Hello everybody welcome to financial matters my name is Merlin Rothfeld today we have a very special guest to help us go over some retirement planning issues specifically pensions versus. 401ks we have an expert in the financial services industry are buying gear and is joining us a alright welcome. Back hey thanks for having me Marilyn glad to be here I’m glad you’re here because I need some help I love the younger generation I’ve got a 401k plan. And I think I’m financially secure and I’m gonna be set for life but there’s.
Other ways of making retirement happen and that certain investment vehicles so yeah walk us through some of the base let’s walk through that real quickly there’s typically two types of plans that. Are offered by your employer one is the pension the other one which most people. Are familiar with is a 401k or an IRA a pension plan defines your benefit so after you retire. They will define specifically how much you’re going to receive in retirement it could be. Five thousand a month ten thousand a month whatever it may be but you know what the.
Defined benefit amount is they’re fabulous I love pensions the more pensions we had it’d be fantastic so much easier it’s fantastic so now. We have the other side we’ve got a 401 K 401 K you define your contribution you get a company match potentially with your companies matching those dollars the money grows tax-deferred which is great.
But then when you get to retirement you really don’t know how much you’re going to take out it’s more of an accumulated value balance and we’ll look at some of those examples today but. Those are the two different types of plans that are out there and there’s some very interesting structural differences as are pointed. Out with a defined benefit that number is yours you you work up to this check amount and that’s your gonna get every month until the. Day you die so if you live – you know 150 years old they’re on the. Hook for that and there was an interesting change happen in the 1970s late 70s which basically took that responsibility away from an employer and put it on you that’s the tricky part because.
Now you are on the hook for your management of your investments so with that defined benefit really I guess the key is it specifies a defined benefit amount all. The risk was on your employer so this is key now what does this look like I think this is. The more important part well here’s a picture of kind of what you might see right so if you ask a fireman or teacher what their retirement account value is they’re. Not going to give you a number they’re gonna say it’s right 60 70 80 percent of my.
Salary so for an example here this is about as you’re. Working through your 30s you get your 50s and 60s maybe you’re making ninety ninety five thousand. Dollars a year and your pension plan will turn from where you’re at your salary it will take your last three four years of salary typically and. They’ll turn that into a pension so when you get to a point of retirement and you’re 65 years old. You will get an salary of sixty-five thousand dollars a year for life and there are two key components.
To that you know what they are I can’t wait with a pension plan you don’t know Merlyn you should know I’m saving this for you let. Me tell you what they are one is it’s guaranteed right so it’s guaranteed it’ll come that paychecks. In your in your checking account or it’s gonna come in the mail every single month second one is guaranteed for life so for as long as you live the employer is on the hook. To continue to pay you that’s the nice part about a pension and I think this is important because in my previous session we looked at time being a factor for.
Retirement and while in the 1940s you know they didn’t have to worry about it running out of money with the pension program if we live to be 80 great we’re getting this in this. Example here sixty five thousand dollars a year you’re getting that all the way through then or you go to one hundred it’s still going to be.
There you go two hundred and fifty because science and technology got that much better you’re still going to be getting this is a huge advantage. I think there’s one other that I would add in here if you notice that that sixty five thousand dollars a year for life is on. A horizontal line that doesn’t have any bumps fluctuations or any sort of movement does the market look like this no you might not appear until the market drops 50 percent and rallies 30. Percent then drops another 50 you’re still going to get that money which makes a pension an amazing vehicle because you’re. No longer subject to these massive market fluctuations which you.
Might be any defined contribution program which is a perfect segue into a defined contribution plan which most people are familiar with it’s a 401k. Asset plan 403 B that’s what most people have today so the risk of those types. Of plans on our shoulders were the ones responsible for putting the money in yes you might hopefully get. A company match that’s one of the big benefits the other big benefits of these types of plans is it’s tax deferred you’re not paying any taxes while the. Money is going in that account so those are a huge benefits.
Plus you also get the tax deduction while you’re saving as well so some significant benefits while you’re accumulating for retirement the tough part is when you get to a point of. Retiring and you have to rely on this money for income it doesn’t turn into a puncheon there is no guaranteed screen stream of income for life there are. No guarantees so we can show that market slide which is a perfect example here on an account you know it’s while we bring this one up I think it’s important. For everybody watching right now to understand why this happened this is a critical piece for this transition from pensions to for one case and IRAs in the pension program member all this was on.
Your employer they had to take your monthly contributions and then they put it in the right investments and whatever they did with it you didn’t care because all you said is. I’m putting in money every month and when I retire I’m getting this amount of money in that Katy example. We looked at it was $65,000 a year your scenario might be different depends on what how that plan. Was structured in today’s market really starting in about 1978 the rules change because this. Was a huge burden for employers they don’t want all that responsibility guaranteed for life Wow that’s a major commitment so what happened is financial firms came in and now. They said listen we will set it up where your employees.
Do the same thing they contribute money each month but we’ll make them responsible for putting it the right investments for portfolio rebalancing for becoming defensive when markets have major Corrections this becomes extremely difficult. Especially considering that the vast majority of people that watch our 401 K all they know is how much money is in there most people don’t even know what.
Positions they hold which is rather frightening to me or the fees let’s not forget the fees or the feels your fees. So 401ks are notorious for fees again the risk is on your shoulders you’re dealing with fees what if you have to take money out.
For remodeling a house or child’s education all that burden is on our shoulders now that’s the tough part about 401ks and you really don’t know what you’re going to get from. An Inc perspective at the end of the day so those two major differences pension plan pretty straightforward you really don’t know where you’re getting until you do know what you’re getting until you when.
You retire you get a certain amount on a defined contribution 401k plan you don’t know what your benefit is but you know what you’re controlling but all right let’s look at this picture. Here I don’t know you said I don’t know I’m getting look this assumes I’m worked for 35 years and I finally retired I’m 65 I’ve gotten to that point where I’m like. I just bought a new set of ping golf clubs I’m gonna. Meeting the course every day during retirement I have almost.
$800,000 safe retirement happy I don’t want to do it I understand what you’re saying but there’s still risk with this plan and the burden is on your shoulders right so what type of. Income can you generate from $800,000 these days CD rates are. Low interest rates are low we’re not in that booming interest rate environment I was playing devil’s advocate there because this is what happens most people look at it going I have this huge sum.
Of money but if you really sat down and said let’s do the math and figure how much do I need. Per year for my entire retirement and whether that’s gonna be 20 or 30 or 40 or 50 years I personally would like to hear mark let’s say 60 years. For retirement well I tell you what given my current lifestyle there’s no way the eight hundred thousand dollars is gonna make it. Through my retirement so you have to start thinking of not the lump sum the lump.
Sum while it’s important it can help us make the right investment choices it does not tell you how much you’re going. To be getting each month during retirement so it’s important to start. Looking for for income generation sources not just saying I this giant lump sum in my 401 K or my IRA. County this is the big difference that we wanted to point out in this lesson on pensions versus 401 K so.
Yep no absolutely right 100% guys in future lessons will dive a little bit deeper into this topic of pensions or. Defined benefit verses 401 K s which is defined contribution and really how it applies to your personal setup your personal situation there are ways that we can generate income streams that don’t involve a. Pension program but our structure is somewhat similarly although you would have to take the legwork to set those things up they’re easy to do you just have to know what. You’re doing our and I will dive deeper into that in future lessons so thank you for joining us today we look forward to seeing you in future sessions.