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Home › Forums › Other › My next door neighbor was a cop, still under 60, been retired for more than 5 yrs › SK in CV wrote: The assertion

May 31, 2012 at 11:46 PM #744709
an
Participant

[quote=SK in CV]
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.)[/quote] You’re assuming those in the public sector have no saving and their only source of money saved for retirement is the pension. These flexibility also apply to the money public employee save. If anything, they have much more flexibility. Since they can just spend their pension money for retirement and the money they’ve been saving since they start working can grow until that die without ever being touch. That would be a huge chunk of money if they let it grow for 60+ years. We all know time is compound interest best friend. Especially when it money is allow to grow without being withdrawn.

[quote=SK in CV]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.[/quote]
NPV is not the only way to compare. But lets take the NPV number. $100k pension growing at 2.5%, the NPV would be ~$2.4M. That’s still a huge chunk of money. Assuming you’re in the private sector, to amass $2.4M by the time you’re 55 and you start working at 22. You’d have to save on average of $72k/year for 33 years if you have no growth. But, I’m sure you’ll say, but you have to take growth into consideration. So, I use 8% growth, which is definitely on the high side. You’d still have to save $15k/year, every year for 33 years to amass $2.4M nest egg. How many 22-30 year old do you know that save $15k/year every year since they get out of college at 22?

[quote=SK in CV]S&P compound annual growth rate of more than 7.5% going backwards from 2011, for any period more than 16 years. [/quote]Past performance is no guarantee of future return. At this snap shot in time, I definitely don’t expect the S&P to grow at 7.5%. If it does, the S&P will be at ~4200 in 16 years. It’s currently at ~1300 today. I wish it would but I’m not holding my breath. The S&P was at ~1400 in 2000. We’re 12 years past that point and we’re below that peak. If you expect average 7.5% return from S&P every 16 years, the S&P need to be at ~4400 for you to meet that 7.5% average goal. I don’t have a crystal ball, but I don’t see the S&P getting anywhere near 4400 in 4 years. Do you?

[quote=SK in CV]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.)[/quote]Again, even at 4% is no walk in the park, depending on when you retire. The last 12 years is no walk in the park. To get 4% average annual return from 2000, S&P needs to be at ~2600 in 4 years. I don’t see S&P doubling in 4 years. So, if you have that $2.4M in 2000, over the last 12 years, assuming you have to stomach to keep 100% of your net egg in the S&P, you’re only only negative nominally, you’re depleting your nest egg at $100k a year, which is $1.2M over that 12 years. So, 1/2 of your nets egg is gone and you’re only 12 years into your retirement. Do you think the remaining $1.2M can last you the next 18 years?

[quote=SK in CV]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?[/quote]I’d take $100k a year in a heart beat. But these pension are not just $100k/year, it’s $100k/year + yearly increases of 2.5%-3.5%. I’d take that in a heart beat.

All of these calculation is assuming you’d die after 30 years. The pension looks even more lucrative if life expectancy get to 40 years. With the advancement of medicine in the last 30 years, I expect that in 30 years from now, 100 years old will be the new 70.