Why take any risk when expecting a pension?

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punkinhead
Posts: 9
Joined: Sun Jun 27, 2021 4:02 am

Re: Why take any risk when expecting a pension?

Post by punkinhead »

Valuethinker wrote: Thu Jul 01, 2021 9:29 am
punkinhead wrote: Wed Jun 30, 2021 5:15 pm In 1991 straight out of college I hired into a company with a pension program. In 2007 they went through bankruptcy and turned the pension over to the PBGC. I'll get maybe $25/year from the PBGC when I turn 62. I was one of the lucky ones because I ignored the promise of a pension and always maxed out my 401k. Plus I had time to recover. The ones that really got hurt were those that retired in their 50's just before the bankruptcy. The PBGC severely slashed their pensions and there was no opportunity for them to "unretire" and hold off taking benefits until the PBGC deemed them to be of retirement age. Those people will mostly have to work until they die.

That's just my cautionary tale of counting on a pension and not saving properly.
I am not aware that the PBGC *ever* makes cuts that drastic in pensions?

They cap benefits at a certain level, I believe - hence the pain of airline pilots.
My knowledge of this is second hand since I wasn't retired at the time and my benefits just got frozen at a pretty low level. The stories of cut benefits were told to me by prior coworkers (my direct boss included) who retired in their early to mid-50's just before the bankruptcy. I'm no expert on the PBGC, but I had a look at their "maximum monthly guarantee" values for 2007 https://www.pbgc.gov/wr/benefits/guaran ... -guarantee which was when our plan was turned over. According to that, a person who retired at 55 is only guaranteed up to $1856.25/month or $22,275/year. To be honest, I don't know what "maximum monthly guarantee" means. Perhaps it means that if the pension plan was well funded when the PBGC took over then they can pay out above that guarantee. Regardless, if someone were receiving, say, $150k/year and had a lifestyle consistent with that income then having income drop to $22k, $30k, or even $50k, is the kind of hit that sends them back to work.

Another big piece of it is that our employer promised us health coverage to bridge the gap to medicare. For someone retiring in their mid-50's, which was quite common for that company, they were counting on low/no cost health insurance for 10 years. That disappeared in the bankruptcy.
ZWorkLess
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Re: Why take any risk when expecting a pension?

Post by ZWorkLess »

I think it boils down mostly to liking the thought of having extra. Once you've got "enough" locked down, what would "extra" money do for you? Allow you to splurge on great vacations with all the kids and grandkids? Allow you to donate heavily to favorite causes? Allow you to leave a legacy for your heirs? Allow you to get a vacation home? Allow you to buy ridiculous presents? For me, my main motivator is retiring earlier. By taking some extra risk now, we will likely be able to retire several years earlier than if I played it very safe.

That said, I would never count on a pension. Too many things can go wrong. I don't even feel very comfortable counting on social security (at least not until the checks were actually flowing), although I do plan for it. I try to only actually COUNT on assets in my own accounts that I control, at least until we are within just a few years of taking social security.
esteen
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Re: Why take any risk when expecting a pension?

Post by esteen »

OP, the biggest assumption I inferred from your post is that you're going to stay at a state government (CALPERS-eligible) job for the rest of your career. You're in your 30's and a whole lot can change in the next couple decades.
Lone_Ranger wrote: Tue Jun 29, 2021 11:47 pm I am vested, and there is a COLA.

But thanks all for the replies. Good reminders that the pension can’t be completely relied on, and my life goals may change.
The "life goals may change" is important. It's not that some people's life goals change sometimes; most people change their life goals, especially over multi-decade periods. I would not count on that job being something that is there for you, or something that you want, just because you're comfortable in it now.
Invictus002
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Re: Why take any risk when expecting a pension?

Post by Invictus002 »

To add to my earlier points, I suggest to take on aggressive investments to yield greater returns. But, understand the aggressive strategies and become an expert at it.

I invested aggressively and with the extra returns, I was able to purchase 5 full years of retirement credits (air-time), which translates to retiring 5 years earlier form the government job.

Every penny for this purchase came from the returns from the market.

The time is so much valuable!
This way, can also collect pension 5 years earlier, start getting COLAs and all those things.
Madbull
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Re: Why take any risk when expecting a pension?

Post by Madbull »

There’s a history on the BH forums of those who frown upon pensions and practically admonish those who ‘dare’ to consider them in their projections, and those who say they should be weighted heavily, (and those in between those views).

Only you know your personal relationship with your pension system. Only you are responsible for knowing how well funded your pension is. Only you can decide how much emphasis to place on your pension.

Ever plan has their variations. Many have been in trouble the last decade +, (generally due to asinine ‘highest 3-5 years times x’ formulas IMO, which only serve to ensure an ultimately underfunded system without adjustments). Others are more demanding in their funding requirements, update their actuary formulas on a regular basis, etc. Only you know how to view your plan.

