401k match vs pension

[mistymoney]

About 20 years ago, I left a job 11 month before qualifying for the pension (5 year mark). Turns out, that was the closest I ever got to one, and although I had longer tenures at 3 employers since then, none has offered a pension.

I left that job for a 20k increase in pay with a 4% 401k match (pension job only gave 500/year for 401k match due to the pension). I thought this was a much better deal as I had the job offer and when I qualified for the pension, it was only going to be about 250/month (5% of my then salary). It didn't seem a lot unless you stayed with the employer longer. I don't know if it would have COL adjust by the time I took it or not. But it didn't seem worth staying for.

Seems that a higher salary with 401k match would be at least an equitable exchange. Spoiler! it is not!

My current employer has a good match comparatively (can be up to 7% of salary) and my current salary is 3x what is was at that pension job. My 401k keeps seaparate tally of total for my and employers contributions include growth in the funds, etc. Well the past 5 years of 7% matching at 3x the salary isn't enough to match that 250/month at 4% withdrawl - not even looking at inflation over the past 20 years.

Was a rather sobering look at things. Thought I would share!

Employers were able to really reduce risk by dropping pensions, and I think that is fine as pension obligations hang on to an organization in negative ways sometimes, but they shoudl have put more money into the matches. I think we have been normalized to these low matches without pensions and then 7% sounds like a whole lot, but even after years of accumulation it really doesn't go very far.

Since this is the highest salary I have ever had (by a bit) with the largest match I've ever had, even without goood accounting, employer matches really haven't moved my bottom line by much. Been a bit disappointing to look into this, actually.

[mistymoney]

Oh forgot I had yet another disappoint data point!

My immediately preceeding employer to this had no match, but an ESOP retirement plan. 8 years that and that balance is only~ 23k, $915 a year under the 4% rule.

8 years I gave them, lol!!

[TimCFJ40]

The 4% rule puts the value of a $250/mo pension at $75,000 at retirement age.

Assuming you still had several decades before retirement when you left that job, the present value of the pension when you left the company was fairly small.  I wouldn't fret it or be all that disappointed. 

[J.P. MoreGains]

I think about this too... I just finished year one at an employer that offers a pension at 5 years.

If I make it to 5 years I should get around $1,100 a month... which for me is significant since I want to retire in an affordable country. That is some nice stability.

But... I also think of the opportunity cost of trying to go and make more money now. My earnings aren't that high, I'm saving and investing a lot. If I could get my earnings up I could make great progress.

Similar things to consider to your situation and what I will get the most value out of.

[wageslave23]

From what I have seen, a pension is usually about the equivalent of putting 20% of your salary away each year. In other words if person A makes 100k and a pension, and person B makes 120k and contributes 20k each year to their 401k then they will both end up about the same come retirement time.  My dad made about 100k for most of his career with a pension. He now gets 60k per year from the pension which is equivalent to 1.5 million. He could have achieved that by putting 20k a year in a 401k during his career. The problem is most people aren't disciplined enough to do that, but that's not the employer's problem.

[Dave1442397]

Some pensions can be risky. My father's company was bought out after he retired, and the new corporate overlords figured out a legal loophole that let them cut the pension payments by a significant amount. The retirees sued and got some of it back, but not all.

I think I'd rather rely on my 401(k) and manage my own money.

[reeshau]

The 4% rule puts the value of a $250/mo pension at $75,000 at retirement age.

Assuming you still had several decades before retirement when you left that job, the present value of the pension when you left the company was fairly small.  I wouldn't fret it or be all that disappointed.

I agree.  @mistymoney , there are a lot of assumptions to put in here, but shorthand:

$250 / month = $3,000 / yr ÷ 5% = $60k / year wage

7% match = $4,200 / yr.  Compounded 5 years @ 10% long-term market avg. = %28,883.09
15 years compounding (you mention 20 years removed) w/ no contributions @ 10% = $115,280.80

20 years compounding (not sure if 20myears was from beginning or end) = $189,672.53

Using the 15 year example, 4% rule would say $384 per month.

None of this is inflation-adjusted; you didn't mention if the pension was adjusted.  (Usually they aren't.  Or, if you do,  it's for a reduced payout than the standard quoted one)

So, I think you are better off.  Or, to say it differently: you are compensated for taking on the investment risk.  (Not commenting on fairly compensated, or not)  Not to mention you have the ability to say FU, and not worry about kneecappjng your pension.  Or, the investment risk of permanently tying your fortunes to that one company.

[mistymoney]

The 4% rule puts the value of a $250/mo pension at $75,000 at retirement age.

Assuming you still had several decades before retirement when you left that job, the present value of the pension when you left the company was fairly small.  I wouldn't fret it or be all that disappointed.

