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If you want to compare apples to apples, look at how much monthly is put into your A plan. You can put it into a financial calculator that you find on Google and assume a 10% return with monthly additions over the length of your career. You will find quite a large sum at the end of your career. Take that large sum and multiply it by 10%. I bet that number will be more than the monthly payment that you will receive from your pension. On top of that, when you die that lump sum can be given to your heirs.
Originally Posted by CantStayAway
I’m glad that you are happy with your A plan. While it may not seem like it, there is definitely a specific rate of return tied to a pension. The same way that when you lease a car you are paying a specific interest amount on the money. The only difference between a lease and a traditional car loan is the dealership does not have to tell you what percentage rate that is with a lease. In both cases (a pension and a lease), you have to back into it yourself with some complicated math formulas. The bottom line is that his response about pensions returning 5 to 6% is pretty accurate.If you want to compare apples to apples, look at how much monthly is put into your A plan. You can put it into a financial calculator that you find on Google and assume a 10% return with monthly additions over the length of your career. You will find quite a large sum at the end of your career. Take that large sum and multiply it by 10%. I bet that number will be more than the monthly payment that you will receive from your pension. On top of that, when you die that lump sum can be given to your heirs.
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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.
Originally Posted by 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.
I’m not sure I explained it well enough. Let me put it this way. It doesn’t matter how much FDX/UPS funds their pension obligation or their assumed rate of return on that. The simple formula (YOS x % x high 5) dictates the monthly benefit, regardless of funding and rate of return, no assumptions needed. Also, there are now laws on funding obligations and required insurance premiums to the PBGC.
There are pros and cons to A plans and B plans. I was just trying to dispel the idea that an A plan can go completely away, to zero. There is a floor to any A plan that you can count on, more so than a B plan. If the economy goes down to the point that FDX/UPS goes bankrupt and a judge allows the divestiture of the pensions, the PBGC will still pay some of it. But if the economy is that bad, how much will the B plan lose? Having both an A and B plan is, as FDX/UPS have, is just another form of diversification.