Pensions and Investments – When Some People Aren’t Ready to Give Up

Black Leather Wallet With Numeric Pad Lock by Vichaya Kiatying-AngsuleeThe following is a guest post from MMD at IRAvs401kCentral.com. IRA vs 401k Central is a website that looks at leveraging the benefits of your investment options so that you can get the most out of your retirement savings and build the biggest nest egg possible!

The other day I was visiting a customer off site when we got into a discussion about retirement pensions and investments. He was walking with me to the front entrance and was just trying to make small talk. He asked if my work provided a good 401k plan, and I let him know that they do. He then mentioned that his company (one of the large automakers) was trying to push people into 401k plans.

Being from the older generation (this man was older than my father), he felt that it was wrong for his company to do that and voiced his disapproval. Clearly he was far more comfortable with the notion of receiving the set payment for life that a pension would bring. His reasons:

1. The pension is guaranteed for life
2. You don’t know what is going to happen in the stock market. He cited the Great Depression of 2008 as being a big example of how we could all suddenly find ourselves with half the money we saved.

Remembering the Good Times:

This gentleman’s opinion came as no surprise to me. There are still thousands of people both old and young that think that a pension is better than a 401k plan.

Perhaps if things were the way they were 50 years ago, I might agree. Not too long ago, globalization was at a minimum, and America was the dominant leader in almost all industries. Competition was low, buying was high, and the fat cats just got fatter. Companies could operate at business models where they paid their employees handsomely both during and after employment.

Those were the times. But all things change. Better or worse, they change.

And once they do, it’s how you adapt that determines how well you’ll survive.

Pensions and Investments – Why There’s Nothing to Fear:

If for years you told me that I was going to be taken care of financially, and then suddenly I was on my own left to decide how to manage my money, I’d have some reservations too. But I think if people were given all the facts and truly shown the differences between a pension vs 401k, they would find that it may not be as raw a deal as they think.

First of all, a pension is not necessarily guaranteed for life. Although the terms may read that way when it is initially set up, there are plenty of examples of workers who invested 30 to 40 years of their lives into a pension based system only to find that at the end of the road it wasn’t there. The money had been mismanaged, dried up, held up in court, or the company had went bankrupt.

For the ones that do end up receiving one, there is also then the danger that they only receive a percentage of what they were originally promised. Again there have been dozens of stories where municipalities or companies only paid people half of what they were promised.

I don’t know about you, but I’d rather control my own density than let someone else tell me the bad news after it’s all too late.

The Pros and Cons of a 401k Plan:

It’s true that with a 401k plan there can be a lot of challenges initially:

• Not everyone knows what to invest in
• Your savings are not guaranteed
• You have the option to not invest which could be disastrous later on when you’re trying to play catch up

However, despite all that, there are some things that can make it more appealing.

You don’t have to be a financial genius. Just invest in a mixture of low cost index funds that appeal to stocks, bonds, international funds, and other assets like real estate, metals, etc. With a 401k I get the power to invest my money the way I want to – safe or risky.

You control what you invest in. There’s no reason you have to lose half your money in a stock market crash. If you’re afraid of this, just invest in safer assets like bonds or cash. Diversity can do a lot to minimize your risk.

You’re employer helps. Just because you don’t get a pension doesn’t mean your work can’t help you out. Lots of jobs offer a 401k employer match as an incentive for you to participate. You should never give up free money when someone is offering!

You control how much. Gone are the days of working a minimum of 30 years to retire. With a 401k you can invest as much as the IRS allows and plan your way to an early retirement if you wish.

Create Your Own Pension:

Suppose you absolutely wanted to get guaranteed income for life. No sweat. You always have the option of taking your 401k money and putting it towards an annuity with a solid company. Even though annuities pose their own set of issues, they will provide for a steady stream of income. Annuities are as old of a financial product as money itself, and they will continue to be for a very long time.

Readers – How do you feel about the change in trend between pensions and 401k plans?I

Kim’s Comments: Never having had a pension eligible job, I don’t really know anything other than planning for myself. My husband works for the school system, so he should get a small pension if the state doesn’t decide to cancel that at some point. I would be pretty worried if that were our only retirement planning. I’d say take it if you can get it, but don’t let that be your only plan, and don’t be afraid of choosing investments in a 401k because it’s new and might seem difficult. If you do, you could be passing up that free money MMD mentioned, and I know no one wants to do that!

Image courtesy of FreeDigitalPhotos.net

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Written By
Sydney White is a Texas-born stay at home mom who enjoys spending time with her family, bargain hunting and, of course, writing. She is currently the editor-in-chief of Snipon.com.

28 Comments

  1. I agree that things change with time for better or worse. The thing most people with pensions seem to forget is that they were invested for years with a pension. If you start working at 30 and invest in your 401k until you are ready to retire you should have a pretty nice little egg. You don’t have to be a guru like you mentioned. I like having control and if I want to invest in stocks, real estate or whatever I can. I will admit I have few friend that are police officers and firefighters and what they get after they retire does look great on paper. Not sure how its going to work though as time will tell.

    1. Mr John Bogle of Vanguard has taught us all that investing is really just as simple and cheap as picking out an index fund and giving it a whole lot of time. At a minimum you can count on the market average, and that is not all that bad! Some people will do okay with a pension. But it would bother me that at any time a legal decision could made to reduce my income or freeze it.

  2. I wouldn’t like to be totally reliant on someone else handling my retirement, but I think some diversity might be nice. I do totally agree that you can make investing in your 401k as simple as you want it to be. It’s too bad there isn’t some better education and/or investment choices out there provided by employers, but you can make the best of what you’ve got.

  3. I work at a private school that has a pension through a union. I invest on my own since there’s no match with our 403b and the fees are terrible. With local municipalities going bankrupt, the idea of relying on a pension just scares me. This major Detroit bankruptcy can destroy people’s retirement. The sad story of Prichard, AL (http://tinyurl.com/b8d2gpx) shows how screwed retirees are when their pension goes bankrupt. Those folks will never get their money back.

    1. Its just really sad to think that you could work all that time and legally not get what you were promised. You are wise to invest on your own. I look at a pension as icing on the cake; not a cornerstone to the overall plan.

  4. Even my friends who are US govt employees are largely pensionless, so I think they’re definitely relics on their way out, and on the whole I think that’s better for people who are self-directed. Pensions kept you tied to one job for so long, whereas with 401Ks you have more ability to move around in your career and direct your own retirement savings.

    1. Being able to move around from job to job if you want is one of the nice benefits of a 401k setup. But beware of “vesting” rules. You don’t want to lose all your employer contributions just because you changed jobs too soon.

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