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Career choices and retirement

  1. Apr 13, 2012 #1
    Hello everyone,

    I am interested in views regarding a traditional pension as opposed to a 401k. I am at a crossroads in my life where I can choose to move to a different career with interesting work and higher pay, but where most employers have a 401k retirement plan. My current employer has a traditional retirement pension plus a 403B.

    My current work is easy and very secure, but not mentally stimulating. I miss having to solve problems and use my intellect in my job. I do enjoy it from time to time and the benefits are good, but I'd like to advance my education and actually put it to use.

    I've done some math on both and depending how long live I could come out significantly ahead with a traditional pension, but I wouldn't have much to leave to my future children. I do take care of myself health wise.

    A 401k could leave me with a lot of money to spend as I get older, but there is always the possibility of losing money in this type of plan or running out if I live a long time.

    I've had some friends and family who have lost money in their retirement plan in the past ten years and it is quite nerve racking to say the least. One in particular has lost over thirty thousand dollars and has not recovered it in about eight years.

    I feel this is a useful topic of discussion for people just starting their careers or people such as myself that are planning a career move, or just anyone. Please offer your opinions and thoughts on the current state and options for retirement.

    AZ

    P.S.
    I realize I am blessed to have this choice in the current economy.
     
  2. jcsd
  3. Apr 13, 2012 #2
    I am not a financial advisor, and you should probably consult one. Since you’ve asked on a forum, I’ll give you my best advice. First, a couple of questions:

    1) How many years have you been working for the current company with the pension? How many years have you been contributing (probably all)?

    2) Are you vested? Will you receive anything from the pension you are currently in if you leave? If not, the income lost should be considered as well.

    You are right to wonder about 401k's. Private pension funds are usually understood to get better returns than personal 401k accounts due to the investment choices made. However, it is worth noting that much investor loss in 401k’s is due to too their poor planning and poor asset choice, and as such it is not impossible for you to do better.

    Depending on the amount of pension contributions you lose by moving and the amount of pay increase, it is entirely possible to take the higher paying job and make financial choices that create just as stable (or more stable) post retirement financial condition.

    For instance, treat the 401k a little like a pension plan by making very safe but potentially lower returning investments, such as bonds, and then as you cash in upon retirement purchase life annuities to cover your longevity risk (that your 401k runs out before you die). I often hear people talk about 401k’s as if they are entirely equity investments. Mine certainly isn’t!

    Or how about this: you suggest you will enjoy the work more. So switch careers, enjoy your job, and sock away anything above what you make now into your retirement savings (choosing to use retirement vehicles to deal with tax issues as necessary). How about using that extra cash to purchase deferred annuities?

    Admittedly, the super low interest rates make purchasing annuities today a difficult choice to defend. However, it may only be a few years before rates rise. In that time you could save the excess salary and buy the financial safety you’re looking for once prices become more reasonable.

    Finally, I’d like to note that people treat pensions as if they are set in stone. They are not. Private pensions that end up with the PBGC usually get cut, and we’ll be seeing an increasing number of public pensions get slashed over the coming decades. This does not mean yours will, but it is important to compare risks in a reasonable way.
     
  4. Apr 13, 2012 #3
    Thanks for your response Locrian.

    I have 5 years into my pension, I believe I have enough years to recover some of my money.

    I am also 30 years old so that will change how I calculate things. Thanks for your advice on life annuities, I hadn't considered that, and I will probably speak with a financial consultant before I make a decision.

    Having a traditional pension has lulled me into thinking I have no choice but to stick with something that feels like a security blanket, especially when I here about how so many people can't even find jobs and lose so much money in a 401k. It has also hindered me by making me too nervous to explore career options. It's actually a little strange.

    It also doesn't help that I hear conflicting things about both types of retirement in regard to there pros and cons.

    I know it is probably not wise to plan one's life around how they will spend the last 15-20 years on earth so I'm going to try to not let this affect me get into some interesting work.

    If anyone else would like to offer their point of view, please do.

    Thanks,
    AZ
     
  5. Apr 13, 2012 #4

    lisab

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    Staff Emeritus
    Science Advisor
    Gold Member

    I only have my own limited experience with 401k accounts, but in mine you can adjust how much risk you're exposed to. If it really bothers you that you might lose money, then chose a low-risk option -- and settle with the lower return that comes with low risk investment options.

    Or you can mix your risks by putting, say, ~30% in a low-risk option, ~40% in a middle option, and ~30% in a higher risk option.

    Locrian has great advice about consulting a financial adviser.

    Also, he's right about pensions not being a guarantee. I had mine "frozen" recently, and it does not adjust for inflation. In ~20 years when I retire, it will have evaporated.
     
  6. Apr 13, 2012 #5

    jtbell

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    Staff: Mentor

    If you end up relying on a 401(k) plan, definitely divide your money among high-gain / high-risk funds and more stable vehicles such as bond funds or annuities.

