This video compares the benefits and limitations of a defined payment plan (pension) versus a defined contribution plan (401k, IRA, 403b).
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Pension plans and 401(k) plans are two popular retirement saving options with their respective advantages and disadvantages. Traditionally, pension plans were the go-to choice for many employees, as they provided a fixed income for individuals after retirement. However, with the rise of 401(k) plans, the debate over which option is better has become more prevalent.
The main difference between a pension plan and a 401(k) plan lies in the way the funds are managed. In a pension plan, the employer contributes a specified amount of money to a fund that is then managed by the employer or a third-party administrator. After retirement, the employee receives a predetermined amount of income for the rest of their life.
On the other hand, a 401(k) plan is a retirement savings account that is funded by the employee with or without employer contributions. The funds in a 401(k) account are typically invested in stocks, bonds, mutual funds, or other investment vehicles, and the account balance fluctuates based on the performance of these investments. Upon retirement, the individual can choose to withdraw funds from their 401(k) account, and the amount they receive is dependent on the performance of their investments.
One of the main arguments in favor of pension plans is the guarantee of a fixed income after retirement. With a pension plan, employees have peace of mind knowing that they will receive a steady stream of income for the rest of their lives. This provides a level of security and stability that can be appealing to many individuals, especially those who may not have the expertise or interest in managing their own investments.
On the other hand, 401(k) plans offer individuals more control and flexibility over their retirement savings. With a 401(k) account, individuals have the ability to choose how their funds are invested, and they can make adjustments based on their risk tolerance and investment goals. Additionally, 401(k) plans allow for portability, as employees can take their account with them if they change jobs.
While the allure of a fixed pension may seem appealing, there are drawbacks to consider. One concern is the potential for underfunding or mismanagement of pension funds by employers, which could result in reduced payouts for retirees. Additionally, with increasing life expectancies and rising healthcare costs, some pension plans may not be able to keep up with the financial needs of retirees in the long run.
On the other hand, 401(k) plans are subject to market fluctuations, and individuals bear the risk of investment performance. This means that there is potential for the 401(k) account balance to decrease, especially during economic downturns. However, for those who actively manage their investments, a 401(k) plan can offer the potential for higher returns compared to a fixed pension.
In conclusion, the question of whether a fixed pension is really better than a 401(k) ultimately depends on individual circumstances and preferences. While some may value the security of a guaranteed income from a pension plan, others may prefer the control and flexibility offered by a 401(k) account. It is important for individuals to carefully consider their retirement needs and goals before making a decision. In some cases, a combination of both pension and 401(k) plans may offer the best of both worlds.
Small taxes can affect investment decisions such as whether to choose tax-free municipal bonds over taxable bonds or do a Roth IRA conversion. I’ve been sitting on over $745K equity from a home sale and I want to invest on the stock market, how do I achieve this without being taxed twice?
I have a defined benefit plan after retiring from the US Navy after nearly 30 years on active duty.
Unfortunately my wife died on active duty in 2014 and was buried with full honors in 2014 in Arlington National Cemetery.
She did well on deployments but after we returned to the US (DC) she had a seizure and was diagnosed with a terminal brain tumor.
Committed to the Navy after her first surgery she worked at the highest level within the Navy.
She was/is amazing and the Navy knew this.
Did you really not mention inflation directly as a problem with relying on a pension? Almost no private company pensions have cost of living adjustments.
Let me just add, based on my understanding, military personnel have healthcare benefits while and after serving, subsidized housing and shopping, and three squares a day, some of the branches have excellent food.
For me our pension was an absolute ripoff. We were told we could retire at 30 years with the company with full pension. Then the union who runs it ran it into the ground and they took away our 30 and out priviledge as a result. So now I need to work 12 extra years (42 total) to get a full pension. In the meantime, we negotiated our 401k match away to get the pension so I haven't had essentially either for 16 years.
Also correct me if I am wrong but I think Vesting is complete in 5 years everywhere……I had to wait 10 years back in the day.
Surprised that You didn't mention the PBGC in Washington that protects the pensions of workers in case their company files for Chapter 11 bankruptcy. Grant it You might not get the full amount of what your pension might have been, but at least you are not walking away totally empty handed.
Sounds like most people here have both pension and 401. With a pension how are your assets allocated in your 401 in equity/bond as percentages?
Have a defined pension plan, including medical. Retired at 65 with a generous net monthly benefit plus social security. My Medicare Advantage is $162 per month. My retirement benefits are amazing and I am very lucky. Way back the Reagan administration convinced folks that funding their own retirement through the “miracle of the market and the invisible hand of capitalism would enrich us all.” I thought “no thank you.”. It worked out fine for me and others who are lucky to have a defined pension plan and a good health plan agreement.
I retired last year post office 50 years of service. CSRS nice because you talk to past retirees they make more money retired than they did working.
I'm a public sector employee with a Section 218 agreement. I'll have a pension, S.S., and 401(k). Yeah buddy.
