Uhhhhh...pensions are a little underfunded...

Parent Cafe
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<p>Doc - “^^ I have to agree with the above. 2 million is not a lot to live on over the next 30 years. This was driven home to me when I looked at my father’s receipts from bills he had paid over the years (he had records for more than 60 years). Its astonishing to compare the cost of living over that time period. An example: my father had surgery in 1953 and was in the hospital for a week. The total cost was roughly $150. There is no guarantee that inflation isn’t going to be much higher than today. Also must people do not want to sit in a rocking chair on a porch for the rest of their lives.”</p>

<p>The 4% withdrawal rates are INFLATION ADJUSTED. These have been back tested for rolling 30-year periods. Follow a sound investment strategy to preserve principal while maintaining these withdrawal rates and while these stories of prices in the good old days are entertaining, they are not relevant.</p>

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<p>We could always have a deflationary depression.</p>

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<p>notrichenough yes I also contribute to social security. Did your dad work 40 years and did his pension have survivor benefits for your mom? If I work 40 years and take survivor benefits for my spouse my pension will also be around 58-64%. I will have made contributions for 40 years. Did your dad contribute or was it all company paid?</p>

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<p>Dstark - “A friend’s mom sold her house. She has 800000 in cash. No other assets. Her SS income after paying for Medicare is 6,000 a year. That is her total income. She has a great chance to live another 20 years. She is going to invest some of that money. Is that money going to run out? It sounds like a lot of money. We read that seniors are sucking the wealth away from the younger people. The elderly live on fixed incomes and for most of the elderly the wealth is used to live on. Is that 800,000 going to last long enough?”</p>

<p>< She has a great chance to live another 20 years.
And she has even greater chance to generate $32,000+ per year without touching principal. That means after she pays for Medicare, she has $38,000 to spend. Without touching principal. Does she need more than that???</p>

<p>< Is that 800,000 going to last long enough?"
One more time: The generally accepted view is that one can take out 4% (adjusted for inflation) without touching principal. For perpetuity. That should last a while.</p>

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<p>“The 4% withdrawal rates are INFLATION ADJUSTED. These have been back tested for rolling 30-year periods. Follow a sound investment strategy to preserve principal while maintaining these withdrawal rates and while these stories of prices in the good old days are entertaining, they are not relevant.”</p>

<p>This is a joke…</p>

<p>Backtesting the past doesn’t mean the future will follow the past…</p>

<p>Look at interest rates for example…</p>

<p><a href=“http://www.oregonlive.com/finance/index.ssf/2013/02/will_the_4_rule_of_thumb_leave.html[/url]”>Will the 4 percent rule of thumb leave retirees empty handed? - oregonlive.com;

<p>I am going go go with this…</p>

<p>"What’s the rub today? In his studies Bengen used historical returns. That’s perfectly fine. Between 1926 and 2011, U.S. bonds returned 2.3 percent a year on average, after subtracting 3 percentage points for the annual inflation rate. U.S. stock returns beat the inflation rate by 6.5 percentage points over the same period.</p>

<p>But bonds don’t pay those rates these days. Investors buying a 10-year U.S. Treasury bond on Friday could expect an annual return of 1.99 percent. That’s 0.57 percentage points below what experts think inflation will be.</p>

<p>When Pfau and Blanchett plug today’s bond returns into a 30-year retirement portfolio, the success rate of the 4 percent rule dives. A retiree with a nest egg of 40 percent stocks and 60 percent bonds has about the chance of a coin flip of outliving his assets in 30 years, they say.</p>

<p>Even if bond returns end up just keeping pace with inflation and stocks generate 6 percent after-inflation returns, that same retiree withdrawing 4 percent stands a 1-in-3 chance of outliving his money, Pfau and colleagues found.</p>

<p>What if bond returns improve? The same 1-in-3 chance of failure turns up if bonds generate low returns for 10 years and then return to historical norms, they say.</p>

<p>Plus there’s evidence that bond returns today are a good predictor of their returns for the next decade, experts say. Worse, a senior’s investment returns in the first 10 years of retirement play a greater role in whether a retiree outlives the money, Pfau has found."</p>

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<p>BCEagle - “We could always have a deflationary depression.”</p>

