Dear Pete: I’m in the midst of a major career change, and have been offered two similar positions with two different firms. One of the companies has a 401(k) plan, while the other has a 401(k) plan and a pension plan. The offer with just the 401(k) plan has a 5% match, and the company that has both retirement plans has a 4% match. If all goes well, I plan on being at this next job for the remaining 25 years of my career. Is having a pension worth getting less of a match? — Kate, Arlington
Finally, someone is looking deep within the benefits packages when selecting a new job.
I can’t begin to tell you how infrequently people consider the quality of retirement benefits, when selecting a job. It teeters on embarrassing.
I once saw a guy turn down an offer he later found-out included a 10% 401(k) match and a generous profit-sharing plan, because he ignored the benefits during his selection process and obsessed instead about the salary offer. To this day, it’s still one of the biggest financial mistakes I’ve ever seen someone make.
Kate, if the company’s pension is strong, you could be holding the golden ticket to a beautiful retirement. Most people your age are forced to fund retirement on their own via a 401(k) and Social Security. If you have a pension, you will have a three-pronged approach to retirement income.
In today’s America, retirement income typically comes from Social Security retirement income and income derived from retirement vehicles such as IRAs and 401(k)s. Back in the 1970s, Americans saw retirement income flowing from three faucets: Social Security retirement income, a pension and personals savings and investments.
Pensions have all but disappeared completely in the private sector. In 1975, 88% of people in the private sector had a pension. Simply put, you could work at a place your entire career, retire, keep getting paid, die, and then your spouse would keep getting paid until they died. For example, my beloved grandpa worked for General Motors for 32 years prior to his retirement in 1983. He then received his pension for 31 years until he passed away in 2014. GM paid the man for 63 years, and they’re still paying my wonderful grandma.
People don’t understand how difficult the math of retirement is.
MORE PETE THE PLANNER:
You’re essentially trying to fund 80 years of living on 40 years of work. This is why I walk around stressed-out most of the time. I know the average American either doesn’t know the math, doesn’t care about the math, or is banking on dying before they retire. It wasn’t always this way. A pension was the great equalizer. It essentially guaranteed you wouldn’t run out of money. Have pensions failed? Absolutely. But I’d rather have one as a backup plan, whether it fails or not.
If I had faith in a company’s ability to maintain a strong pension fund, I’d take a position with a pension attached to it 90% of the time. As I think through the financial lives I’ve studied, outside of business owners who built a company and sold it, people with a pension and a robust 401(k) balance are the most comfortable in retirement. I’m talking about everyday Joes, at all income levels.
Kate, take the gig with the pension, and then aggressively fund that 401(k) like you didn’t have a pension. Not only does that bring some semblance of security if the pension fails, but it will create an absurdly comfortable retirement if the pension doesn’t fail. You have the chance to solve the retirement puzzle with this job selection. Do it.
Peter Dunn is an author, speaker and radio host, and he has a free podcast: Million Dollar Plan. Have a question about money for Pete the Planner? Email him at [email protected]
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