[quote=AN][quote=SK in CV]So what you’re showing there is if the annual pension payments are invested every year for 30 years it will be worth that much? That’s not the same as retiring with a $3 million 401K.
For it to be equivilent to a $3 million 401K, you have to start with $3 million and reduce it every year by the $100K and add investment income. I don’t have to do the calculation. I know that 7.5% annual investment return will yield $225K a year without ever reducing principle.
But I did the calc. $1,250,000 with annual withdrawals of $100K on the first day of the year, 7.5% earnings will last for more than 40 years.[/quote]
I see you’re adding in the anual investment return for the 401k side. I didn’t do that. If you add in investment return, then you’re adding risk. BTW, where can I invest that guarantee 7.5% for 30 years? I S&P didn’t do that between 1950-1980. It’s definitely below its 2000 value. Will we cross the 2000 value in nominal term any time soon? I have no idea. This is why I assume 0% investment return. There are so many variables. If you retired in 2000 and you put your money in index S&P, you lost money in nominal term over the last 12 years. I haven’t even counted inflation or the expected 7.5% return.[/quote]
The assertion (I believe) was that a $100K pension was the equivilent to a $3Million 401K. It simply isn’t. Nothing about annual raises. Nothing about inflation. With a 401K you have unlimited flexibility. Skip withdrawals entirely until you’re 70. Even after that, minimum distributions are pretty small. 100% of any remaining balance can be left to an heir, with a pension you can’t do that. (Possibly a lower survivor annuity.)
The only way to compare is doing a NPV analysis. That, of course, ignores the possibility of a premature death, in which case the value goes way down. So even using a 40 year life is probably overstating the requirement. 30 is probably more reasonable for retiring at 55.
S&P compound annual growth rate of more than 7.5% going backwards from 2011, for any period more than 16 years.
Using 4%, you could get annual payments of $100K a year for 38 years with $2.4 million, assuming the first payment was at the beginning of the first year. (Monthly payments would probably come close to extending that life to 40 years.)
So at 55 years old, if someone is going to offer you either a $100K a year or $3 million in a 401K, which one are you going to take?
