Retirement Shock: Need to Find a Job After 40 Years at General Electric
wsj.com
wsj.com
One easy improvement your this particular case would have been to roll some of the money from GE stocks into bonds and do a classic 60:40 split. If he really wanted to stick with that company, he could have even bought GE bonds since their default risk is reasonably low.
Diversifying is a wise move for strongly mitigating downside risk.
One of the wisest and thoughtful people I know was a long-time and early employee at a major tech company. That friend did exactly the same thing, diversifying early. It is difficult to overstate how successful he has become in life; success need not be measured in dollars.
My father's side grandfather had 2 retirement plans, 1) Navy Seals (12 years) 2) NYC Handy man (25 years)
My mom's side grandfather 1) Custodian in NYC 20 years + 2) Jazz Musician Union 10+ years.
They both were able to live a decent life after retirement and didn't work a single day afterwards. This will not happen for me. I also have a privatized plan for 15 years but my son had cancer for 5 years (Drained my retirement early) and we had 5 kids and chose to have my wife stay at home for about 7 years. Not very easy to save, heck I have no debit outside of mortgage and some student loans still. Zero credit card debit and no car payment. I know I am ahead of the curve but what about everyone else up to their necks in debit?
The system is broken and most people don't save enough and a few can't. https://www.bloomberg.com/view/articles/2017-01-03/the-401-k...
Annuities are not pensions. They pay fixed amounts based on some interest rate. The difference is in the lifetime of the beneficiary. We all die eventually, normally befor hitting 100. Short of magic, that isn't going to change much.
The difference with a defined benefit retirement plan is that the cost of benefits can rise drastically. Look at the difference in the cost of health care today and in 1960.
"The average lifespan of a company listed in the S&P 500 index of leading US companies has decreased by more than 50 years in the last century, from 67 years in the 1920s to just 15 years today"
I doubt things look any rosier 6 years later. So what does the math look like when the firm lifespan of the most profitable companies is quite a bit less than the lifespan of someone's useful working period?
You're absolutely correct. You cannot do these things and have functional DB plans.
An issue arises when contemplating the incentives. Every person involved in the up-front planning for DB plans is incentivized to be wildly unrealistic about the future. It's not like anyone doing the negotiating will have any real consequences, so why not offer lower contributions to win your election / union approval / make quarterly numbers?
DC plans have the distinct benefit of helping incentives align. It puts the costs on the balance sheet in the short term, and accountability is much more immediate.
It's not a perfect compromise. For pretty much everyone, ideally run pensions are better. It's just that getting there has proven at best incredibly difficult and unreliable.
At that point, you might as well do your own thing with Vanguard or Fidelity. The net result is the company got rid of the retirement plan, and started reselling other companies' commercial retirement plan products to their employees.
You can also "do your own thing with Vanguard or Fidelity" in an IRA, which has the tax benefits of a 401(k), however, the yearly contribution limits are unreasonably low, especially compared to a 401(k).
If there is no employer contribution, you essentially already are doing your own thing, except with whomever your company picked to be the retirement benefits manager, instead of it being your own choice. So you create your own IRA at the company you pick, and roll over everything from your employer's 401(k) into it every time you switch jobs.
I also think that IRA and 401(k) contribution limits should be combined, so none of this "$5,500 IRA limit and $18,500 401(k) limit," it should be "$24,000 combined 401(k)/IRA limit."
I was just saying that if you are young and have $10,000 a year to save for retirement you are better off, from a tax perspective, saving $5,500 into an IRA and $4,500 in your hallow 401(k) rather than saving $5,500 into an IRA and $4,500 in your Fidelity brokerage account. That's it.
My concern is that companies that offer a hollow 401(k) are actually getting some kind of kickback for forcing all of their employees to one company as their retirement benefits manager, or to a specific subset of portfolio options with that company, and the employees have no effective recourse, because of the separate contribution limits.
If the limits were combined, there would be no reason whatsoever to insert the no-contribution employer as middleman into retirement planning, or even to deposit more into the employer-sponsored plan than the maximum matching amount. Most of the companies are implicitly saying "you're on your own after you retire", but the law still says you have to invest through your employer to min/max your retirement plan. Given that many of them will dump employees long before retirement age anyway, it makes less and less sense for any retirement account to inexplicably have an employer's corporate logo pasted onto it.
I think it points out the dangers of government regulating too closely, but it IS a valid point.
Nearly every major industrialized nation's infrastructure was bombed to hell after WW2, except America. To the victor went the spoils, and so our economy boomed to a much much greater degree than it would have otherwise.
This lasted for a generation or two, and certain aspects of that capitalist feeding frenzy were enshrined as cultural values.
