Author Topic: Do pensions increase or decrease badassity?  (Read 5947 times)

Honest Abe

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Do pensions increase or decrease badassity?
« on: September 30, 2012, 03:34:55 PM »
Here's the skinny:

If I work until 55 I get 60% of my gross income as pension for life,
If I work until 45 it becomes 40% for life

It seems like the common opinion that you should at LEAST work until you get the full 60% (many people continue after this to get the extra 1.5% per year)

A pension is obviously a beautiful thing, but does it cause people to work too long when they can possibly achieve FI earlier?

Mrs MM

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Re: Do pensions increase or decrease badassity?
« Reply #1 on: September 30, 2012, 05:17:48 PM »
40% at 45 sounds pretty sweet to me, depending on your gross income. 

I guess it all depends on what your expenses are relative to that 40%.  If they are covered, then you're golden.  I would obviously prefer the earlier path, since 10 more years of work for 20% more doesn't seem worth it to me.  Plus, in those 10 years, you'll probably end up doing so much and learning so much that you'll be making up that additional 20% in some other way.

It's funny how the idea of more money can have you keep working an extra 10 years.  I think it does cause people to work too long....  either way, it's a good dilemma to have.  :)

arebelspy

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Re: Do pensions increase or decrease badassity?
« Reply #2 on: September 30, 2012, 06:57:42 PM »
Pensions are often a good example of golden handcuffs. 

I plan to work about 10 years in my pension-based job, and purchase 5 more years.  I can do the full retirement and get a percent at age 60, but I'll likely take it at a 4%/yr loss and take it at age 50, getting 60% of what I could get if I waited 10 years (not 60% of my salary, but 60% of my pension). It's based on some spreadsheets I've done.

I wouldn't let it tie you down.

Heck, if your savings rate is 60%, the 40% covers you completely and you wouldn't need ANY that you saved.  If your savings rate is 50%, you only need your savings to cover 10% of your income.  Pretty easy.

Post some more specific numbers if you'd like and we can calculate what you need to save, but getting 40% at 45 seems like it should be good, assuming you have a decent savings rate and that it's inflation adjusted (COLA'd).
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Honest Abe

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Re: Do pensions increase or decrease badassity?
« Reply #3 on: October 01, 2012, 04:05:10 AM »
Thank you both... I agree with the "golden handcuffs" statement, Are. I'll go over my mint account and post some numbers on an intro post soon.

sol

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Re: Do pensions increase or decrease badassity?
« Reply #4 on: October 01, 2012, 09:04:28 AM »
They're only handcuffs for people who see the glass as half empty.  Most of the country doesn't have a pension and has to save money anyway, and anyone with a pension is better off than those folks.

Most pensions (like mine) don't care so much about when you retire, they mostly care about when you start taking benefits.  If you get a 40% pension at age 45 or a 60% at age 55, what do you get if you retire at 45, live off of other savings for 10 years, and then start drawing the pension at age 55?  Usually closer to 60 than to 40%.

Don't feel locked in by a pension.  Retire whenever you think you can afford it.  Think of the pension like gravy, not part of your regular salary, and it's hard to see a downside.

bo_knows

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Re: Do pensions increase or decrease badassity?
« Reply #5 on: October 01, 2012, 09:09:45 AM »

Most pensions (like mine) don't care so much about when you retire, they mostly care about when you start taking benefits. 

Exactly.  My wife has a pension, and really all that matters is the pension value formula and when you start taking benefits.

I think that her formula (assuming you take benefits at age 60) is something like  1.7% * (Years of Service) * (Avg. Salary of last 5 years).    So, you'd just have to make a calculation as to how much that pension is worth in the future, versus staying on for another 10 years.  After our kids get to school-age, and my wife goes back from part-time to full-time, she'd need to put in at least 5 more years until she quit to keep this benefit maxed out.

Everyone's situation is different.

tooqk4u22

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Re: Do pensions increase or decrease badassity?
« Reply #6 on: October 01, 2012, 12:48:49 PM »
This whole thread just reinforces the fact that government pensions need to be reformed/retooled/eliminated.  As indicated above, they are far more valuable than a normal private sector employee could do, the math for these things are almost always wrong because the assumptions are aggressive, things change, and politicians pander, etc.

Please, please, please one of you give me the standard I contribute 10-20% to the pension fund.....do the math it doesn't come anywhere near the benefit you will ultimately get.

Honest Abe

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Re: Do pensions increase or decrease badassity?
« Reply #7 on: October 01, 2012, 01:19:33 PM »
This whole thread just reinforces the fact that government pensions need to be reformed/retooled/eliminated.  As indicated above, they are far more valuable than a normal private sector employee could do, the math for these things are almost always wrong because the assumptions are aggressive, things change, and politicians pander, etc.

Please, please, please one of you give me the standard I contribute 10-20% to the pension fund.....do the math it doesn't come anywhere near the benefit you will ultimately get.

Usually employee contributions are far less than 10%. I'm grandfathered into a 3% contribution, although now if you get hired its 6%

What most people forget to factor in is that part of the contributions come from the employer (just as they would in a 401k match.) Where municipalities run into trouble is overly optimistic future gains in the fund and in some cases making the local government legally bound to make up for the difference, leaving taxpayers on the hook. This is not a good idea, as some systems are finding out now. Most systems have retooled their contribution requirements, and upping the mandatory retirement age to 65+.

