller is too greedy or tax to high.

i am trying to get them to be more healthy and i think compared to other seniors, they have less health problems. the problem im concerned is they won't have enough for healthcare and i will be held responsible for all their medical costs (i'm an only child). considering i don't have much money myself and im doing better than 90% of people in my age group, a possibility exists for me and for many im sure that FIRE will be delayed or impossible. this is my biggest fear. but they are healthy and have alright medical history.

no survivor benefits for the dad. thankfully the mom is more serious about good health.

Siobhan

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beltim

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Re: Risks of relying on a pension for retirement
« Reply #24 on: January 16, 2015, 11:48:02 AM »
At first when my parents told me how much they were getting for their pension I thought it was criminal and could understand Christie wanting to cut it, even I supported it, but now, I think it's maybe a bit more dire situation for my parents than I thought and they need to be much more careful managing their retirement money.

You really, really need to learn how pensions work.  Let's take an example from the state of New Jersey, where somewhere starts their career making $50k and sees 3% annual increases.  After 25 years they hit that six-figure mark that wardkf was so concerned about.  At that point, they'd be eligible for a pension of just under $45k (this is more generous than the average public employee pension, particularly for plans that also pay into Social Security).  How much money, you may wonder, does this cost the state?

Well, I set up an Excel spreadsheet to figure that out, and I've attached it here so you can play with the assumptions.  Basically, assuming a 7% annual return, it would take contributions of 12% of the employees salary each year to fund the average employee pension.  Note: the 4% rule isn't applicable here because for a pension fund of any reasonable size, a 90% success rate isn't necessary because half of retirees will live longer than the median and half will not live as long.  So the applicable percentage of the fund that can go to paying pensions is about 9% (a 75% stock/25% bond portfolio can withstand a 9% withdrawal rate for 30 years [well above the average length a pension is paid] with a 54% success rate: http://www.aaii.com/journal/article/retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable?utm_source=sitesearch&utm_medium=click).  So the cost to the state is a mere 12% of the employees salary each year they are employed.

But wait, there's more!  Public employees in NJ are required to contribute to the pension fund themselves!  I'm not sure what the rate is for all employees, but teachers are required to contribute 6.5% of their salary to the pension fund (http://finance.zacks.com/new-jersey-teacher-retirement-benefits-6165.html).  That means that the state only has to contribute 5.5% of employee salary to the pension fund to make the benefits work out. 

So no, a public employee benefit that adds an additional 5.5% to salary expenses is not criminal.  What is criminal is NJ not funding the pension system as required by law: http://www.njspotlight.com/stories/14/05/21/christie-s-2-4-billion-cut-triggers-battle-over-future-of-nj-pension-system/
« Last Edit: January 16, 2015, 11:54:59 AM by beltim »

astvilla

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Re: Risks of relying on a pension for retirement
« Reply #25 on: January 16, 2015, 01:06:08 PM »
At first when my parents told me how much they were getting for their pension I thought it was criminal and could understand Christie wanting to cut it, even I supported it, but now, I think it's maybe a bit more dire situation for my parents than I thought and they need to be much more careful managing their retirement money.

You really, really need to learn how pensions work.  Let's take an example from the state of New Jersey, where somewhere starts their career making $50k and sees 3% annual increases.  After 25 years they hit that six-figure mark that wardkf was so concerned about.  At that point, they'd be eligible for a pension of just under $45k (this is more generous than the average public employee pension, particularly for plans that also pay into Social Security).  How much money, you may wonder, does this cost the state?

Well, I set up an Excel spreadsheet to figure that out, and I've attached it here so you can play with the assumptions.  Basically, assuming a 7% annual return, it would take contributions of 12% of the employees salary each year to fund the average employee pension.  Note: the 4% rule isn't applicable here because for a pension fund of any reasonable size, a 90% success rate isn't necessary because half of retirees will live longer than the median and half will not live as long.  So the applicable percentage of the fund that can go to paying pensions is about 9% (a 75% stock/25% bond portfolio can withstand a 9% withdrawal rate for 30 years [well above the average length a pension is paid] with a 54% success rate: http://www.aaii.com/journal/article/retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable?utm_source=sitesearch&utm_medium=click).  So the cost to the state is a mere 12% of the employees salary each year they are employed.

But wait, there's more!  Public employees in NJ are required to contribute to the pension fund themselves!  I'm not sure what the rate is for all employees, but teachers are required to contribute 6.5% of their salary to the pension fund (http://finance.zacks.com/new-jersey-teacher-retirement-benefits-6165.html).  That means that the state only has to contribute 5.5% of employee salary to the pension fund to make the benefits work out. 

So no, a public employee benefit that adds an additional 5.5% to salary expenses is not criminal.  What is criminal is NJ not funding the pension system as required by law: http://www.njspotlight.com/stories/14/05/21/christie-s-2-4-billion-cut-triggers-battle-over-future-of-nj-pension-system/

sorry when i meant criminal i meant "really high" or so "high" it was criminal. i didn't mean it was an actual crime to get a pension, i just thought the amount at first was so high that a lot of other workers not in the public sector would be very jealous and envious and jump in with christie in slashing and destroying it.

but on closer inspection i realize it's not really a lot and know a lot of promises were broken time and time again by Whitman and Christie and can see them more for the wolves they are now. which was why i started the thread cause i want my parents to be more careful with their money and not solely rely on a pension. it seems political winds have influence on how my parent's will retire but i want to help them control the things they can control by saving, not spending so much, invest not gamble on individual stocks, etc, but that message is not easy to get across sometimes for my dad.

wardkf

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Re: Risks of relying on a pension for retirement
« Reply #26 on: January 16, 2015, 06:01:35 PM »
Six-figure pensions, Beltim, not six-figure incomes while working.  Such as in Bell City, California...admittedly an aberration.  But there are many stories of public employees padding their pensions by working loads of overtime and other tricks in their final years of work--the years that count in the pension calculation--aided and abetted by their colleagues, who are hoping to pull the same trick themselves.  Many have received pensions in excess of their salaries.

Yes, this gaming, most egregiously in CA and, I believe, IL, is not the norm.  But few states have pension systems sustainable over the long term.  One can complain about the pittance retirees receive or the unfairness of it all or whatever as much as one wants.  But demographics and math will not be denied.

wardkf

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Re: Risks of relying on a pension for retirement
« Reply #27 on: January 16, 2015, 06:24:18 PM »
And, beltim, your last point is mine as well.  One reason pensions are underfunded in so many states is because there are competing priorities for funding.  And even though many states are not making their full required contributions, their contributions are increasing, taking up a greater and greater share of operating budgets.

Again, things that are not sustainable are not sustainable.  Public pensions in many states likely fall in this category.

What does this mean?  Two things--the younger you are, the more likely your "returns" from a public pension will be lower; and planning for retirement on a pension alone (whether public or private) is most likely foolhardy.

Social Security is a pension system.  Is there anyone who doesn't believe benefits will be cut or contributions (your taxes) increased, or both, in the not-too-distant future?  The demographics are the same for other public pension systems to a greater or lesser degree.