Comments on: Pension: Archaic Relic? http://retireby35.com/2009/09/pension-archaic-relic/ Chronicling my journey to financial freedom Wed, 08 Sep 2010 20:00:28 -0700 http://wordpress.org/?v=abc hourly 1 By: Her Every Cent Counts http://retireby35.com/2009/09/pension-archaic-relic/comment-page-1/#comment-164 Her Every Cent Counts Tue, 15 Dec 2009 20:17:26 +0000 http://retireby35.com/?p=414#comment-164 I dream of pension plans. Well, not really. I wouldn't want to be tied to any one job for my entire life! It's funny, my dad was an actuary and as a child I had no idea what that meant... now I understand why he said his job is becoming obsolete. He spent his whole life figuring out plans that would be the least risky for companies. No wonder he was so depressed all the time. I dream of pension plans. Well, not really. I wouldn’t want to be tied to any one job for my entire life! It’s funny, my dad was an actuary and as a child I had no idea what that meant… now I understand why he said his job is becoming obsolete. He spent his whole life figuring out plans that would be the least risky for companies. No wonder he was so depressed all the time.

]]> By: admin http://retireby35.com/2009/09/pension-archaic-relic/comment-page-1/#comment-98 admin Sun, 13 Sep 2009 16:41:03 +0000 http://retireby35.com/?p=414#comment-98 You're right that most pensions follow a J-curve. I know someone that works for County and in his pension plan he gets around 2.8% of his salary for every year he works, until when he hits the 25 year mark and it suddenly gets boosted to 100%! So if he misses just that one year, he only gets 67.2%. It's crazy what a difference that makes, so he definitely wants to hang on until the 25th year since he is already in his 21st year. To me the way the pension plan works is kind of like a carrot and stick routine. The longer you hang around the more it hurts if you leave, so most people end up incentivized to stay around until it becomes really profitable. But in my case there really is no incentive: ours is a straight 1% no matter how many years you work and if you take early retirement (and want the benefits early), even that amount gets reduced by 5% per year... And like you said, inflation can be a killer and over a few decades a lofty sum will end up be tiny peanuts. So I am not depending on a pension by any means. That is pretty crazy how rapidly your pension cranks up later in life from 20k -> 40k -> 80k! And all in the span of 10 years! I can see why you would have a dilemma about whether to stay on for another 10 years (60k difference per year is definitely large by most means). I think overall the question comes down to which is more important, the money or the time, and whether you will have enough resources to retire at the age of 45. If you can live a comfortable retirement at the age of 45 then maybe all the money in the world won't be that important to you, but if that extra amount would really change your future lifestyle (and how happy you are in retirement) then it might be worth hanging on for some more years... and you can always compromise by just doing 5 more years and not 10. You’re right that most pensions follow a J-curve. I know someone that works for County and in his pension plan he gets around 2.8% of his salary for every year he works, until when he hits the 25 year mark and it suddenly gets boosted to 100%! So if he misses just that one year, he only gets 67.2%. It’s crazy what a difference that makes, so he definitely wants to hang on until the 25th year since he is already in his 21st year.

To me the way the pension plan works is kind of like a carrot and stick routine. The longer you hang around the more it hurts if you leave, so most people end up incentivized to stay around until it becomes really profitable. But in my case there really is no incentive: ours is a straight 1% no matter how many years you work and if you take early retirement (and want the benefits early), even that amount gets reduced by 5% per year… And like you said, inflation can be a killer and over a few decades a lofty sum will end up be tiny peanuts. So I am not depending on a pension by any means.

That is pretty crazy how rapidly your pension cranks up later in life from 20k -> 40k -> 80k! And all in the span of 10 years! I can see why you would have a dilemma about whether to stay on for another 10 years (60k difference per year is definitely large by most means). I think overall the question comes down to which is more important, the money or the time, and whether you will have enough resources to retire at the age of 45. If you can live a comfortable retirement at the age of 45 then maybe all the money in the world won’t be that important to you, but if that extra amount would really change your future lifestyle (and how happy you are in retirement) then it might be worth hanging on for some more years… and you can always compromise by just doing 5 more years and not 10.

]]> By: S. B. http://retireby35.com/2009/09/pension-archaic-relic/comment-page-1/#comment-97 S. B. Sat, 12 Sep 2009 20:14:28 +0000 http://retireby35.com/?p=414#comment-97 Oops...meant to say ages 26 to 35 for you. Oops…meant to say ages 26 to 35 for you.

]]> By: S. B. http://retireby35.com/2009/09/pension-archaic-relic/comment-page-1/#comment-96 S. B. Sat, 12 Sep 2009 20:13:04 +0000 http://retireby35.com/?p=414#comment-96 Your pension plan formula is pretty typical, although 1.0% x years is a bit on the stingy side. What you are discovering is that a typical pension accrues more as you get older. It's commonly called a "J-curve". You're being hurt not only by the fact that you don't plan on working there your whole career, but also by the fact that your years spent there occur near the beginning of your eligible working years, and not near the end. The pension would be worth much more if you worked at your company from ages 56 to 65, rather than from ages 36 to 45. For me, it's in the middle of my possible working years, plus my employer is more generous. Hence, it does amount to something significant, but if I retire at 45, I will have to wait until 65 to start drawing benefits, and inflation eats up so much in 20 years. My pension dilemma is actually a pretty major decision I have to face. If I retire in my 40s, it is just when the J-curve is starting to crank up. It is very lucrative to stay with my employer until 50 or 55 because of the pension. My approximate pension value would be $20K/year at 45, but it increases to $40K by 50, and to $80K by 55. That is really, really hard to pass up. However, retiring that late conflicts with how I really want to handle my career and my life. Sigh. Your pension plan formula is pretty typical, although 1.0% x years is a bit on the stingy side. What you are discovering is that a typical pension accrues more as you get older. It’s commonly called a “J-curve”. You’re being hurt not only by the fact that you don’t plan on working there your whole career, but also by the fact that your years spent there occur near the beginning of your eligible working years, and not near the end. The pension would be worth much more if you worked at your company from ages 56 to 65, rather than from ages 36 to 45.

For me, it’s in the middle of my possible working years, plus my employer is more generous. Hence, it does amount to something significant, but if I retire at 45, I will have to wait until 65 to start drawing benefits, and inflation eats up so much in 20 years.

My pension dilemma is actually a pretty major decision I have to face. If I retire in my 40s, it is just when the J-curve is starting to crank up. It is very lucrative to stay with my employer until 50 or 55 because of the pension. My approximate pension value would be $20K/year at 45, but it increases to $40K by 50, and to $80K by 55. That is really, really hard to pass up. However, retiring that late conflicts with how I really want to handle my career and my life. Sigh.

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