In the end, pensions aren't inherently bad, but many have been caught flat footed by the sea change that has taken place in population and the markets. If you're new in the pension system you're not getting nearly as good a deal as people used to get.

tooqk4u22

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Re: Do pensions increase or decrease badassity?
« Reply #8 on: October 01, 2012, 01:39:31 PM »
Usually employee contributions are far less than 10%. I'm grandfathered into a 3% contribution, although now if you get hired its 6%

I know, and there are some that don't require anything - but there are some that require higher.  Certainly lower doesn't make me feel better.

What most people forget to factor in is that part of the contributions come from the employer (just as they would in a 401k match.) Where municipalities run into trouble is overly optimistic future gains in the fund and in some cases making the local government legally bound to make up for the difference, leaving taxpayers on the hook. This is not a good idea, as some systems are finding out now. Most systems have retooled their contribution requirements, and upping the mandatory retirement age to 65+.

In the end, pensions aren't inherently bad, but many have been caught flat footed by the sea change that has taken place in population and the markets. If you're new in the pension system you're not getting nearly as good a deal as people used to get.

Agreed, pensions aren't bad per se - but as you suggest there such impropert management/assumptions - there is an inherent conflict because the benficiaries don't bear any of the risk of it not playing out (although this may be perceived as you suggest and may change) and the politicians that negotiate the contracts won't be around when taxes need to go up or the contract will be forgotten about.  A better way to approach it is for the government to contribute a max amount per year per employee to a union controlled/owned fund with no taxpayer backstop - if the market tanks or the assumptions are wrong then the union and its members make it up.  There may be a couple of instances like this but it would never happen across the board because unions would quickly realize the deal tehy are getting.

Setting all that aside - it is still an absurdly rich benefit when you compare what is paid in vs. what you get out.


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Re: Do pensions increase or decrease badassity?
« Reply #9 on: October 01, 2012, 02:03:48 PM »
What most folks that aren't in these systems don't know is that many of these systems were actually overfinded by the generally accepted actuarial standards applied at the end of the 1990's.  Some local government entities in California actually raised the pay out because a state law allowing this was passed by the legislature and signed by the governor.  For example, Santa Clara County, which is a CalPERS member, went from 2 percent per year of service at age 55 to 2 percent at 50 and 2.5 percent at 55 and over.  At that time I think the County was still paying the employee's contribution to CalPERS as well.

Now that the world has changed, the employees are paying a large portion of the cost of the enhanced benefits.   And CalPERS is still underfunded by any realistic standard. 

I don't know if pensions decrease badassity for natural badasses, but a lot of people that might otherwise be motivated to save and invest figure the pension has them covered and don't save in IRA's or 457 plans.

arebelspy

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Re: Do pensions increase or decrease badassity?
« Reply #10 on: October 01, 2012, 03:19:25 PM »
They're only handcuffs for people who see the glass as half empty.  Most of the country doesn't have a pension and has to save money anyway, and anyone with a pension is better off than those folks.

Most pensions (like mine) don't care so much about when you retire, they mostly care about when you start taking benefits.  If you get a 40% pension at age 45 or a 60% at age 55, what do you get if you retire at 45, live off of other savings for 10 years, and then start drawing the pension at age 55?  Usually closer to 60 than to 40%.

Don't feel locked in by a pension.  Retire whenever you think you can afford it.  Think of the pension like gravy, not part of your regular salary, and it's hard to see a downside.

This is true, but thanks to inflation the pension when you get it may be worth very little.  If I stop working at 35 and don't take the pension until 60, its value in real dollars has shrunk a lot.  So when you retire does have a very real impact, not just when you take benefits.
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sol

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Re: Do pensions increase or decrease badassity?
« Reply #11 on: October 01, 2012, 05:58:38 PM »
Setting all that aside - it is still an absurdly rich benefit when you compare what is paid in vs. what you get out.

That's kind of a broad statement.  Pensions come in many different flavors, and you can't paint them all with the same brush.

I'm a federal employee and my pension is only 1% of my highest-3-year salary average times years of service.  Doing the math on that (and assuming historic market returns for the pension fund in which it is invested, and average life expectancy), I would have to work 41 years before I get more out of it than is put in by both me and my employer.  I don't intend to work 41 years, since I didn't even start until I was 31.

Federal pensions were a lot more generous until the introduction of FERS in the 1980s.  The current system is still a good deal if you start young and work a long career.  It's a pretty crappy deal if you want to retire early.

On the bright side, the employer contribution to my pension doesn't count as part of my salary, so I don't pay taxes on it.  Sucks that my salary is reduced by that amount compared to my market value in the private sector, but I'm trying to find the silver lining here.

And on the flip side, the federal pension fund is the first place Congress goes when the budget comes up short.  It gets raided to pay for wars and medicare payments on as semiregular basis, and employee contributions go up and benefits go down every time we have a budget crisis, so it's not exactly a guaranteed benefit.
« Last Edit: October 01, 2012, 06:19:24 PM by sol »