How To Make Your 401k Pay As Much As a Pension - from Harry Sit

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Rowan Oak
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How To Make Your 401k Pay As Much As a Pension - from Harry Sit

Post by Rowan Oak »

How do you make your 401k pay as much as a pension? One word: contribute. It takes about 15-20% of your pay to get to the level a typical pension plan once paid. If you want to achieve the same level of retirement income, you will need to target the contributions at 15-20% of your pay, counting your employer match.
https://thefinancebuff.com/401k-vs-pens ... nsion.html
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Garco
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Re: How To Make Your 401k Pay As Much As a Pension - from Harry Sit

Post by Garco »

From my personal experience, the analysis in this article is "right on the money." For the core of my working career until retirement my employers and I in combination contributed 15% each year to a 403B (5% from my gross paycheck, 10% from employers). Keeping that up long enough (in my case 39 years), getting good salary growth, and contributing to Social Security, led to more than adequate combined pension income when I retired at age 70. Our out-of-pocket health care costs were also contained because my employer offered an excellent BC/BS health plan, and that carried over to my retirement years (coordinated with Medicare).

Of course, timing -- i.e., the performance of the equities markets -- also matters. And in my case other major expenditures mattered, in particular the cost of college education for my kids. But we were not big spenders. One car at a time, sticking with our starter house. The kids attended private colleges and graduated without student loan debt. They were also helped by some merit scholarship money support and more importantly by a partial subsidy (a gift of US Savings Bonds) from the grandparents.

There may have been other factors that helped (number of children, job/employment stability). But we did this on one income.
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firebirdparts
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Re: How To Make Your 401k Pay As Much As a Pension - from Harry Sit

Post by firebirdparts »

That's a great article. If you get past step 1 (contribute) and put everything in a target date fund, you ought be about as good as the pension fund was, apart from the "mutualized" aspect of the pension plan. In the olden days, the company had to eat sequence of return risk, and that was partly balanced by the fact that nobody could inherit a pension.
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DesertDiva
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Re: How To Make Your 401k Pay As Much As a Pension - from Harry Sit

Post by DesertDiva »

Good article, well articulated. If the people who obsess about market timing ans asset allocation instead focused on contributing, they would be further ahead. Making contributions seems more “painful” but it is the core activity behind growing a portfolio.
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Top99%
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Re: How To Make Your 401k Pay As Much As a Pension - from Harry Sit

Post by Top99% »

This was a good article overall but I am surprised there wasn't more emphasis on the importance of starting early. I assume he means 15-20% of your salary starting on your first day of work. But, it would be good to be very explicit about that along with the risks of starting later. For example, if one starts in their mid-40s 50% might not be enough.
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CyclingDuo
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Re: How To Make Your 401k Pay As Much As a Pension - from Harry Sit

Post by CyclingDuo »

Top99% wrote: Thu Dec 03, 2020 9:28 amThis was a good article overall but I am surprised there wasn't more emphasis on the importance of starting early. I assume he means 15-20% of your salary starting on your first day of work. But, it would be good to be very explicit about that along with the risks of starting later. For example, if one starts in their mid-40s 50% might not be enough.
I took it to mean for jobs of yore, the pension contribution did begin starting the first paycheck of work as it was mandatory. To do so today via the 401k and match the pension, you would contribute 15-20% from the get go. Obviously, we know that the reality is one may not get a match or much of a match in the first year, or first few years as it ramps up with years of service for many organizations, so the employee would have to voluntarily choose to contribute 15-20%.

I found it interesting that the company the author worked for in the benefits department on the pension plan valued the cost at 20% of the total payroll. That certainly fits with typical financial planning advice these days of saving 15-20% of your income which places one in the "excellent" category of saving...

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Our household came to having one job with a pension later in life that is going to work out for us, after decades of saving in our own retirement accounts in previous jobs. I previously had a job in the European Union with a mandatory pension, but walked away from the job before I was vested (required an 18 year vesting period). For the current job with a pension that my spouse has, the mandatory contribution rate is 6.29% from day one for the employee and 9.44% for the employer which equals a 15.73% combined contribution rate. Fortunately, there are also voluntary 403b and 457b plans which we have also been contributing to in spite of there being no match since the match is for the pension. That helps the employee get their contribution rate up to at least a 15-20% rate of their own income.

Although the point you raise is valid regarding the importance of starting early, I don't know why the author did not include it in the scope of the article. Instead, he focused on data that shows people don't want their 401k to work like a pension as they either opt out, or contribute at much lower rates. Student loans? Bad advice going into the benefits meeting? No advice or education on the importance of saving? I'm sure it all is part of the picture. Suffice it to say, there is no shortage of information on the importance of starting early wherever you look these days. I pounded it into the heads of my own children, just as it was pounded into the heads of my wife and myself by our parents.