I worked for the state of California. Retired early with a pension that receives 2% COLA increases annually. Will soon be eligible for social security. I’ll be earning more than what I was making when combining both pension and social security. I love it! Retirement is fantastic!
Happy that I have both 401(k)'s and a pension.
Ugh pensions are not guaranteed if you have one. I for one believe there are always greedy groups trying to steal from you and never stop devising ways to get our monies.
With a pension, it will not grow in value at anywhere near the rate that a fiat dollar will decline in value. You cannot control your pension. It does not earn. If you have a 401K or Roth or individual investment portfolio you can control the funds, stocks, and commodities in order to earn. You have control. As long as you understand "buy low, sell high" you should do better than with a pension. I wonder how many pension plans or investment plans will survive that which is coming? You must take that into consideration as well. Good luck.
Military retirement, federal retirement, TSP, and SS at 62. All COLA'd except for the TSP. It's not a ton, but it's enough.
When my company froze my pension in 2007( no cola as well), my pay did not increase. So I don't think that point is that real. My retirement is mostly my 401K ( IRA) and SS when I turn 62. my pension doesn't even cover health insurance. I saved better than most, no marriages, kids and living below my means helped.
Medical centers/hospitals still carry fixed defined benefit plans for their long term employees, as you noted. Over the last several yrs they have switched to defined contribution plans, and target funds as you said.
When I worked for a hospital/medical school, we were all called into a mtg (everyone who had 20 plus yrs) and offered the defined contribution plan. They offered a series of funds for us to pick, and they would match our contribution. We had to sign paperwork for them to legally stop contributing to the defined benefit plan.
That was 2006/07. The market crashed in 08' and the people who took their advice, lost a lot of money. I decided not to opted out of the defined benefit plan, because I felt that it was their obligation and I knew that the defined contribution plan was for their benefit, not ours. I am now retired and enjoying my fixed annuity every month from the defined benefit plan & SS.
Recently, I found out that the current employees who took the defined contribution route, had their contributions stopped by the Hospital. Thus, now they are only putting in their own money, and not getting matching funds anymore. They went back on their promise. I had a feeling they would do that in the end.
You cant outlive your pension? Tell that to the ex bethlehem steel workers.
Actually…some places offer both the fixed annuity (pension) and 401(k) to those who are grandfathered.
Everyone still gets a defined benefit plan, its called social security. I would've rather kept the 12% for 40+ yrs of work and invested it myself.
Another con on the American workers by the corrupt career politicians.
Retired at 58 with public DB pension that pays 85% of my final salary for life (COLA-adjusted and 100% passed to surviving spouse for life). $8.5k payment every month. Add my early SS at 62 and I’m making 110% of my final salary for life and it is COLA-adjusted.
I’m 29 years deep into a municipal pension and hoping to retire in 5-7 years around 55-57 . That was the primary reason I stuck with this career because it certainly wasn’t the pay. To combat that pay differential, I have always had a side hustle that I use for investing and vacations for my family. Fully funding our Roth IRA’ and a now sizable brokerage acct using some of those monies to cover health insurance from 55-65 until medicare kicks in. The key to making this work is planning way in advance. Think about it early and often!
I’m collecting a pension after 40+ years as an engineer that is about two 14:21 -thirds of my retirement income. But it has no COLA or other benefits other than paying my spouse if I pass before her. I also have a decent amount of money in my 401K fund which is likely to form the backbone of my retirement at some point in the future. Although my younger coworkers were envious of my pension, they have a lot more control over their retirement fund and don’t have to feel the need to stick with the company forever to maximize that fund.
I worked in a union facility and for some of the years we had a defined contribution plan, started withdrawing it and letting my 401k stay untouched. Im retiring at the end of this month at 61.
NYS Teachers’ Retirement is one of the healthiest in the nation. I retire in June with a pension of around $100,000. Never thought about it when I started teaching, but now I’m financially secure and can enjoy my retirement without worrying about where the money comes from. I can’t wait!
Im in a defined contribution pension plan. My employer (UPS) contributes $14/hour into the Western Conference Teamsters Pension. It's a multi-employer pension plan. UPS has no risk I dont think. Every participant has a private account as different employers have different contribution rates. An anual pension is figured from that and paid monthly. Is that better or worse than a defined benefit plan?
Just retired first of the year, with both pension and 401k, plus retiree medical benefits. I put 20% into my 401k each year, plus a company match, and will take the pension in a lump sum to be put into an IRA. I am very thankful to have all the benefits that we got, even though they are changing for new hires. My company was non union, but treated us very well. Retired after 31 years at age 60.
I can tell you some Airline Pilots would say 401K as the Airline went broke and there was no more Pension !
Through my working life my company went through 4 mergers. Those that had a pension were frozen. I started in 1989 and was not subject to a pension. The 401k served me well and I was able to retire at 59 1/2. I would not have been able too with a pension.