I agree.  @mistymoney , there are a lot of assumptions to put in here, but shorthand:

$250 / month = $3,000 / yr ÷ 5% = $60k / year wage

7% match = $4,200 / yr.  Compounded 5 years @ 10% long-term market avg. = %28,883.09
15 years compounding (you mention 20 years removed) w/ no contributions @ 10% = $115,280.80

20 years compounding (not sure if 20myears was from beginning or end) = $189,672.53

Using the 15 year example, 4% rule would say $384 per month.

None of this is inflation-adjusted; you didn't mention if the pension was adjusted.  (Usually they aren't.  Or, if you do,  it's for a reduced payout than the standard quoted one)

So, I think you are better off.  Or, to say it differently: you are compensated for taking on the investment risk.  (Not commenting on fairly compensated, or not)  Not to mention you have the ability to say FU, and not worry about kneecappjng your pension.  Or, the investment risk of permanently tying your fortunes to that one company.

I agree there are lots nooks and crannies here. And some details I can't recall. but once you were in it it went up a lot each year, if you made it to 25 or 30 years when you max out the pension, you got about 80% of your 3 highest years gross pay. Add in soc sec and you were whole - no loss of income.

The 20k increase came at a cost, and I'm not sure I didn't walk into a worse situation financially. I went from very rich benefits to almost nothing outside of the 401k match, not even health insurance - got a 100/month stipend toward buying your own. 4 week vacay to 2 weeks, somehow I was too stupid to realize no one told me the vacation time! Luckily I didn't need the STD or LTD that I left behind.

But for this post - I am really only looking at pension vs employer contributions and what those get you. I think the 401k matches are not sufficient as the employer retirement contribution, is all I'm saying!

[reeshau]

But for this post - I am really only looking at pension vs employer contributions and what those get you. I think the 401k matches are not sufficient as the employer retirement contribution, is all I'm saying!

I, for one, am glad for the switch.  I do have a partial pension.  I am in a strange in-between cohort; for a short while, I had both pension and 401k match.  But my Fortune 50 employer went bankrupt, and the salaried pension went to the PBGC.  My partial pension is within their insurance limits, so I will get my full payout at 65.  But many others made more than that (I think it was $56k, but would have to reference the right year) and so will only recover partial payments.

Even worse happened to those who retired early. (laid off in their early 50's)  The gory details were that this payment was also funded out of the pension, but was not covered by PBGC.  So, they lost 100% of it, regardless of limits.  Many people who were laid off in the 2008 financial crisis thought they had escaped the worst, only to find out they had a nasty surprise.

I can manage the risk OK, so am very happy to have to dollars under my watch.  But I also understand that for the broader population this is a problem.  Doubly so, because it's not in mandatory public school curricula, so that they would have a sporting chance.

[mistymoney]

Even worse happened to those who retired early. (laid off in their early 50's)  The gory details were that this payment was also funded out of the pension, but was not covered by PBGC.  So, they lost 100% of it, regardless of limits.  Many people who were laid off in the 2008 financial crisis thought they had escaped the worst, only to find out they had a nasty surprise.

Are you saying they took early retirement getting $x per month under the pension - and then ended up going to 0 per month?

But they'll get the pension boards approved payout when they reach a certain age like eveyone else? Will their previous payments be counted against it?

[reeshau]

Even worse happened to those who retired early. (laid off in their early 50's)  The gory details were that this payment was also funded out of the pension, but was not covered by PBGC.  So, they lost 100% of it, regardless of limits.  Many people who were laid off in the 2008 financial crisis thought they had escaped the worst, only to find out they had a nasty surprise.

Are you saying they took early retirement getting $x per month under the pension - and then ended up going to 0 per month?

But they'll get the pension boards approved payout when they reach a certain age like eveyone else? Will their previous payments be counted against it?

Yes, essentially.  Their early retirement benefits were not guaranteed.  I believe they had a choice to have substantially-reduced payments continue, or cut off until standard age.  In total, stories of 70% reduction in promised benefits (early + standard) were common.

[johndoe]

my current salary is 3x what is was at that pension job.

Dry your eye, friend

The grass is always greener ... but if you're investing that huge increase I don't see how the pension could keep up with that sort of salary difference!

[mistymoney]

my current salary is 3x what is was at that pension job.

Dry your eye, friend

The grass is always greener ... but if you're investing that huge increase I don't see how the pension could keep up with that sort of salary difference!

LOL! of course, the inflation has been at work too!

but yes, I am ahead on that score at least! I did have a tough time when both kids were in college and I was trying to help as much as I could and didn't contribute for to 401k for about 5 years. By then, I was making too much for any financial aid outside of loans, so that is also a wrinkle!

[Laura33]

But for this post - I am really only looking at pension vs employer contributions and what those get you. I think the 401k matches are not sufficient as the employer retirement contribution, is all I'm saying!

