Pension vs. 401(k)

Given a choice, which would you choose: a guaranteed fixed income for the rest of your life, or a lump sum that you could invest? As it turns out, lots of people prefer a sure thing.


This is what a recent survey showed about public sector employees posed with the option to select a defined benefit pension plan or a 401(k)-type defined contribution individual account. In fact, even when the defined contribution plan was the default option and workers had to proactively choose the defined benefit pension plan, they made the effort. In the eight states studied that offered a choice between the two options, all had employees choosing pensions at rates of 75 percent or higher in 2015.


If there’s one thing this survey can tell us, it’s that people are paying attention. Most people don’t have unrealistic expectations about stock market outperformance, “getting rich” and retiring early. Many people remember what the recession was like and want to be better prepared should it happen again – particularly during retirement.


A MetLife survey recently revealed that 21 percent of retirement plan participants who opted to receive their pension or 401(k) assets as a lump sum depleted that money, on average, in less than six years. Among those given only the option of a 401(k), who took a lump sum, their money ran out in an average of four years.


Employer-sponsored pensions aren’t that common anymore, but you don’t necessarily need one. It’s possible to reposition a portion of the assets from a retirement plan and create your own guaranteed income stream with an annuity; the guarantee is backed by the financial strength of the issuing insurance company. We can help you determine if an annuity is right for you. Please contact us to schedule a consultation.


Even employees who have a pension plan may not get the retirement income promised because many pensions are now underfunded. This is particularly true of private, multi-employer pension funds. These are funds typically created by labor unions and cover industries where people often work for multiple employers in a year, such as trucking or construction.


Many of these funds have had difficulty recovering losses since the recession because the employees also work in declining industries such as manufacturing. When pension plans don’t have enough money to pay out the income they’ve promised, sometimes they go bankrupt or pay reduced amounts. To give you an idea of how many private multi-employer pension plans are currently underfunded, according to one report, it would take $76 billion to shore up the ones on the brink of insolvency.


Single-employer pension plans appear to be in better shape. Their maximum pension guarantee from the government’s Pension Benefit Guaranty Corporation, should their plan fail, is $65,045 a year versus a multi-employer plan guarantee of $12,870 a year for union plan workers with 30 years of service.


Though many employees may still prefer a pension over a self-directed 401(k) investment plan, today’s pensions are not as generous as they were in the past. Many involve higher retirement and benefit-vesting ages, longer work periods to qualify, lower payout percentages and smaller inflation adjustments once payouts begin.

Ray Lantz

Raymond C. Lantz, Jr. is the president and founder of USA Wealth Group, Inc. Ray has many years of experience advising clients in retirement and sophisticated tax planning strategies, multi-family and commercial real estate projects, and legacy planning. Ray is a graduate of Clark University, holds a law degree from Boston College, and a master of laws in taxation from Boston University. You can hear him every Sunday on Money Wise with Ray Lantz on WBSM 1420AM or on the Radio Pup app. 

Interested in reading more?  Here are some articles that may be of interest to you:  

Public Employees Choose Pensions

The Retirement Choice Causing Some To Run Out Of Money

What happens when your pension fund runs out of money

Some Union Retirees Could See Pension Benefits Cut 90%, PBGC Chief Warns

Pension cuts getting steeper for state and local governments


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We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

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Pension Matters

Pension Matters

When it comes to preparing for retirement, headlines about underfunded pensions can be troubling. One study found that 21 state pensions held less than 40 percent of the assets needed to pay benefits. To make up for that shortfall, each taxpayer would have to contribute an extra $1,385 per year.

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