I'm retiring in 143 Work/ 205 Calendar Days with 29 Year-of-Service in CalPers coordinated with Social Security at 100% Wage Replacement. My Roth & 403b are minimal. I'm a Renter. <<<Downsides>>> I'll be 62, not yet Medicare Eligible. There is NO Healthcare in my Pension. CalPers COLA is 2% Statutory with a 80% Purchasing Power Guarantee. My workarounds: My $5k in Premium Share & OOP Costs will pay for Healthcare ANYWHERE in SE Asia. <I have cousins in the Philippines> I'm planning a Three Year Vacation, if I acclimate, I'll never return except to visit. Note 1: After 90 Days in SE Asia, I can return to the US to visit, for no more than 120 Day & my Insurance will work in the US. Note 2: There are Philippine Hospitals that can Bill <SOME> Medicare Advantage Plans.
Kids can inherit an IRA/401k/TSP they don’t inherit a pension.
Many years ago I vested for a small defined benifit and then left the company. I was able to roll the lump sum into a new company's 401k. No doubt, that amount doubled several times over the next 30 years. So glad I was allowed to convert it into equities, instead of leaving it in an insurance product.
My wife has a pension (teacher) and I don't. I like the combination, actually – it allows me a little more risk-tolerance in my investments.
One slight disagreement with your video – as a public school teacher, her salary is considerably higher than what she would get as a private school teacher
My husband would need at least $600,000 in a 401k or more to make up for the pension he got. He has 401k too though. They also paid for his and mine and our son’s health benefits at age 55. Saved us a fortune. He started a second career at age 55 and is still working. He was in a trade union. We put the money we saved on health insurance in savings. It probably saved us over $300,000 nit having to pay for health insurance on the marketplace.
I did not have much retirement. At age 50 I started a state job. When I retire at 65 my pension will be worth $2200/month on top of our SS. That is amazing for 15 years vested. I had no idea.
A fundamental difference is that those managing their own investments will on average tend to have money left over, sometimes significant, when they pass or as they approach their late years. This is necessary in order to have sufficient buffer to cover volatility in the profile. Some of this money will feed into the health care system, but some will presumably be passed to family or charitable causes. Beyond the individual impact, I wonder if this will have some cultural or other impact, especially as the people that had to switch to 401k are now approaching later ages, given that the switch to 401k happened around the 80’s.
I took my my first retirement at 45. My pension started paying me about 58% the next month. If I work until 65, I will collect well over 1 million in gross payments from the pension; while still working.
Some pensioners, me included, are hit with the WEP provision. I am looking at SS as fun money and not including it in my planning.
My mother's pension does not have a cola and the company got rid of the retiree medical insurance. I have a military pension and then a 401k from my post military job. I would say a 401k is better although the military pension enabled me to max out the contribution to it and my IRA.
I know lots of retired people. And every single one is on some form of pension. Most are a public one. All got to go yrs earlier. All make substantial more than if they had saved for themselves. They don’t have to worry about whether they’ll get a check next month and for how much because of market fluctuations . They can enjoy retirement starting at a young age knowing that for the rest of their lives that pension check will arrive on time every time.
I know of no one retired on their own savings.
I am 53 with 2 pensions and a decent 401k..I want to retire at 57.5..
I have a public sector DB plan. I’m not complaining but the fixed payment won’t have any COLA’s forever. I’m hitting the 457 plan hard to help.
I'll be receiving a small ($1400 per month) pension from a company I worked for years ago. The contacted us to let us know that they will be sending us a buy-out option in the spring. Is there a calculator I can use to determine if the buy out amount is worth taking?
I’m going to be 66 in March. I retired in 2022 age 64. I am blessed to have Social Security, pension, 401K and an annuity. In addition a $300K slush fund for fun and games. Also NO DEBT.
I just retired in 2023 at the age of 56 after working 30 years in the state criminal justice system. I get a monthly pension check which will be supplemented by Social Security at age 62. I also have a modest deferred comp account to draw from if needed.
I worked one place for twelve years and was vested in the defined benefit plan, but unfortunately, it's a fixed – not an increasing – benefit so it will become a smaller and smaller part of my overall retirement income. Luckily, SSI will be about five times as big, and I have an IRA as well.
One thing you didn't mention about 401k's and the like (403b's, SIMPLE IRA's, etc.) is that you have to watch where and how the money is invested, and how much is taken up-front in the contribution, or what the cost ratio is on the investment. I worked one location and the up-front money taken out was 5%. I convinced the powers-that-be to look at changing the IRA location to Vanguard, with extremely low cost mutual funds and no up-front money taken out. They paid for and brought in an investment adviser for all the employees to use, to customize the investment mix and help them understand the new system, as well as help them decide whether to roll over any past investments into the Vanguard system.
Retirement is great. I took my first defined benefit retirement and cashed it out after 10 years employment. I bought my first house with the money. later in my life I retired again with 20 years at another outfit. I really liked that benefit, and am content with the end result. Thank you Geoff for your channel.
I would encourage everyone to retire as soon as you can. An old wise man told me in 1972, (I was 18) that I would need $1,000 times my age in order to be secure in the future. He was right. Nowadays I don’t know the new formula, for youngsters, but it worked for me, and I am now 70.