<p>And it wouldn’t likely matter. These studies include the time period of the Great Depression through now. </p>

<p>A solid investment plan has stood the test of time.</p>

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<p>Earlier when I mentioned employee contibutions BC made a very good point in saying that when an employer pays for the pension that is really just part of the overall compensation of an employee. Can we really say pensions are too high without talking about the entire compensation structure?</p>

<p>I work in NJ so we are a fairly high wage area. We pay most professionals a salary in the $40k area to start with a top end of around $100k. The highest paid person in my department makes $120,000. We have accountants, attorneys and other college graduate professional position. Our IT staff most likely makes in the $80k range with the high being around $100k. Someone making 100k would pay 35% of the health care premium.</p>

<p>We have a decent turnover of people leaving for higher paid private sector jobs but we also have a share of older staff that have either been laid off or retired coming to work for us.</p>

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<p>“notrichenough yes I also contribute to social security.”</p>

<p>I am always a little confused about the government worker pensions. It seems that some people contribute to (and receive) social security, and some don’t. Some have to contribute to their pensions, and others don’t. Some get rather meager pensions for the amount of work and money they have put in, and others get an outrageously inflated pension. I suspect it has to do with the state or group of employees that one is working with. It does seem very unfair to lump all government workers together, as if they all are getting paid crazy and unsustainable amounts of money to retire early.</p>

<p>In Washington State there is a bit of a hubbub now about how some top officials got these bonuses right before they retired, serious pension spiking. Their friends are making sure they get these raises, and it is draining the cities out of money. In addition, some cities are paying millions for every last healthcare expense for retirees for decades. Paying for hot tubs, elective surgery. All contract negotiated items that obviously weren’t looked at closely, when the towns had plenty of money. It’s pretty sickening. People hear stories like this and think all govt employees have this kind of deal going on, but I’m sure that’s the exception, not the rule.</p>

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<p>busdriver that is called pension spiking and the NJ pols do it all the time. You work in a pension qualified job- say town council for 21 years making $4000 and then get appointed to a high level job making $150k and your pension is based on the $150. Guess what the plans where that occurs are not in bad financial shape because those plans have made the employer 4% contribution for most of the last 20 years. All the pension misdeeds you can think of NJ has but the plans not in good shape are the plans where that does not happen. I think it proves my point that the real issue is strictly the failure to fund the pensions as required.</p>

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<p>Tom1944, your state votes for governors that support cutting taxes for the wealthy and don’t fund pension plans.</p>

<p>Right?</p>

<p>So…how do you change things?</p>

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<p>< This is a joke…
Not sure I follow. Are you saying that 30 years of back testing and Monte Carlo simulations aren’t legit???</p>

<p>< “A retiree with a nest egg of 40 percent stocks and 60 percent bonds has about the chance of a coin flip of outliving his assets in 30 years, they say.”</p>

<p>If you want are trying to show that these studies won’t hold up because of the unique environment we are in, then choosing a portfolio of 60% bonds is the way to prove that IMO.</p>

<p>Most of the Trinity Studies had a lower allocation to bonds.</p>

<p>Further, as we sit here at the end of a 20 year bull market in bonds, choosing an allocation of 60% bonds is not something I would do.</p>

<p>< “Plus there’s evidence that bond returns today are a good predictor of their returns for the next decade”
No argument here. Then don’t place 60% of your allocation in bonds and be surprised it doesn’t past your testing. Left shaking my head at that one…</p>

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<p>tom1944 - "BC- I think that is the bigest misconception with government pensions most people do not know that government employees are mandated by law to contribute to them.</p>

<p>People who had private sector pensions generally made no contribution and do not know that is not the case with government plans."</p>

<p>Tom I think you might be in NJ from some of your posts.</p>

<p>In NY State, once an employee has 10 years of service, they contribute 0% to the NY State Retirement system that funds the pension.</p>

<p>That is the case for the VAST majority of current NY State employees, save for those hired during the last 1.5 years.</p>

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<p>Our governor is the best politician I have ever seen. It helps that he followed the worst politician I have ever seen. CC created a narrative that people were ready to hear. He was able to blame a group of people public workers (mostly teachers) for a problem that they did not create. That said the pension issue is a bi-partisan mess.</p>

