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  • Andy Flack, MBA, CFP®

Are Monthly Pensions Really Better Than a Matched 401(k)?

Planning for retirement is harder than ever because people are living much longer retirements. This trend makes it more difficult for companies to “guarantee” a life-time income for their employees. Unwilling to accept this growing challenge, companies are opting to use 401(k)’s thereby transferring the retirement planning responsibility from themselves to their employees.


This transition creates a glaring new problem — workers are now left on their own to ensure their retirement with no help from professionals by default, armed with zero knowledge of personal finance. This is the real problem.


If we can close the knowledge gap, this transition could be very positive. After-all, the pension model has some tremendous drawbacks given the changing needs of retirees. Pension managers don’t sit down with each employee to discuss their financial goals and determine whether the funds are invested appropriately during or after retirement. Instead, they simply promise a certain dollar amount of income replacement — a badly flawed system especially if the pension doesn’t have a cost-of-living increase. During a 30 year-long retirement with 3% annual inflation, the cost of living will go up by 240%. That means the pension will have lost 60% of its purchasing power! Will the pension be enough? We begin to see how pensions that were once effective have started to lose their luster as retirement periods increase.


Also, pensions are invested in securities much like 401(k)’s. They are subject to the uncertainty of the markets and stability of the company/industry. While guarantee is used to describe pensions, we all know that nothing is really guaranteed. Pensions can and have failed in the past.


Funding a 401(k), on the other hand, may be much more effective than the old pooled-pension model. Some people may have higher retirement spending goals than others that would require a completely different set of investments. Either way, nobody wants to live on a fixed pension if the cost of living keeps going up. A 401(k) gives people the opportunity to use investment strategies where the income can increase along with the cost of living. There can be huge advantages that come with controlling your money as long as people are well informed and take an active role in planning their financial future.


Slowly, the knowledge gap is being addressed as 17 states have made personal finance a part of their public high school curriculum. For those already in the workforce, some companies hold large seminars to provide general education on the subject to raise the awareness of their workers. Unfortunately, neither of these solutions typically leaves people fully capable of creating a financial plan or investment strategy on their own. While it’s clear that progress is being made, many are still in need of help.


If you would like to take a more active role in your financial future but don’t know where to start, I would be happy to sit down with you. Don’t get left behind by the times — even if all you have is a 401(k). Since companies aren’t hiring pension funds to manage your retirement, it’s up to you to make conscious decisions for your future. Stop taking a passive role and call me today to set up your free meeting.