The idea that there was a social contract between employers and employees, and that an average hard working American wouldn't be tossed out on the street if they got sick, would have a house to live in and would not have to toil in their old age, was baked into America. If you work hard and you're loyal, you'll be ok.
However, where that was seen as a Governmental function after the Great Depression, in the boom years after WW2, the economy was simply flooded with money.
When there's that much money and opportunity around, it's easy to start thinking that the Government was the problem. That the social contract would always remain, and that we could trust our bosses who we knew and worked with every day far more than some politically motivated government bureaucrat.
Corporations bought the politicians. Then the politicians passed laws to make the bribery legal. Then slowly those post WW2 culturally enshrined easy answers became law.
Now we have people seriously talking about "trickle down" economics as if it were a real thing. Because it was kinda like that in the 50's when we were the only major industrial powerhouse in the world.
Now we've privatized nearly our entire healthcare system, because in the 50's hell, going to the doctor was cheap and how could that be anyone's problem but yours?
And now we have no retirement plans other than "we will let you put some of your own money into the stock market tax free, but hey if the market tanks you're on your own bruh! (even though you had zippy control over that)"
Again, because maybe that would have made sense in the 50's and 60's, and god knows if anything might have seemed true in that era it must be the word of God himself.
The problem of course, is that now that the winning team picks the referees, there's pretty much no way out of this. The government SHOULD be providing healthcare, and decent retirement so that business doesn't have this burden.
But then it'd be too easy to start new businesses. The referees picked by the last winning team aren't too keen on that.
I believe longer lifespans coupled with generous safety net provided by the government is a historical anomaly, propped up due to the growth spurt that happened post great depression + ww2. Now that things are reverting back to historical norms, we should rethink the way society is structured.
Social welfare such as the old age pension and disability pensions were starting to be eased before that. In Britain and it's colonies it was just after the turn of the century. (Not idea re: the USA.) They were basic, but you wouldn't starve.
> Now that things are reverting back to historical norms, we should rethink the way society is structured.
Or should we fight against reverting to historical norms? I'm not so keen on seeing our quality of life and life expectancy decline.
2. A pension can ride out a "bad" market because some people are paying in while others are paying out. In a 401(k) if you retired in 2009, you took a lifetime hit, even with a balanced portfolio. And you can get hit by a bad market and a long life at the same time!
3. Individual investors are morons. They buy overpriced funds and do a lousy job managing them. I am a moron, but at least I know it and invest accordingly. Vanguard did a huge study of all their individual retirement accounts, and number of trades that produced the best return was: zero. Every trade you make (statistically) is buying high and selling low. Pension managers aren't perfect, but they pay attention to expenses and don't chase the latest hot stock. Therefore you need much less of a contribution to fund a pension.
It depends on how you assess these factors, but Joey Schmoe is going to have to save 15% or more of her salary to get the same retirement security as a pension contribution of 10%. A pension is only unaffordable if those contributions aren't made, and then a wave of retirements sets off an unsustainable withdrawal. But that's not a feature of defined benefit vs. defined contribution, rather it's governments who use shady accounting rather than making a small contribution annually.
When you add in the fact that almost everyone who contributes to 401(k)s is well-off (half the population doesn't even have access), it is hard to imagine a method that is less likely to lead to comfortable retirements.
One other issue I have noticed with 401k's. Do 401k's exacerbate inter-generational income inequality? I know a number of people who are going to, in the next few decades, inherit very sizable 401k accounts. This is great, in that their parents were very frugal, saved well, and had comfortable retirements. But on the flip side, a pension would have died with that person, now there is this ongoing inter-generational transfer of wealth that otherwise wouldn't have occurred.
On the flipside, if the person who has a 401k finishes it, and has no more money they will then have to depend on their descendants for their livelihood.
Which can make the living standards of the descendant lower, because now they are taking care of their parent for the rest of their life. Which only gets more expensive the further they go (IE: Illnesses)
http://amp.timeinc.net/time/money/3925308/rich-families-lose...
>Indeed, 70% of wealthy families lose their wealth by the second generation, and a stunning 90% by the third, according to the Williams Group wealth consultancy.
I love this "factoid" though:
>“It takes the average recipient of an inheritance 19 days until they buy a new car.”
Anecdotally, I personally have two friends who got inhertences, both immediately spent it on cosmetic surgery.
And if people are consistently drawing more than they're paying in it's not sustainable. Every solution to that problem has drawbacks. You increase the premiums and fewer people pay in. You lower the benefits and maybe fewer people pay in too. It becomes a hard sell either way.
