flensr

I do know how pensions work. And state and federal pensions work very similarly to private pensions, in that a portion of compensation is paid into a pension fund which gets invested and managed by the company, and in the end is treated effectively like a long-term annuity, where the amount initially invested in the pension fund theoretically can't be touched and you never get that nest egg back when you die. The diff between a company and govt pension is that govt pensions are at risk of being borrowed from, at the stroke of a pen by the legislature and governor, while corporate pensions are somewhat more rigorously regulated yet still at risk to cover company liabilities. A govt can also budget more to cover pension payouts if they fail to contribute enough into the pension fund, while a company that under-contributes to its pension fund ends up having to cash-flow the difference and might end up defaulting on the whole thing if they end up with too much pension liabilities and not enough pension fund investments.

Also, I was specifically talking about an "A/B strategy" for managing your own retirement assets. Nothing to do with A and B "plan" retirements. A/B fund strategies with regards to your own investments refers to having separate conservative and aggressive funds within your own retirement accounts, and is a way to maximize returns over the long term while managing risk over an approx 5-year rolling period. A properly followed A/B fund strategy can maintain market average returns essentially indefinitely without risking losing everything or even having to cut withdrawal rate in a market downturn lasting several years. My point in bringing this up is that almost every pension on the planet returns ballpark 5%, no better than an annuity that you can purchase, because of how they're run. If you properly invest the amount contributed to the pension in your name instead (ie. take the buy-out if that's an option and invest it yourself), you should be able to see returns closer to 8-10% over almost any timeframe. The trick is to have an "A fund" containing 5 years of household expenses invested conservatively, and the remainder in the "B fund" invested as aggressively as desired. In the history of the stock market, there have been very few 5-year periods where the market has not turned a profit, and over the history of the market it has returned an average approx 10-11%. So a 5 year "A fund" should cover almost any conceivable market downturn, you live off the A fund when the market is bad, and you refill your A fund from the aggressively invested B fund when the market is good. It works, and it returns about double what you see from a typical company run pension. You can easily calculate return your company's pension is expected to return by taking the buyout amount, and figuring the rate of return it would have to have in order to pay out the expected pension payout for life. Generally you'll see that it's ballpark 5%.

Money works the same regardless of your industry and history has shown that ALL pensions can be at risk. An unhealthy pension fund can go bankrupt, and a healthy pension fund can get raided to cover other liabilities in the event of bankruptcy. That's the same no matter where you are.

Sluggo_63

Ok. So you seem pretty smart on this. How much would I have to have in my B-plan to draw $130,000 annually (interest only) until I’m 80, 85, or 90?

tnkrdrvr

Well, according to DALPA, a Delta pilot getting 18% DC (didn’t happen) and investing all cash over cap money (what percentage of pilots do this), would need at least 29 years to beat the combined UPS DB and DC plan. (source: Delta MEC August 2016 video comparing what they were trying to get vs what UPS had at the time) It was similar to beat FEDEX. Of course for retired military guys, the DB will never be topped by a DC due to insufficient time for money to compound and the long lag time to reach max pay rates at pax haulers.

Clearly, that 18% didn’t happen. Which sucks since it would have helped everyone push the bar up. The primary benefit to DB plans is the enormous amount of money you are effectively sheltering from the taxman until retirement. Sure, you might be able to beat that rate of return if you just took it all upfront, but after Uncle Sam takes a ~30% bite upfront, you are starting out in a deep hole trying to catchup. An ideal contract would have the company maxing out your DC and as big a DC as is financially sustainable for your company. (Obviously no point in negotiating an unsustainable pension) The downside is pensions don’t feature an inheritable nest egg. The benefit of the UPS and FEDEX blended model is that many guys won’t need to touch their DC funds very much and so these can continue to grow and be passed on to whomever you choose.

tnkrdrvr

https://us.v-cdn.net/6031685/uploads...yf70jrh3ak.jpg

Another more up to date source.

BoilerUP

The DALPA comparison video used a 16% DC, not 18%...the 18% in the video was their assumed DOS raise with their TA2, which they got...but subsequent DOS raises did not meet assumptions and therefore their rates at end of contract were 2.2% lower than assumption. Over the course of their hypothetical, that 2.2% deficit from projection could amount to 'real money'.

Then again, Delta profit sharing has exceeded assumptions the last few years, so who knows?

The biggest issue with the DALPA video retirement comparison, IMO, was that their assumption included cash-over-cap funds taxed at 0% until retirement...and every dime of tax-free DPSP Cash invested earning 6% annual return.

Either way, the reality is we all make assumptions when it comes to our retirement; I assume my DB plan will still be there when I retire, Delta pilots assume they'll get at least 10% in profit sharing until they retire. I consider having both a DC and DB diversified retirement income streams, others don't...and that's okay. We're fortunate that, in 2019/2020, we get to be having these kinds of discussions as it relates to earned and deferred income.

CantStayAway

Assuming a 10% return if you retired today at 65 and you withdrew the full 10% (theoretically never touching the golden goose) it would be $1.3 million. This doesn’t factor in inflation though. Personally I think a 6% withdrawal rate is a good target. That allows the account to continue to grow over time if you average 10% returns throughout retirement. To go with that, you’d need approximately $2.17 million.

BoilerUP

Isn't 10% a rather aggressive RoR for someone in retirement?

Profane Kahuna

How much would you need to invest every year to mirror that $130,000 pension, just in case it gets stolen and you want a backup retirement fund?

Variables: 20 years of work at the company till 65, live another 25 years.

DWC CAP10 USAF

I came up with $3200/month over 25 years averaging 9% gains would get your B find account right at $3.25M. Then withdrawing the normal 4% in retirement would give you $130K annually.

Your $3200/month over 25 years would be $960K of your one money. Obviously if there is a company match your personal contritions would be less.

Silver02ex

I would say that’s average, if you don’t account for inflation or taxes. Look at the history of most growth mutual funds or an S&P 500 index funds.