A Retirement Myth

Have you ever heard someone say that in the "good old days" retiring was easier because most of the people had pensions (or something similar)? I have -- time and time again. In fact, I think so many people have heard this that most believe it as "fact" -- that retirements were better/easier in the 70's for instance, because so many people had pensions/company-sponsored retirement plans.

Not so fast. Turns out that the "facts" are wrong. Check this out from Kiplinger:

Don't blame the boomers' underfunded retirement predicament solely on disappearing pensions. The golden age of the gold watch is largely a myth. A recent Investment Company Institute report noted that although 90% of private-sector workers who had access to a retirement plan in 1975 were covered by a traditional pension, only 20% of them ever received any income from those plans. Back then, more-stringent vesting rules prevented many workers with fewer than ten years on the job from qualifying for any pension benefits, and the biggest checks were reserved for those who stuck with one employer for 20 years or more. In reality, few did.

The 401(k) was created in 1978 so that an increasingly mobile workforce could take their retirement savings with them as they moved from job to job. Today, more people receive retirement income from defined-contribution plans than they ever did from traditional pensions, says Peter Brady, senior economist at ICI. In 2009, 34% of private-sector retirees received income from an employer plan -- either directly or through a spouse -- compared with just 21% in 1975. "The good news is that private-sector pension income has increased over time, and the shift from traditional defined-benefit plans to defined-contribution plans has not led to a decline in private-sector pension income," Brady says.

Now the challenge is how to take a lifetime of savings and convert it to a stream of income. Increasing life expectancies and rising health-care costs mean those dollars have to stretch even further.

So:

1. There's a myth that a large portion of Americans had rich pensions in the past. We can toss the thought that they did in the trash.

2. Americans are not earning less in retirement with 401ks that they were with pensions.

3. But costs of retirement have gone up, namely people are living longer and health-care costs are out of control.

4. As such, we all need make adjustments such as working longer, saving more for retirement than ever before, and so on.

Personally, I'm socking away as much as I can, saving over 30% of my salary for several years now. I not only want to retire some day, but I want to retire early. Or, perhaps, even take early semi-retirement even earlier.

Comments

[Alex]

I work for a company that stills offers traditional pensions but who knows if it will still exist when I retire in ~25 years. I think one important difference between pensions and 401k is that a 401k requires more discipline and sacrifice that a pension. You have to make a conscious effort and forego some pleasure now if you want to contribute a good chunk of your salary into a 401k. At least with my pension it's just something they give you, so there's no real sacrifice. A pension is similar to Social Security. Instead of expecting the government to take care of you you're expecting your employer to. I'd prefer to invest my own money and forego the pension for a higher matching percentage in my 401k. I'm sure all of this is a generational thing though as I've grown up fulling expecting Social Security to be insolvent by the time I reach retirement and pensions are pretty much unheard of.

[sandra]

Not to mention additional "quality of life" costs that didn't even exist back in the day like cell phones, internet, satellite tv, etc. that eat into the money coming in. Not that any of these are necessities, but they're a standard part of so many people's lives now that people think they can't live without them and must continue to fund them.

[Money Beagle]

A lot of my family either worked for the automotive companies or the government, so I've seen firsthand many of my relatives get a pension as a result. I guess, personally, the percentage is probably much higher than what is representative of America. Still, having seen this, it does get a little disheartening knowing that I will never get a pension and that every nickel that I have stashed away is from me saving it, not from my employer actually doing anything to help with it (except for about a six month period, I've never worked for a company that matches contributions).

Granted, most in my family aren't struggling and have made wise choices, but it does make me wonder how people who can't afford to put anything for retirement now are going to make it down the line, especially hearing that Social Security, as it stands today, is set to be out of funds by 2037.

[Everyday Tips]

I think retirees in the 'old days' often times stayed in a nice, modest homes their whole lives and didn't have this need to live in grandeur. As a matter of fact, I know many people that bought large homes AFTER their kids left the nest. I look at my grandma who stayed in an 1100 square foot home her whole life vs. my in-laws,who went and bought a giant house after the kids left and now are suffering somewhat because their portfolio took a huge hit in the stock market and they have to maintain a big house. Dumb decisions don't make retirement any easier either.