Compared to a 401k, where the company contributes 3% of an employee's salary (or somesuch) a year as an incentive to participate and if the employee screws themselves, that's their problem. It sounds a bit more attractive I imagine than all the other burdens a company has maintaining a pension program. And being responsible for it and to the recipients in perpetuity...
And you couple that with, not every sort of job operated a pension program even at their heyday. Not having access to a 401k program in 2018 doesn't mean your job would have had a pension program in 1978 either...
If your argument is that people pay into their own retirement as an account, then current people don't get pensions, unless they paid in (which the first group at some point did not do, so back to start).
At some point people must pay in to start, and that group is completely susceptible to the same market failures as before - if the market tanks when a large cohort is about to retire, then there will not be enough to cover them. Tapping the value from those not yet retiring to pay for those retiring will mean there is not significantly less for those not yet retiring.
You also overplay the value needed in a 401k. No one plans to live forever, so planning for a decade or a few after retirement is fine, with an expectation that at some point you may have to live of SS alone. This works fine, and doesn't need a fear inducing 25x salary savings.
Finally, companies fail, and with them pension plans fail. People move jobs a lot, so these pensions need to be mobile. Many pension plans require a decent amount of time to even get one, so people failing to meet that lose value over and over. At least a 401k is their money.
Your solution does not make these problems go away.
A better solution is to have a national pension plan, where everyone pays in, and everyone get some benefits. But that's SS, which already exists. Instead of 401ks and company pensions (why do people tie retirement plans with employers anyways?) increase SS taxes and payments.
But pensions seems so ripe for abuse. It's too easy to make optimistic and unkeepable promises about future compensation.
A quick calculation shows that you'd have to save roughly 2.5% of your salary during your working life, earning only 3% over inflation, to accumulate the median 401(k) balance.
Speaking of individuals,
4. Individual investors can't sue and otherwise police the companies they hold very effectively. A large fund is in a better position to prosecute fraud and that kind of thing.
The maximum 401(k) contribution for 2018 is $18,500. It's gone up $500/yr pretty regularly, but even if you contribute that maximum (~$750 paycheck pre-tax so your take home goes down much less) without an employer match, you can retire on $40k/yr in 24 years. And that's at the conservative 4% figure you mentioned. That doesn't include employer match, which is free money that most people with 401(k) access have. That doesn't include supplemental Roth IRA savings (2018 max of $5,500/yr) which can give you more a favorable tax structure in retirement. And that doesn't include additional savings you can have in a regular brokerage account, on the same securities your 401(k) is on, just without the tax advantages.
This probably violates a bunch of SEC regulations.
Essentially what you're saying is that you'd like to get a raise (more pension without a loss of salary). Well, wouldn't we all!
Now for people who spend frivolously, forced savings might be helpful, but it's not clear to me why the companies should take that role; seems like a role for the State (and, in fact, that seems to be the rule in many countries, with mandatory pension plans).
You and your wife chose to have five children, and chose for her to work as a childcare provider, which we know is a low-paid gig.
I'm very impressed that you managed to do that without going into debt, but I have little sympathy for other people who in similar situations find themselves struggling: the rest of us derive a smaller benefit from the continuation of your genetic legacy than you do, so it is appropriate that society should pay a smaller part of the cost of that lifestyle choice.
People who fall into similar situations without your foresight might struggle more, but so too do people who buy expensive cars they can't afford or pursue careers they enjoy instead of careers that pay well.
Unless you are the one starting said ideological conversations?
The difference is that an on-topic reply to an on-topic comment on an on-topic post diverges as part of an ultimately topical and natural progression, whereas starting with a polarized and ideological post that has little to do with technology, startups, or spontaneous cleverness only serves as an opportunity to reinforce the poster's ideological outlook as the new normal; that is, to move the Overton window.
I myself have been guilty of this. I told a friend of mine that I'd gotten some traction with a blog post about not getting hired by dropbox, and he asked me to share a really juvenile idea he'd had for protesting the TSA. I did it; the post was poorly received, and the community spanking was enough to remind me of what effective participation in a pseudonymous social news link aggregator looks like.
That being said, neither did I start this conversation, nor was it the sort of ideological shouting that drowns out the interesting stuff. The grandparent has a good anecdote about the poster's experience with retirement planning and raising a lot of children, and it makes a point with which I happen to disagree. I voiced my disagreement without attacking the comment or the person who made it.
Ultimately, I disagree both with your implied disagreement with my original point and with the validity of your rhetorical question, but I don't disagree with the topicality of your attack and therefore I don't think your comment deserves the downvote it has at present.
Parent's enjoyment of those children is an appropriate benefit which both parent and parent's wife have purchased at the cost of parent's wife's career and their retirement savings.
