The other thread about variable company matches to 401k accounts got me to think about this.
My employer is a Fortune 500. If you came on board after a certain date, you're not eligible for pension. In lieu of pension, you get a percent of your salary into your 401k account. This percent is based on years of service, and is from 4% of salary up to 6% of salary. All employees also get a matching contribution regardless of pension eligibility, this is up to 4% of your salary.
If you are eligible for pension, you had the choice to take the 4% contribution at the time of the cutoff and would no longer recieve credit for additional years service when your pension was eventually calculated.
Ok, so my situation is that I was never eligible for the pension. I put together a horribly rough spreadsheet to figure out what kind of returns you needed to get on the company contribution in lieu of pension based on how the pension value is calculated. This is what I came up with:
- assume I retire at 65
- assume I live to 92
- average annual return prior to retirement, 8.5%
- average annual return post retirement, 2%
Those rough annual returns are what is needed to take a yearly draw down equal the pension yearly payment w/o the balance going to zero before age 92. I'm sure the finance people spent countless hours running numbers and scenarios using acturial tables to figure out what benefits the company when they made the decision. And I'm sure I'm missing something, but very roughly...those are the types of returns I need to get on the money I'm getting now to make up for the pension I won't be getting from my employer down the road.