One of the documents I used in a class I taught college freshmen over the years included data on saving and investing as well as typical average and median salaries based on career choice and education level. It's always good to view the median career income earnings of one's education level to see, using the save 15-20% of your income, how much of it you should have set aside (not counting returns).

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https://www2.ed.gov/policy/highered/reg ... payoff.pdf
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Top99%
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Re: How To Make Your 401k Pay As Much As a Pension - from Harry Sit

Post by Top99% »

CyclingDuo wrote: Thu Dec 03, 2020 10:45 am
Our household came to having one job with a pension later in life that is going to work out for us, after decades of saving in our own retirement accounts in previous jobs. I previously had a job in the European Union with a mandatory pension, but walked away from the job before I was vested (required an 18 year vesting period). For the current job with a pension that my spouse has, the mandatory contribution rate is 6.29% from day one for the employee and 9.44% for the employer which equals a 15.73% combined contribution rate. Fortunately, there are also voluntary 403b and 457b plans which we have also been contributing to in spite of there being no match since the match is for the pension. That helps the employee get their contribution rate up to at least a 15-20% rate of their own income.

Although the point you raise is valid regarding the importance of starting early, I don't know why the author did not include it in the scope of the article. Instead, he focused on data that shows people don't want their 401k to work like a pension as they either opt out, or contribute at much lower rates. Student loans? Bad advice going into the benefits meeting? No advice or education on the importance of saving? I'm sure it all is part of the picture. Suffice it to say, there is no shortage of information on the importance of starting early wherever you look these days. I pounded it into the heads of my own children, just as it was pounded into the heads of my wife and myself by our parents.
Our savings rate was negative until we were in our late 20s and then about 10% from then until our late 30s. I thought I had won the stock option lottery during the tech bubble so wasn't worried about saving. When the tech bubble popped, zeroed out my stock options and took our net worth down by about 80% I sat up and paid attention to saving and investing. We started saving about 70% of our after tax income in 2001 and carried that through until about 2011 at which point we backed it down to about 20%. Neither my wife's parents or my parents were savers since they had generous pensions so we learned via the school of hard knocks. Working in our favor was our maximum savings rate coincided with a pretty good time to invest since there was an excellent sale on REITs in the 2000s and 2 really good sales on stocks. So, we got lucky. Starting earlier could have removed the necessity of luck and a very aggressive savings rate later.
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deserat
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Re: How To Make Your 401k Pay As Much As a Pension - from Harry Sit

Post by deserat »

Thank you for linking that article/post. The summary stats are disheartening, especially for the savings percentages of > $100k salaried people...dismal. Although, some people might only contribute to a 401K to get the match and then invest elsewhere.

The 15-20% makes sense to me as well for a pension-like performance with personal investing.
Grt2bOutdoors
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Re: How To Make Your 401k Pay As Much As a Pension - from Harry Sit

Post by Grt2bOutdoors »

Rowan Oak wrote: Tue Dec 01, 2020 3:57 pm
How do you make your 401k pay as much as a pension? One word: contribute. It takes about 15-20% of your pay to get to the level a typical pension plan once paid. If you want to achieve the same level of retirement income, you will need to target the contributions at 15-20% of your pay, counting your employer match.
https://thefinancebuff.com/401k-vs-pens ... nsion.html
I was about to suggest you need to contribute a lot more than that if you want to match some plans that will pay 60 percent of final pay. Local and state government plans by me are paying in 30 percent of gross wages to meet their funding obligations. That ain’t chump change!
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Betterself
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Re: How To Make Your 401k Pay As Much As a Pension - from Harry Sit

Post by Betterself »

I get a pension pays 60-70% of my final pay. I also contribute roughly 20% pretax income into my 401/457. According to some cheap financial consulting firm hired by the employer, my tax deferred accounts pay 60-70% of my pension at average time and 30-35% at worst case.

It is tough to match pension value.
Grt2bOutdoors
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Re: How To Make Your 401k Pay As Much As a Pension - from Harry Sit

Post by Grt2bOutdoors »

Betterself wrote: Thu Dec 03, 2020 11:04 pm I get a pension pays 60-70% of my final pay. I also contribute roughly 20% pretax income into my 401/457. According to some cheap financial consulting firm hired by the employer, my tax deferred accounts pay 60-70% of my pension at average time and 30-35% at worst case.

It is tough to match pension value.

That jives with my 30% contribution rate in my previous post. Thanks for the confirmation!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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