For me, I’m very confident in my plan. I have more confidence in receiving my full due over that of SS, (which I do believe will still payout, but only to an estimated 60-70% of current values). In my opinion, based on my views of our pension plan, I’ve chosen to be aggressive with 85% stock/15% bonds even in my early 40s. Why? Extra income potential. Id rather have the potential for more $, versus lose out. But if it doesn’t pan out, I’ll still survive life.

My .02, /shrug

Edited to mention, as others have, there’s no sure thing you’ll be there till actual retirement. I went through that last year, leaving my gov pension career after just over 20 years. No one knows what the future holds. You’ve gotta look out for you & your loved ones, always.
Last edited by Madbull on Thu Jul 01, 2021 10:35 pm, edited 1 time in total.
toomanysidehustles
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Re: Why take any risk when expecting a pension?

Post by toomanysidehustles »

LittleMaggieMae wrote: Wed Jun 30, 2021 12:25 am Investing and taking risks early in one's career can keep the pension from shackling you to your employer later in your career.
^^^THIS^^^
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sergeant
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Re: Why take any risk when expecting a pension?

Post by sergeant »

What is the funding level of your plan? I know CalPERS all in is about 70% funded. My plan, which is managed by CalPERS is 85% funded. A friend that works for the city of Irvine is in a plan at CalPERS that is 100% funded. Check your funding level.
I had similar thoughts many years ago before I retired. We saved in our 457b accounts, managed debt, and now have pensions that pay way more than we spend every year. We also have several million dollars in assets. I don't regret taking risk while expecting a pension.
AA- 20+ Years of Expenses Fixed Income/The remainder in Equities.
tomsense76
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Re: Why take any risk when expecting a pension?

Post by tomsense76 »

Any investment (including holding cash) is taking risk. It's not a question of not taking any risk. It's a question of which risks one is willing to accept.

For example there have been many threads of folks (understandably) worrying about bonds keeping up with inflation (especially while we are near the zero-bound). How that particular risk plays out is unknown. That said, one can model out different scenarios on one's portfolio to assess the impact of that risk appearing and determine what effect that will have on reaching one's goals.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
Valuethinker
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Re: Why take any risk when expecting a pension?

Post by Valuethinker »

punkinhead wrote: Thu Jul 01, 2021 9:52 am
Valuethinker wrote: Thu Jul 01, 2021 9:29 am
punkinhead wrote: Wed Jun 30, 2021 5:15 pm In 1991 straight out of college I hired into a company with a pension program. In 2007 they went through bankruptcy and turned the pension over to the PBGC. I'll get maybe $25/year from the PBGC when I turn 62. I was one of the lucky ones because I ignored the promise of a pension and always maxed out my 401k. Plus I had time to recover. The ones that really got hurt were those that retired in their 50's just before the bankruptcy. The PBGC severely slashed their pensions and there was no opportunity for them to "unretire" and hold off taking benefits until the PBGC deemed them to be of retirement age. Those people will mostly have to work until they die.

That's just my cautionary tale of counting on a pension and not saving properly.
I am not aware that the PBGC *ever* makes cuts that drastic in pensions?

They cap benefits at a certain level, I believe - hence the pain of airline pilots.
My knowledge of this is second hand since I wasn't retired at the time and my benefits just got frozen at a pretty low level. The stories of cut benefits were told to me by prior coworkers (my direct boss included) who retired in their early to mid-50's just before the bankruptcy. I'm no expert on the PBGC, but I had a look at their "maximum monthly guarantee" values for 2007 https://www.pbgc.gov/wr/benefits/guaran ... -guarantee which was when our plan was turned over. According to that, a person who retired at 55 is only guaranteed up to $1856.25/month or $22,275/year. To be honest, I don't know what "maximum monthly guarantee" means. Perhaps it means that if the pension plan was well funded when the PBGC took over then they can pay out above that guarantee. Regardless, if someone were receiving, say, $150k/year and had a lifestyle consistent with that income then having income drop to $22k, $30k, or even $50k, is the kind of hit that sends them back to work.

Another big piece of it is that our employer promised us health coverage to bridge the gap to medicare. For someone retiring in their mid-50's, which was quite common for that company, they were counting on low/no cost health insurance for 10 years. That disappeared in the bankruptcy.
That's interesting. Thank you.
Fat Tails
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Re: Why take any risk when expecting a pension?

Post by Fat Tails »

CurlyDave wrote: Tue Jun 29, 2021 11:49 pm
infotrader wrote: Tue Jun 29, 2021 11:43 pm Sometimes, the biggest risk is not taking any risks.
I look at it more as a guarantee that inflation will eat away at your lifestyle. Even with a COLA, retiree costs increase faster than CPI-W.
+1, the time to take more risk is precisely when you can afford to. Should one only take risk when they have no pension?
“If you would be wealthy, think of saving as well as getting.” ― Benjamin Franklin
Parkinglotracer
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Re: Why take any risk when expecting a pension?

