So you want a pension

Who doesn’t want a pension in retirement? I have one. My income stream is the key to a financially secure retirement. It is my pension and Social Security.

But the thing about a pension is that the ability to accumulate value is based on long service with the plan sponsor, the employer or union. My pension is based on nearly fifty years with the same company. The more years of service and as my salary grew so did my pension.

One of the UAWs current demands from auto makers is reinstatement of a pension plan for workers hired after 2007. Car makers have offered an improved 401k instead.

So, which is better, a pension or a good 401k with employer money contributed?

The answer is that depends. Long service says the security of a pension wins, but limited service favors the 401k and it’s possible that over time and considering investment performance the 401k may always win.

Consider this for auto workers:

Team leads have an average tenure of 118 months (nearly 10 years) followed by skilled trade workers, with approximately 104 months (nearly 9 years), and production workers at 88 months (over 7 years).⁸

AutodriveAmerica

Beyond the auto industry job tenure is even lower.

In January 2022, median employee tenure (the point at which half of all workers had more tenure and half had less tenure) for men held at 4.3 years. For women, median tenure was 3.8 years in January 2022, little changed from the median of 3.9 years in January 2020. Among men, 28 percent of wage and salary workers had 10 years or more of tenure with their current employer in January 2022, higher than the figure for women (26 percent). (See tables 1 and 3.)

BLS

Tenure in public sector jobs is nearly 50% higher

No matter how you slice it, average job tenure does not favor a defined benefit pension plan.

A pension has the advantage of an income stream without investment decisions or risk by the individual. However, an employer pension is not without risk and depends on adequate funding by the employer and the ongoing financial state of the company.

Without a pension a person must have the discipline to always save, to make prudent long-term investments and to keep focused on the retirement goal decades in the future.

The most important strategy for retirement is creating a steady, minimum risk income stream. For most people Social Security is the foundation. Relatively few workers have a pension. But there are other ways.

A few companies offer annuities as an investment in a 401k. A portion of your savings gradually build your own pension. Availability is growing.

You could take a portion of after-tax savings and purchase an immediate annuity at retirement. These can be structured to include survivor benefits and inflation protection.

You could invest in interest paying vehicles such a different types of bonds, reinvest interest until needed as income.

You could buy a few dividend paying stocks to generate income.

Or you could do all of these in combination which is perhaps the best idea.

Note that this approach minimizes the withdrawal risk to your steady income stream from market performance. You can still leave a portion, perhaps majority, of your investments in the market to grow in the future…but your income needs are covered!