[Eric]

Agreed, that retirement is a myth for many people that do not take into account the rising costs and potentially less income in older age. We should be saving all we can, so we can pay the many health care costs and longer living expenses. Good job saving 30%.

I think another challenge about retirement comes from John Piper:
http://www.youtube.com/watch?v=60_TmQdxkcI

Keep up the good work,
Eric

[Sarah]

Didn't people used to stay at jobs much longer? Do current day pensions have a much shorter vesting period? Even with 401ks and ESOPs there is still usually a considerable vesting period, where you will lose matching money if you do not stay 5 - 10 years.

I think one of the bigger problems is that matching money with 401Ks & pensions are an easy place for companies to cut because they will get less resistance from employees who don't have to take an immediate hit.

I was having a debate with a coworker the other day where he was saying that schools should just eliminate teacher pensions, and let them have 401Ks and that would solve everything. I told him that in order to make that equal, the school woudl have to give all the teachers raises by the same amount that they put into the pension (or 1/2 if they do a 1-1 match), otherwise the teachers are really taking a pay cut. He couldn't grasp what I was saying.

The corporate world in general is very different today than it used to be. You used to be able to pay for college with a part-time job on the weekends, and have no student loans. You used to be able to work your way up from the mail room if you worked hard, and didn't necessarily need a degree. Unfortunately the way things are structured today most people are in debt before they ever start earning money, and the money that could go towards retirement is being used to pay off their student loans. When they finally do have the ability to pay towards retirement, they are a lot less likely to receive any matching funds from their employers.

[Arimack]

I am in line to recieve a traditional pension within a year (I am at 19 years with the military). It does take commitment and dedication but traditional pensions still exist and are available. The military still offers traditional pensions for service between 20 years (50% salary) and 30 years (75% salary). Like mentioned above, this is an all or nothing proposition (if you do not make it to 18 years then you get nothing, at 18 you are guaranteed to be retained until your 20) but once you hit 20 you are guaranteed 50% with a 2.5% annual increase to you pension every year you stay after 20 up to a max of 75% at 30 years. I will be in my early 40s and looking at 50% of my salary annually, with lifetime health care until Medicare kicks in and survivor benefits, for the rest of my life. I plan on working in a second career for another 10-15 years but it allows me to pick my second career based on my interest in the career vice needing a specific salary to maintain my families lifestyle.
Of course, my chosen profession has involved people actively shooting at me but in the end it has been worth it. Traditional pensions still exist but typically they are in arduous, dangerous, public sector professions like police, fire, military. They are offered to attract high quality people to these difficult and dangerous professions.
Still I have saved like I would not have the pension and thus I never added the annuity into my retirement planning.

[Lurker Carl]

Many traditional pensions don't have cost of living provisions. If there is no inflation during your retirement years, no problem. What initially was a comfortable retirement income evaporated with high inflation in the 1970s and 80s.

We're experiencing the same problem right now. Uncle Sam claims zero inflation so no one receiving Social Security is getting a COLA. In reality, the cost of energy, food and other daily necessities are skyrocketing.

[Troy]

Your article takes into account only private employers.

Approximately 20% of employment is public. Local, state, federal, military, education, etc.

Most of that public employment has some form of pension.

So alot more people had pensions in the past than is assumed in the article.

[Brent]

So, when all these boomers start to cash out their 401k's what will they be moving into for income? I feel like if you invested in those securities now, they would only go up in value due to the influx of boomers who will have to buy them.

Does this sound like a good or bad idea?

[FMF]

Troy --

And they still have them now, don't they (example -- see the military comment above.)

The point isn't that they don't (or didn't exist) but that many people didn't take advantage of them even though they did exist. For example, what % of people who are ever in the military last for 20 years?

