"Worse case" retirement scenario

Retirement Retire Well on Less
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From the financial advisor credited with discovering the 4% safe withdrawal rule:

https://www.msn.com/en-us/money/other/why-retiring-this-year…

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" Many workers in the late 1960s retired on defined benefit or final salary company pension plans that were guaranteed to pay them incomes for life. Today most have to survive on their 401(k), which has just fallen 15%."

I too used to look fondly back to the days of defined benefit pension plans–until I realized

  • Pension plans have gone bankrupt–leaving recipients to only collect a reduced pension
  • Not all plans have cost of living adjustments. Those without mean lower real income over time.
  • You had to typically stay with the same company for at least 5 years to get vested in their pension program. If you quit before vesting then you walked away with nothing. How restrictive!

Much rather take my chances with defined contribution pension plan (ie 401k). Once I reached age 55, I started rolling over funds from 401k into an IRA. This has given me the flexibility to manage my investment strategy.

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Much rather take my chances with defined contribution pension plan (ie 401k). Once I reached age 55, I started rolling over funds from 401k into an IRA. This has given me the flexibility to manage my investment strategy.

401K assets are not assets of the company. If the company goes bankrupt, the 401K assets are not at risk.

IRA does give you more flexibility to manage based on your investment strategy.

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True story
In 1985 at age 57, my uncle retired early with 30 years as a teamster with a pension of $1,800 per month. He thought he’d died and gone to financial heaven. But these pensions are fixed. When he died in 2019 at 91, the purchasing power of the $1,800 had dropped to $732 based on the CPI-W. But that’s with an average annual inflation rate of 2.5%. Had the average annual CPI-W been 4% for those retirement years, the purchasing power would have dropped from $1,800 to $449.

Inflation is the enemy of the retiree. This can be partially offset by an inflation adjusted pension typically only available from government employers, depending on how the inflation adjuster is determined or perhaps by income from dividend paying companies whose dividends grow each year.

BruceM

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