What's so great about a pension?

[Anonymous]

My SIL is a teacher who has a pension. Other family members occasionally make jabs that she has it made because she has a pension. Isn't a pension just a 401K? Her contributions are matched at a similar % as mine are. What's the big deal about having a pension?

[Anonymous]

Pensions aren't contributed to like a 401k...DH has a pension that is based on the avg past 3 years salary multiplied by the number of years served by 2%...so if he is in 20 years he gets 40% of the last 3 salary. HE contributed not a dime to that. He also has a traditional 401k that is matched 4%.

So at retirement, if his last 3 years avg $200,000 he gets a monthly payout of $6,666.67, PLUS social security PLUS whatever we draw from 401ks.

[Anonymous]

Your 401k is a defined contribution plan. You decide what to put in and then take on the risk of your investments losing value or you living too long and not having as much income as you were expecting. Your SIL probably has a defined benefit plan that guarantees payments of a set amount no matter how long she lives or what the market does. Of course, pensions can go bankrupt and screw retirees but that’s really unlikely with a government plan.

[Anonymous]

Anonymous wrote:Pensions aren't contributed to like a 401k...DH has a pension that is based on the avg past 3 years salary multiplied by the number of years served by 2%...so if he is in 20 years he gets 40% of the last 3 salary. HE contributed not a dime to that. He also has a traditional 401k that is matched 4%.

So at retirement, if his last 3 years avg $200,000 he gets a monthly payout of $6,666.67, PLUS social security PLUS whatever we draw from 401ks.

I should add DH's career has a retirement age earlier than most, but he can go back and work in a different capacity full time at 55 and defer the benefit. It sucks that pensions have mostly gone away except for public sector workers, but it is part of what keeps talented people in roles for which they are not compensated nearly as much as they would be in the private sector.

[Anonymous]

Agree with PP’s, plus want to add that you can use up the funds in a 401k, but a pension will keep coming as long as you live.

[Anonymous]

Pensions all work differently. I do have to contribute to mine, but I think traditionally you didn’t have to so that may be what your relatives are thinking of.

It’s a nice safety net knowing that unless the state goes bankrupt I have some guaranteed income in retirement.

[Anonymous]

The question is whether it’s a defined benefit or defined contribution. If it’s a defined benefit, employer bears the risk of market losses. If it’s a defined contribution, the employee bears the risk.

[Anonymous]

Not exactly the question, but I'll add a cautionary tale:

My father retired in 2007 after something like 40 years at the same company. He had the option of taking the defined benefit pension (guaranteed income for life) or cashing it out and investing himself. He is a smart finance guy and cashed it out, thinking he could make more money on investments and keep the income. Then the market crashed during the housing crisis. They are still doing OK, but he often says he wishes he had kept the pension.

[Anonymous]

Anonymous wrote:Not exactly the question, but I'll add a cautionary tale:

My father retired in 2007 after something like 40 years at the same company. He had the option of taking the defined benefit pension (guaranteed income for life) or cashing it out and investing himself. He is a smart finance guy and cashed it out, thinking he could make more money on investments and keep the income. Then the market crashed during the housing crisis. They are still doing OK, but he often says he wishes he had kept the pension.

You do not f around with pension. Glad they are still okay

[Anonymous]

A defined benefit plan is an incredible security blanket to have in a down economy, or if you end up living significantly longer than estimated when other people might be starting to feel the pinch of dwindling retirement assets.

[Anonymous]

Pension= defined benefit. Unless the company goes bankrupt you are guaranteed a portion of your salary for life. If I stay 30 years at my organization, I will get 80% of my salary. I consider this part of my compensation.
401k= defined contribution. No guarantee the money will be there when you retire. If you recall in the aughts, many people lost their retirement because their 401ks were invested in company stock. Stock market crash = nothing left in 401k

[Anonymous]

What happens when you die? Does you spouse or kids get it?

[Anonymous]

Anonymous wrote:Not exactly the question, but I'll add a cautionary tale:

My father retired in 2007 after something like 40 years at the same company. He had the option of taking the defined benefit pension (guaranteed income for life) or cashing it out and investing himself. He is a smart finance guy and cashed it out, thinking he could make more money on investments and keep the income. Then the market crashed during the housing crisis. They are still doing OK, but he often says he wishes he had kept the pension.

But stocks are way way up from 2007?

[Anonymous]

The vast majority of people are way more risk adverse than you think. People love pensions because they feel like it is guaranteed money. It's like an annuity without all of the bullshit ripoffs of buying an annuity. People like safety.

[Anonymous]

A pension is income for life. You’ll continue to get paid until you die. In some cases, your spouse can continue to receive income until they die, but you usually have to set that up before retirement and it usually pays less per month if you elect a survivor option.