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<p>I honestly don’t know if my dad had to make any contributions or not. He started there in the 40’s so I suspect not.</p>

<p>Yes, my mom has survivor benefits but I don’t know at what level and I don’t know how that affected his pension amount.</p>

<p>The state pensions in MA lower your pension by 5-10% depending on your age when you retire, for a 2/3 beneficiary payout. And if your beneficiary pre-deceases you, your pension jumps up to the full amount. It as apparently state-tax free, as well.</p>

<p>Interesting reading:</p>

<p><a href=“http://www.mass.gov/treasury/docs/retirement/retguide.pdf[/url]”>www.mass.gov/treasury/docs/retirement/retguide.pdf</a></p>

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<p>Syrdave- yes I am aware of that because the Port Authority of NY/NJ follows the NY retirement not NJ’s for that very reason. They also use overtime in their pension calculation. NJ does not. Guess what NY does not have a severe pension problem. No where near as bad as NJ.</p>

<p>Another example that shows it is a problem created by missing contributions not excessive benefits.</p>

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<p>notrichenough- NJ has about 8 options you can choose. They all lower your payout to some degree. Some less than others.</p>

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<p>

In private companies where they still have a pension plan, a similar set up is not uncommon; eg. the pension could be based on something like the highest three years’ salaries. This is another area that ought to be made similar to SS where your adjusted actual contributions over 30 something years count rather than the few years where you managed to a high flying job or tons of overtime.</p>

<p>I’m also skeptical about the 4% mantra. That’s based on your returns being significantoly better than inflation for decades. If I am a mediocre investor who basically gets returns that match inflation, 300K for 30 years works out to 10K/year adjusted for inflation. One factor that I didn’t see when I skimmed through the thread is the taxability factor. Withdrawing post tax dollars gives you effectively a higher income than tax deferred money, the corollary being that pretax 401k money has to be discounted compared to the savings you have in your non-retirement or Roth accounts.</p>

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<p>notrichenough, my H has worked in state government for about 25 years. He will retire with a pension of 43% of his annual salary. I hear many people saying government employees get paid hugely more than private sector employees, and then retire to juicy pensions. I’ve never been clear on where that comes from. </p>

<p>The Treasurer of our state makes less than most first year attorneys at white shoe firms.</p>

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<p>"Most of the Trinity Studies had a lower allocation to bonds.</p>

<p>Further, as we sit here at the end of a 20 year bull market in bonds, choosing an allocation of 60% bonds is not something I would do."</p>

<p>It is not something I would necessarily do either…</p>

<p>Depends on the bonds…I wouldn’t own treasuries at these prices. </p>

<p>The problem with equities is the volatility in prices. Many elderly investors have a problem with that. When stock prices drop investors get nervous. Plus many investors want fixed income.</p>

<p>As far as stocks are concerned, earnings are inflated by low interest rates. QE is an added distortion. The 4 percent rule means you are probably going to spend your principal. If the markets decline while you are selling assets you can end up with an insufficient amount of assets to play with.</p>

<p>Dividend yields are also lower than average over the last several decades. Some of those stock returns were based on dividends.</p>

<p>The economy going forward may grow less than than the past. This could hurt returns going forward. </p>

<p>“Not sure I follow. Are you saying that 30 years of back testing and Monte Carlo simulations aren’t legit???”</p>

<p>What do you mean legit? The past does not predict the future… 30 years is long enough?</p>

<p>I drove a similulator in driver’s ed but it wasn’t the same as driving a car. </p>

<p>What is your asset allocation? What are the stock returns you expect over the next 40 years? What inflation rate do you expect?</p>

<p>I don’t know too many 80 year olds that want to have 50 percent of their financial assets in stocks.</p>

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<p>Dad- you may be correct about the 4% employer contribution. I am taking that from the trustee reports. The funds that made those contributions most years PERS-Local are significantly better off than those that did not PERS-State and the Teachers pension. </p>

<p>Again you may be correct but it would be nice to go back and see where we would be if the contributions were made. As I posted earlier we would not have had two or three early retirements plus a 9% bump to prove the State could play games because the pension was flush.</p>