Yeah, like the quote Dave Ramsey likes to cite (forget it's origin): if you aim for nothing you'll hit it every time. Can't emphasize enough how important it is to get a plan started early on. Far more important than the details of the plan which can generally be tweaked along the way.
We saved when we had no idea about early retirement. It meant when we learnt about ER it was a lot easier to make that a realistic goal. We didn't go from spending all our money to having to learn to be frugal. We were already frugal. All we did was tighten our belts a bit. I'd add closer to retirement we spent more. Our spending slowly crept up. We stopped that spending in the pandemic and then retired.
Education is important as well though. The problem on this thread is that if your viewpoint is simply focused on your WR it's an extremely myopic viewpoint.
It is interesting that nobody here is talking about the UK pensions collapse that was just barely averted last week thanks to a bailout.
It seems to me that many of the pots of money that represent the denominators in the safe withdraw calculations are based on institutions with embedded growth obligations that are just plain impossible to maintain much further into the foreseeable future.
A third infusion started today. I guess I don’t get how the English save. It sort of sounds like private sector employees are buying into something radically underfunded like say Illinois public employee pensions?
It will be interesting to see how this unwinds. The pensions must have a particular return. When rates were low they had to hedge against rates going even lower. Suddenly rates went up very hard, very fast. And it looks like they will continue to do so.
How does it end? Does the backstop of the dollar make US pensions somehow less vulnerable? Will it spread to the EU?
A third infusion started today. I guess I don’t get how the English save. It sort of sounds like private sector employees are buying into something radically underfunded like say Illinois public employee pensions?
My understanding is that it predominantly relates to 'defined benefit pensions' where you are guaranteed a lifelong inflation-adjusted income based on your final or average salary upon retirement, and the number of years you have contributed to the system.
As opposed to a 'defined contribution plan' where what you get depends on how much you put in and how the fund performed. Obviously the former is more burdensome on the pension provider, and are increasingly rare.
This article gives a good breakdown. The government's now cancelled plan to engage in large scale unfunded tax cuts seem to trigger the crisis:
My understanding is that it predominantly relates to 'defined benefit pensions' where you are guaranteed a lifelong inflation-adjusted income based on your final or average salary upon retirement, and the number of years you have contributed to the system.
As opposed to a 'defined contribution plan' where what you get depends on how much you put in and how the fund performed. Obviously the former is more burdensome on the pension provider, and are increasingly rare.
This article gives a good breakdown. The government's now cancelled plan to engage in large scale unfunded tax cuts seem to trigger the crisis:
It will be interesting to see how this unwinds. The pensions must have a particular return. When rates were low they had to hedge against rates going even lower. Suddenly rates went up very hard, very fast. And it looks like they will continue to do so.
How does it end? Does the backstop of the dollar make US pensions somehow less vulnerable? Will it spread to the EU?
I don't know where it ends. I'd suggest at some point these pension funds go bust. I cannot see how defined benefit schemes can continue to exist. They were poorly formed when they were created. They are of course great for the recipient but the risk is just too high for the pension fund and therefore society in general.
I wonder if it spreads. I think that depends on how large a proportion of defined benefits funds exist but like a lot of financial plunges they tend to just gain momentum and aren't necessarily based on facts.
I suppose I view US pension funds as being at risk based on how much of the portfolio consists of defined benefits compared to contribution funds. I don't think the dollar will help them out.
Where it ends is with an increase in the retirement age. I remember seeing media floating trial baloons about raising the UK retirement age to 72? or 75? somewhere in the mid 2030s. The benefit will be additionally eroded by any magic that can be done to under-calculate the inflation % used to determine the cola. Or, the way it's done in most of eastern europe: the benefit is defined as a % of the current minimum wage -- and then you just delay upping the minimum wage for as long as possible. Tl;dr: going forward (e.g. for those of us currently in our 30s or 40s), it's wise imo to think of any defined benefit pension as a nice surprise rather than as a certainty.
Don't forget that either one can be converted into the other ex post in many cases. A defined benefit plan can be turned into a defined contribution plan by taking a lump sum distribution (if available) and investing it into the market. A defined contribution can be turned into a defined benefit plan by selling market investments and buying an annuity.
IOW, the market permits individuals to engineer a synthetic version of either one. It all comes down to the risk of mismatching assets and liabilities in terms of pay-ins and pay-outs. This risk can be found in the interest rate. There are markets for that. Insofar a fair price can't be calculated, the market will still quote you one.
Most of the brouhaha comes from various institutions/corporation/governments trying to get away with overpromising and underdelivering. Again, this cuts both ways. The only question is whether one is overpaying or underpaying for risk---basically is the premium too high/low received/paid-out?
Don't forget that either one can be converted into the other ex post in many cases. A defined benefit plan can be turned into a defined contribution plan by taking a lump sum distribution (if available) and investing it into the market. A defined contribution can be turned into a defined benefit plan by selling market investments and buying an annuity.
It is so far from this simple it's not funny. If you are in a defined benefit fund you would be nuts to change it. All market risk is on the provider.
Most of the brouhaha comes from various institutions/corporation/governments trying to get away with overpromising and underdelivering. Again, this cuts both ways. The only question is whether one is overpaying or underpaying for risk---basically is the premium too high/low received/paid-out?
It's nothing to do with this at all. It's not about being able to do it technically. It's about the fallout of doing it or not doing it.
It's much more like game theory or something like that,
If you are on a defined benefit scheme you should stick with it.
The fund wants to try and get rid of defined benefits.
How do we come up with a better decision. The technical implementation is not the issue.
The market has provided a sub optimal long term solution and it needs to be dialed back but if you get a good deal you don't want to lose your benefits. If funds are still doing this they are stupid but I doubt that is the issue. It's the existing policy holders who are on a deal too good to be true.
Or, the way it's done in most of eastern europe: the benefit is defined as a % of the current minimum wage -- and then you just delay upping the minimum wage for as long as possible. Tl;dr: going forward (e.g. for those of us currently in our 30s or 40s), it's wise imo to think of any defined benefit pension as a nice surprise rather than as a certainty.
In Poland, state pensions (both ones that are already being paid out, as well as promises about the future) are updated every year based on the combination of GDP growth and inflation. The rationale behind it is that the GDP growth component allows the pensioners to participate in the fruits of growth that they laid the foundation for, and inflation component protects them against well, inflation (in case where it exceeds GDP growth). It's a pretty fair system in principle, but we're already at the stage when social security premium are not covering yearly outgoings, and the state pensions fund is propped by yearly infusions from the central budget (something that is not happening yet in the United States). As the demographics rapidly change in the 2030s, the system as is won't be able to function any more (unless we take in a good couple million of immigrants).
State pensions aren't defined contribution based pensions in any meaningful sense of the word, as you're playing against an adversary who 1) sets reserve bank interest rates 2) publishes statistical inflation rates / GDP deflators used in pension adjustment 3) adjusts them upwards at will to win elections as the majority of voters are at or nearing retirement age and 4) most of it relies not on actuarial reserve pots but active redistribution from payers to payees.
Defined benefit pensions are fine provided actuaries do their job - that's what they draw their pay for, after all.
It's that we have created a "comprehensive coverage" mentality where everyone suffering some economic mishap -- most of them their own doing: lack of foresight etc -- gets to call the gubmint for help, and is virtually guaranteed to be bailed out.
Reminds me of the Hemingway quote, "How did you go bankrupt?" