09 April 2006
By Tami Luhby
Traditional plans for public employees and others offer worry-free management, payouts; health benefits a plus
Ray Mignone always took playful jabs at his buddies who went to work for the government or in public schools. He wondered why they would settle for such relatively low-paying jobs.
But Mignone doesn't find it so amusing now that he's getting closer to retirement and sees how much better off many of those friends will be in their "golden years," thanks to generous traditional pensions.
"We professionals always made fun of our friends who became firemen and teachers," said Mignone, 52, a financial planner in Little Neck. "But they have the last laugh. We may be making more money now, but these people will have a better retirement."
Having a defined-benefit pension - which an employer funds, manages and distributes - alleviates many financial worries for those fortunate enough to still have them. Often, Mignone's clients who have pensions don't have to save as much as those who have just 401(k)s in order to have a comfortable retirement.
Research, in fact, shows that money from a traditional pension - combined with Social Security - generally replaces 56.3 percent of a couple's pre-retirement income, while a 401(k) combined with Social Security substitutes for just under 43 percent. Social Security alone replaces 34.4 percent. Some pension plans - particularly those in the public sector - replace an even greater percentage of salary.
"Having a pension and Social Security [combined with private savings] allows most households to live as well after retirement as they did before," said Alicia Munnell, director of the Boston College Center for Retirement Research, which studied the topic. "If you don't have a pension, you'll have to tighten your belt in retirement."
Many of Mignone's clients who were public school teachers are getting about $50,000 a year from their pensions, with $18,000 more from Social Security. Without the pension, the teacher would need $1 million in savings earning a return of at least 5 percent a year to generate the same income. Teachers often retire in their 50s and can then spend more money on travel and other pleasures than their peers can in retirement.
Many traditional pensions also come with retiree health benefits, which help senior citizens afford the ever-escalating costs of medical care - a major worry for many in retirement. And most public-sector workers have the added benefit of annual cost-of-living increases in their pension checks to protect them against inflation.
Another thing those with traditional pensions don't have to worry about is "ruining their own retirement" by investing too aggressively or too conservatively or by saving too little in 401(k)s or other accounts, Mignone said.
In a traditional pension plan, the company is responsible for funding the pension and properly investing assets to ensure that the money will be there to cover monthly retirement checks. With a 401(k), employees have to determine how much to save and how to invest it to reach their retirement savings goal.
On their own, many workers don't live up to the responsibility of saving for retirement, said Dallas Salisbury, chief executive of the Employee Benefit Research Institute. They often don't start saving soon enough or put away enough money.
"The major advantage of pensions is that you're accumulating retirement wealth in spite of yourself," he said.