I also think the math is off.  The key is time value of money.  5 years didn't get you $3K/yr for life -- it got you $3K/yr for life starting in another 20-30+ years.  If you want a fair comparison, you have to look at the present value of that money.  If you're 30 years out, the present value is more like $375/yr.*  And you'd need less than $10K invested to generate $375/yr.  So if your match for 5 years has totaled up to $10K or more, you're better off with the match.

Where you are absolutely dead-on is on the formula many pensions used, which meant the value of the pension dramatically escalated in the later years.  Two problems with that, though:

1.  It required you to stay put for 30+ years to take advantage of it.  If you left, you got the much lower early-years value.

2.  It was subject to change without notice, and when they changed it, you were entitled to only the benefits that you had vested as of that very moment -- not all of that future higher value you had planned on.  They did that at my DH's work, btw.  He was lucky enough to still get an actual pension, which I couldn't believe.  But a few years in, they changed over to a "cash value" approach, which works much more like a 401(k) in terms of growth in value.  He's still better off than not having one (particularly since he was grandfathered into some older contribution rates that no longer exist for newer employees), but that whole "giant leap in value over the last 5-10 years" doesn't exist -- basically, after 20 years, his salary has grown 3-4x, but his pension value at retirement is pretty much the same as when he started.  Which, again, is fine, since we never counted on it in our retirement projections anyway.  But if we had been like my dad, who never worried about saving since he had a pension, we'd be in a world of hurt.


*I am using Rule of 72, meaning that if you get around 7% return, your money should double every decade, and 30 years gets you 3 doublings -- $375 to $750, $750 to $1500, and then $1500 to $3000.

[TimCFJ40]

I, for one, am glad for the switch.  I do have a partial pension.  I am in a strange in-between cohort; for a short while, I had both pension and 401k match.  But my Fortune 50 employer went bankrupt, and the salaried pension went to the PBGC.  My partial pension is within their insurance limits, so I will get my full payout at 65.  But many others made more than that (I think it was $56k, but would have to reference the right year) and so will only recover partial payments.

Even worse happened to those who retired early. (laid off in their early 50's)  The gory details were that this payment was also funded out of the pension, but was not covered by PBGC.  So, they lost 100% of it, regardless of limits.  Many people who were laid off in the 2008 financial crisis thought they had escaped the worst, only to find out they had a nasty surprise.

I can manage the risk OK, so am very happy to have to dollars under my watch.  But I also understand that for the broader population this is a problem.  Doubly so, because it's not in mandatory public school curricula, so that they would have a sporting chance.

I was in this cohort as I had a pension with my fortune 500 company the first time I worked there.  I left the company, and when I was severed I was offered a buyout of my pension benefit that I happily took and rolled into my 401k.  The payout was just under $100k for 10 years of service, and I was in my mid 30s, so by normal retirement age it will be worth around $1m at 10% growth. 

I was very happy to have the money under my watch as well, as the company I went to next went bankrupt and I saw a lot of the older high earners and retirees got really screwed. 

Also note that most pension payouts are based on a ~6% return on investment, so there's a good bit of room to make money on the spread if you are offered a buyout and invest the proceeds in your IRA (vs cash out and party...)

[mistymoney]

But for this post - I am really only looking at pension vs employer contributions and what those get you. I think the 401k matches are not sufficient as the employer retirement contribution, is all I'm saying!

I also think the math is off.  The key is time value of money.  5 years didn't get you $3K/yr for life -- it got you $3K/yr for life starting in another 20-30+ years.  If you want a fair comparison, you have to look at the present value of that money.  If you're 30 years out, the present value is more like $375/yr.*  And you'd need less than $10K invested to generate $375/yr.  So if your match for 5 years has totaled up to $10K or more, you're better off with the match.

Where you are absolutely dead-on is on the formula many pensions used, which meant the value of the pension dramatically escalated in the later years.  Two problems with that, though:

1.  It required you to stay put for 30+ years to take advantage of it.  If you left, you got the much lower early-years value.

2.  It was subject to change without notice, and when they changed it, you were entitled to only the benefits that you had vested as of that very moment -- not all of that future higher value you had planned on.  They did that at my DH's work, btw.  He was lucky enough to still get an actual pension, which I couldn't believe.  But a few years in, they changed over to a "cash value" approach, which works much more like a 401(k) in terms of growth in value.  He's still better off than not having one (particularly since he was grandfathered into some older contribution rates that no longer exist for newer employees), but that whole "giant leap in value over the last 5-10 years" doesn't exist -- basically, after 20 years, his salary has grown 3-4x, but his pension value at retirement is pretty much the same as when he started.  Which, again, is fine, since we never counted on it in our retirement projections anyway.  But if we had been like my dad, who never worried about saving since he had a pension, we'd be in a world of hurt.


*I am using Rule of 72, meaning that if you get around 7% return, your money should double every decade, and 30 years gets you 3 doublings -- $375 to $750, $750 to $1500, and then $1500 to $3000.

thanks. this makes some sense.