[Jeff]

Yeah I served in the military for 6 years in the infantry and decided enough was enough. The pay is very poor for the hours and dedication you have to have to flourish in that kind of career. In order to make it worthwhile for trained soldiers to stay in the service, they need to have a generous pension program. On the other hand, San Jose police officers start around 60k a year, have a pension, and people are not (always) shooting at them.

[jim]

Its a good point. Pensions weren't as great as we'd think. Before ERISA legislation there wasn't much regulation or oversight for pensions. Before ERISA about 50% of pensions had a 15 year vesting schedule. So if you worked 13 or 14 years then you got nada. I think there were even horror stories of people losing their pension shortly before scheduled retirement and the law didn't stop that at the time.

My grampa had a pension though. Personally I'd take a guaranteed define pension over a 401k any day.

[jeffinwesternwa]

I AGREE w/ the article! In the "good 'ol days", I only remember retired folks having social security and savings - typically CD's as interest rates were reasonable. Pensions were only for career "government" workers. Today's bloated federal, state, local governments means MORE government pensions (mostly unfunded and defecit) and far LESS personal responsibility happens - SAVINGS. Even modest lower middle claass folks 30+ years ago had smaller homes they lived in longer, often paid off, purchsed cars less often, had only ONE vehicle, and had less "outgos" as cable tv, cell phones, day care, internet, etc., weren't "usual" expenses! Thus, more responsibility to save!Today, startig young by age 25 means at least 15%~ of income MUST be saved/invested and starting later means 20%~ (or more) is THE umber to make it. All while reducing debt and NOT starting life w/ unsecured debts in the 20's age group. It CAN be done. Discipline, sacrifice, hard work and stick to it, not for a year or two but, decades. I DID and retired fully at age 47!

[jeffinwesternwa]

The last two years social security and VA recipients have received a $250 lump sum to offset the "no cola" debacle. (In reality the '08 BIG 5%+ COLA was from the high run up of energy/gas the final quarter of the year, and won't again be increased until the decline in prices is REVERSED and exceeds the previous index - it's all in the open on the web and NO cinspiracy exists w/ prices!).
but, that $250~ for a person receiving say $10K a year ($833 a month for example) is 2.5% INCREASE/COLA TAX FREE! Someone getting even just over $1200~ a month (a well above average SS or VA payment) has effectively gotten a 2%~ COLA each of the last two years. Yet, pries have not (yet) exceed 4th quarter 2008) Wasteful for votes!! All at our expense of defecit spending and paying .40~ on a dollar to borrow. Shame on the politicians/government. The budget for FEDERAL expenses was about $2.8T~ in 2008. This year it's $3.8T+ !! A freeze @ 2011 levels doesn't make the defecit reduce! CUT THE BUDGET to 2008 levels FIRST, then find 10%~ more cuts over the NEXT five years! Rework Social Security/Medicare. Make EVERYONE pay SOME taxes. Close loopholes, rework the tax code. NOW!!

[MBTN]

I work for a company that still has a defined benefit pension. However, anyone hired after a certain date is no longer eligible. Instead they have a "cash balance" pension. The pension vests after 5 years, although you don't get much of a pension until you've been employed for at least 15-20 years. They also have a 401(k) plan to supplement the pension which has a employer match without any vesting period. The match is pretty small (3%) but it is better than 0%!

The good thing about the pension is that it encourages people to stick around for the long haul in order to get a good pension payout. Most people I work with have been with the company for at least 10 years if not more.

[Mike Hunt]

Seems like retiring in the mid 90's to early 00's would be ideal as the pension system for private companies was still alive and well.

Or getting a top gov't job like a senator where you can retire after 1 term and get full salary for life.

Or like my uncle, teaching at the University of Queensland in Australia, he will get 70% of his final salary (about $250k a year!) for life and TAX FREE to boot!

Talk about a great deal!

More power to him.

-Mike

[Sarah]

@Mike Hung - You know that is a myth, right?
http://www.snopes.com/politics/socialsecurity/pensions.asp

[Mike Hunt]

Sarah,

Thanks for the link- I stand corrected. But I am pretty sure about my uncle's situation.

-Mike