    I've spent my entire "real work" career, beginning at age 29, in small colleges, covered by 403(b) plans run by TIAA-CREF, the "600-pound gorilla" in this field. I've always divided my contributions equally between "TIAA traditional," a variable-annuity plan which guarantees your contributions and provides a modest return in the 3%-4% range, and "CREF stock," their original broad-based stock mutual fund. (They have other choices now, but I've never used those.)

    I increased my contributions regularly so that since about 1996 my total contributions (including the employer contributions) have been at least 20% of my salary. The attached graph shows the results for the two components and their total. The CREF portion lost a lot during the dot-com / 9-11 bust, and during the Great Recession, but the TIAA portion has been chugging along steadily.

    Variable-annuity plans do have a bad reputation in general, because they're complicated and the ones run by for-profit insurance companies etc. tend to have high fees associated with them. My understanding is that TIAA is an exception because it's a non-profit to begin with, and serves non-profit organizations. So if you have access to a non-TIAA variable annuity, you'd better look at it very carefully. It might be better to use a bond fund instead, which can still go up and down, but not by nearly as much as a typical stock fund.
     

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    Last edited: Apr 14, 2012
  7. Apr 16, 2012 #6
    I've always looked at a 401K as a great option especially if there is an employer match. You have control over where your money goes and how much risk you want to tolerate; nobody can take it away from you (generally speaking).

    I also have a pension...and while it is great I see it as something that can be frozen as others have said or taken away all together if a politician or someone else decides it isn't good for me to have it anymore or if some entity goes bankrupt or bets wrong.

    If you are disciplined, a 401K is great. Just remember to adjust the agressiveness of your investments as you get closer to retiring and you'll probably be fine. Too often people look at pensions as untouchable and IMO they underestimate the risk associated with the pension not being there in the future.

    Life is too short to stay in a job that makes you miserable.
     
  8. Apr 17, 2012 #7
    Look at http://www.bogleheads.org -- especially the wiki.

    Even if you decide to take a more active approach to retirement planning the website is still extremely valuable.

    The biggest problem, IMO, with 401ks tend to be the limited options companies offer in their 401k options. If you are considering a new employer look them up on Brightscope (http://www.brightscope.com/) to evaluate their 401k. Too often companies choose a limited set of funds in their 401k with a terribly high expense ratios.

    I turned down a pension for a 401k, not b/c I thought the 401k was better financially but due to not wanting the golden handcuffs around me.
     
  9. Apr 17, 2012 #8
    I contribute enough to get the employer match in my 401K. Beyond that, there are better places to invest money. Many employer plans are limited and the costs are higher than normal.
     
  10. Apr 17, 2012 #9
    I don't see how you get to that conclusion. Only sticking the amount to get the employer match ignores the fact that all your investments in the 401k/403b are pre-tax. Hence, depending on your tax rate, you've made (not paid taxes) a pile of money just by contributing to it and the income off the investment is tax deferred. Secondly, the buying power or a properly negotiated employee program usually results in lower fees, since companies like Fidelity, Stanley, T. Rowe Price, Diversified, etc. want the company’s account.

    Now, IMO, there is little real difference in a 401k and a 403b. The 401k is generally found in "for profit" companies (GE, Bechtel, Westinghouse, etc.) and the 403b is generally found in "non-profit" or "not for profit" entities (schools, county hospitals, universities, etc.). For self employed and small companies you can add in things like SEP IRA, Keogh, etc. I’ve been around enough years I’ve got all types of accounts spread over several investment companies. I could lower my fees by grouping them with one investment company, but I don’t want all my eggs in one basket. This is really a conversation you need to have in person with a specialist.

    So my 2 cents is different. Max out the employer contribution, including “catch up provisions” for those my age. In my tax bracket, just putting the money in the 403b nets me 35% “return” from the income tax savings. Stick to managed funds appropriate for your age and goals. Since I just got this same advice from several of my investment advisors, I suspect you’ll hear the same. FWIW, when you change jobs you can roll your 403b/401k into any investment company you want to increase fund selection and lower fees.

    You can never start saving too soon, and save as much as you comfortably can tax free.
     
  11. Apr 17, 2012 #10
    Max out all of your tax advantaged avenues first. That's $17k in 401k and $5k in Roth or Traditional IRA. I like to invest in a Traditional 401k (pre-tax contributions) and a Roth IRA (post-tax contributions) so that I can diversify my taxed and non-taxed income when I retire. If you make too much to invest in a Roth IRA, look into doing a back-door Roth IRA.

    I say "when I retire" ... LOL, I doubt I'll ever really want to retire, though. I love working. Regardless, I'm still maxing my tax advantaged accounts.
     
  12. Apr 17, 2012 #11
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