Put another way, parent and I both receive an economic benefit, but parent receives an emotional benefit. You can argue that I should pay for the economic benefit I receive, but I do not think it appropriate that I should subsidize the price of his emotional benefit.
I went for replacement myself: 2 kids.
They didn't choose to have their saving set back by however long because their child got sick.
So we certainly choose this for our lives and I am glad we did. Two of them graduated from college and one of them is serving in the Middle East in the National Guard.
You choose to drain your retirement early, if you didn't have that option (in other words, your employer controlled your retirement instead of you) you wouldn't magically get extra money to pay for cancer treatments - your retirement portion of your salary would just be unavailable for you to use. Just because you didn't use your retirement account for its intended purpose, that doesn't mean that defined contribution retirement plans are "broken."
In general, its probably not a great idea to drain retirement accounts to pay for bills, as they have some protection from creditors... at least talk with a bankruptcy attorney beforehand. I would personally rather declare bankruptcy than drain my retirement accounts.
It might just be me but I'd prefer controlling my money over my employer doing so, my employer might not even be around in five years. You can't prevent your employer from "investing" your retirement fund into Bernie Madoff's pyramid scheme[4], but you can prevent yourself from doing that. In the past I've worked at places where I don't trust upper management to make the right financial decisions. I'm glad I have a 401(k) because I can collect significant tax benefits from maxing it out.
Your wife obviously isn't going to get a retirement saying home with the kids with or without employee controlled pension, so I don't understand what that complaint is about? Or how it relates to retirement accounts.
In my opinion, if your employer offers a 401(k) they should be legally required to a) be opt out rather than opt in and b) be legally required to contribute some amount. That would fix some issues with people not prioritizing saving for retirement, however, unless you make draining your retirement account illegal then you aren't going to prevent people from doing dumb stuff.[5]
[1] They have actually changed that recently, a few years ago they introduced a new defined TSP contribution option that you may opt into instead of the defined benefit option.
[2] Some exceptions apply for war vets living in poverty
[3] I'm so sorry to bring up that possibility, I don't want to be mean, but its a fact that most people who claim to be in the special forces are lying, its a common thing.
[4] The NY Mets lost a bunch of money in Bernie Madoff's pyramid scheme.
[5] Dumb stuff being the guy I know who cashed out his retirement account to buy furniture.
1. Do your retirement plans transfer between companies.
2. What happens to your retirement plan if the company goes down under.
2. Doesn't really matter as long as the bank with the account is still around. Once you leave the company, they no longer contribute to your retirement account.
(I'm specifically talking about 401k retirement accounts.)
1. Not generally (ever?). This is one reason why traditional pensions are less attractive these days. Pensions were really a product of a world where someone worked for GM for their whole career or at least a long period of time. (Pensions tend to be constructed so that they rewarded long stints at one or two companies rather than short stints at a bunch of companies.)
2. It's probably safe. There's various legislation around private pensions and, at least as a last resort, the pension of a bankrupt company could be taken over by the Pension Benefit Guaranty Corp.
In fact, they now seem way too generous: paying such obligations accumulated large unfunded financial liabilities (6 trillion is an estimate I saw a few times), which shows them as unsustainable. This means that the pensions of your grandfathers paid a lot of money of your children, so their parents (us) struggle to fix this.
The solution is not more of the same defined benefit schemes to stick our children with still bigger bills. We must do something else (defined contribution? variable benefit?)
Maybe it was for the sake of actually being a going concern? I see no proof that this was ever sustainable (nor do I see proof that it absolutely wasn't, I'm just saying, what are the numbers involved?)
Was the model ever solvent? Or did your grandfathers benefit from the money being pumped into the system during their successors' years, successors who would never have that same benefit?
That said, the idea that you "don't have a choice" in saving for retirement (that is to say, perhaps a pension program that's less generous) has something going for it. There's a reason NFL players go bankrupt. None of us are particularly good at intuitively understanding future needs and planning for the future.
I’m sure that’s a very useful piece of advice for a Worker for whom “construction” means, you know, actually making stuff, not financial trickery
I believe no one can reliable predict which way a stock is likely to go. If there is a way to predict, only a few people know, and that prediction is soon baked into the stock price.
Diversify also means more than stocks and bonds... land, art, apartment buildings, laundromats, etc.
https://www.betterment.com/resources/should-i-own-stock-in-t...
Also means I can walk any time I want, most I’d lose out on was next year’s RSUs.
In what universe it is an unpopular opinion? I've always only heard the recommendation to diversify
Your retirement returns will be less than selling at a lifetime high price of whoever you work for.