Post by Parkinglotracer »

Some take the risk they need to in order to grow their portfolio they need and some take the risk they think is prudent to do the same

Your heirs may be the beneficiaries of your willingness to take risk.

Personal decision I’d say
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snackdog
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Re: Why take any risk when expecting a pension?

Post by snackdog »

Most of the time in the stock market if you take excess risk you get eventually get wiped out. So, the normal allocation advice applies even to people with multiple inflation protected pensions.
DrGrnTum
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Re: Why take any risk when expecting a pension?

Post by DrGrnTum »

Here is an announcement that CalPERS just released.
21.3% investment returns for 2020-21 fiscal year.
This may or may not ease one's worries on the risk factor with a CalPERS pension.
By itself the announcement would somewhat indicate that they know what they are doing.

https://www.calpers.ca.gov/page/newsroo ... pplemental
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Wiggums
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Re: Why take any risk when expecting a pension?

Post by Wiggums »

snackdog wrote: Sat Jul 03, 2021 8:10 am Most of the time in the stock market if you take excess risk you get eventually get wiped out. So, the normal allocation advice applies even to people with multiple inflation protected pensions.
I think you might be talking about mean reversion?

https://www.bogleheads.org/wiki/Mean_reversion
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Wiggums
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Re: Why take any risk when expecting a pension?

Post by Wiggums »

Parkinglotracer wrote: Sat Jul 03, 2021 7:24 am Some take the risk they need to in order to grow their portfolio they need and some take the risk they think is prudent to do the same

Your heirs may be the beneficiaries of your willingness to take risk.

Personal decision I’d say
My 92 mother has Wellesley. She wants to stay ahead of inflation.
Thesaints
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Re: Why take any risk when expecting a pension?

Post by Thesaints »

Lone_Ranger wrote: Tue Jun 29, 2021 11:13 pm Many have asked, “how aggressive should I invest when I am expecting a pension when I retire?” The answer is usually something like, “you can afford to take big risk, but you ALSO can afford to take little risk, so do whatever feels right.” That makes sense to me.. but my question today is why should I take ANY RISK?

At risk of oversimplification, I see two possible scenarios playing out over the next 25 years.

1. Market returns are decent to very good. In this scenario, I have confidence my Calpers pension will fully fund my retirement cash flow needs. My investments in stocks are just a bonus.

2. Market returns are low to very low. In this scenario, my Calpers pension will struggle and have to cut payouts, which means I need to tap into my personal investments to live. In this scenario, my personal investments in stocks also did horrible and are very small, uh oh!

I am weighing keeping my AA very conservative even in my 30s, to ensure I survive in both scenarios.

Does my logic make any sense??
You are assuming that one has no interest in pursuing a more luxurious retirement, nor capital assets acquisitions.
Ron Ronnerson
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Re: Why take any risk when expecting a pension?

Post by Ron Ronnerson »

DrGrnTum wrote: Wed Jul 14, 2021 9:34 am Here is an announcement that CalPERS just released.
21.3% investment returns for 2020-21 fiscal year.
This may or may not ease one's worries on the risk factor with a CalPERS pension.
By itself the announcement would somewhat indicate that they know what they are doing.

https://www.calpers.ca.gov/page/newsroo ... pplemental
I read about this yesterday. As a result of the recent returns, CalPERS has lowered its assumed rate of return form 7% to 6.8% while its funding level went from 71% to 82% (or 80% funded using the 6.8% rate of return assumption instead of 7%). Meanwhile, California is planning to use some of its budget surplus to add to its reserves while also paying down billions in retirement debt. The reforms that have been implemented in recent years greatly increased contribution rates and lowered benefits for new workers. Put together, California pensions are on a noticeably better trajectory now than as recently as just a few years ago and this may affect the decision on how much risk someone who is expecting a pension may wish to take.
Thesaints
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Re: Why take any risk when expecting a pension?

Post by Thesaints »

The S&P 500 returned >35% over the same fiscal year. They would have slightly beaten that 21.3% by simply holding a 60/40 portfolio.
Incidentally, CalPers target allocation is 58/42, but their ER is a lot higher than what a 60/40 institutional portfolio would cost...
Parkinglotracer
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Re: Why take any risk when expecting a pension?

Post by Parkinglotracer »

Wiggums wrote: Wed Jul 14, 2021 10:03 am
Parkinglotracer wrote: Sat Jul 03, 2021 7:24 am Some take the risk they need to in order to grow their portfolio they need and some take the risk they think is prudent to do the same

Your heirs may be the beneficiaries of your willingness to take risk.

Personal decision I’d say
My 92 mother has Wellesley. She wants to stay ahead of inflation.
+1
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