Create Your Own Pension Plan

As the debate in Madison rages on concerning public sector employee’s benefits and collective bargaining rights, now is a good time to look at the differences of retirement benefits from those participating in the Wisconsin Retirement System and their private sector counterparts.

Why are benefits from the Wisconsin Retirement System so good?

 

The retirement plan for eligible employees works as a forced savings plan.  There is an employer and employee contribution amount that is deposited annually into the Employee Trust Fund on behalf of the employee which equates to around 11% of pay, depending on an employee’s classification.  Right now the State contributes to both portions and Governor Walker’s proposal would have the employee’s contribute the employee portion (5.6%).

Money is put in every year regardless of personal finance, market, or economic conditions.  These dollars are for a future monthly benefit and employees can’t borrow or withdrawal the assets.

 Simply put, a good amount of money is invested consistently for a long period of time without it being touched.  A retiree in the WRS can expect between 50-85% of their pre-retirement salary to be replaced when factoring in Social Security.

 How can I duplicate these types of benefits?

 

According the Bureau of Labor Statistics only 21% of private employers offer a traditional pension plan (9% for companies with less than 100 employees).  This number is trending lower at a rapid rate and is from 2007 (the numbers are probably much lower right now). 

Most companies will offer some type of defined contribution plan such as a 401(k) plan that puts the bulk of the savings burden on the employee.  Often companies will make a contribution for their employees in the form of a match or profit sharing contribution.  According to the Profit Sharing Council of America the average employer contribution is around 4%.

Assumptions:

*A female working in Wisconsin retiring at age 62 with 30 years of employment history

*Pre-retirement salary was $50,000

*Social Security benefits will be $1,177/month or $14,124/year (avg. SS retirement pay)

*Retirement benefits from the state will be $2,365/month or $28,376/year which coupled with SS will bring the annual retirement benefits up to $42,500 (85% of $50,000)

 A private sector employee making $50,000 that puts in 7% of her pay and gets a 4% employer contribution for 30 years would expect to have $434,820 in a lump sum amount at age 62 if the investments earned on average 6% per year (a balanced portfolio of 60% stocks and 40% bonds that was rebalanced quarterly earned 8.42% per year over the last 20 years ending 1/31/2011).

 This lump sum amount can be turned into monthly payments through an immediate annuity which according to immediateannuities.com would give a 62-year old Wisconsin female a monthly lifetime payout of $2,365/month with a 10-year beneficiary payout option.  If you add in the same Social Security benefit of $1,177/month you will get to $42,500 per year.

Conclusions

 

  • Pension-like benefits can be created by those without traditional pension plans.
  • Without a disciplined savings and investment approach the above assumptions are nearly impossible to reach. 
  • Make sure to factor in employer contributions when evaluating pay.  Most human resources professionals will tell you that very few people ask about the level of employer contributions to a plan, they might just ask if a plan is available.
  • Keep updated with your plan.  If your employer reduces their contribution (like many did during the great recession) then you should be prepared to make up the difference with your own contributions if you want to stay on track.
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s