But you will not sell at the lifetime high price. Please don't forget to sell at all.
I'm curious why you keep so much in Honeywell stock? For a very long time GE was a great company to have that would routinely give nice returns and dividends, and then things went downhill. Layoffs happened, and those people were faced with much lower portfolio valuations if they were heavily weighted in the company they work for.
$18.5k contribution + $10.5k employee match + $2.3k dividends. The dividends are like an additional 7% bump in contribution.
But I certainly agree that your core nest egg and growth investment be kept totally decoupled.
> Retirement looked pretty good until GE shares collapsed. His shares are now worth about $110,000, prompting a late-life job hunt.
I don't understand; it says he has an $85,000 pension. Isn't that more than enough to retire on? His stocks collapsed to about half their worth (roughly $110,000). This isn't exactly a crazy one off scenario; if you are invested in a single company and do not diversify, it's hard to place the blame on "others" and "complain" about having to find another job after keeping an almost six figure pension at the same time.
Is there a chance that GE could forfeit on their pension payout requirements if they lose more capital? Not sure how that works so forgive my ignorance.
If he cashed out of GE and went into index funds, the stock portfolio would be conservatively worth another $3300 a year.
That's still $62800/year. If he owns his home, that amount can fund his retirement, until his first major medical expense.
https://www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum...
> “Employees need to think very carefully about investing their own money beyond 10% in company stock,” said Corey Rosen, founder of the National Center for Employee Ownership, a nonprofit that works with companies. “If you are looking at retirement, then diversification is a good thing.”
The whole article seems to be "People trusted GE stock way too much; it went down and they lost massively". This is another reason to be informed and proactive about the basics of finances and where your money really is. Perhaps I sound too harsh, but I simply fail to understand how all these people thought that holding 6 figure amounts in a single stock was a good idea? I just do not get it... wouldn't any financial planner have recommended diversification?
Indeed. But yet people in this thread are advising moving it all to just a single index fund.
While index funds are somewhat diversified many suffer from over-investment into specific industries like tech. If the .COM bubble burst again tomorrow several of the most popular index funds with be hit hard...
For example, look at the popular Vanguard Total Stock Market Index Fund, 20% in Technology, and 20% in financial, but if you dig into the financial portfolio you'd realize that a pop in tech would also sink many of the investment companies in financial too.
I guess what I am saying is, an index fund is better than a single company holding, but it isn't a broadly diversified portfolio. If you want a diversified portfolio it will cost you, since many of the alternatives don't perform as well (e.g. international index funds, small-cap, etc).
We all know picking stocks is perilous- but what do you if it's 1970, six years before VFINX was even created? You pick your own stocks, hire a broker, or buy expensive mutual funds. Don't feel like a good stock picker? The safe play, of course, is to buy big reputable companies with a long history of stable stock- see, GE.
Anyway, I just wanted to point out it was something of a different world back then. I think it wasn't even that long ago that you typically still had to buy whole shares of things. Which, as I'm sure you can imagine, is a big part of why DRIP is another recent phenomenon.
"GE revised its GE Medicare Benefit Plans handbook in 2012, underscoring the right to 'terminate, amend or replace the programs or plans, in whole or in part (subject to applicable contractual requirements), at any time and for any reason,' according to records in a 2014 lawsuit by two former GE employees, alleging that GE violated an implied obligation to provide continued health-care coverage. The clause existed in all previous versions of the handbook as well, GE said."
http://www.thefiscaltimes.com/2015/08/04/GE-Saved-Billions-C...
All the more reason to diversify retirement funds which one has that option.
Roughly $140 billion in GE stock-market wealth was lost in the past year
And in 30 years it'll be worth $40k a year anyway.
That said, I think he's concerned that, given GE's trajectory, the pension will evaporate. What then?
> GE’s pension obligations, nearly $100 billion at the end of 2017, are underfunded by almost $30 billion.
Yikes.
Why does that surprise you? Obviously the misleading and clickbaity headline will be chosen over the honest headline.
look at those who had a GM pension...
He didn't diversify. He definitely could have afforded to pay a money manager on a GE salary.
At least he has that fat $85k/yr pension!
Does this work because your browser was logged into a paid WSJ account before you used archive.is to log the page? Or is it only because WSJ's paywall allows archiving sites to read full articles as a matter of policy?
Just curious to know how reliable this solution might be for other sites.
Google requires anything reachable via their search engine isn't behind a paywall. Paste the full URL into a google.com search and click the link. You'll bypass the paywall, because google is the referrer.
WSJ and other news sites go along with this because it's not worth it for them to be excluded from search indexes.
Did you know his own retirement package included lifetime usage of the corporate jets?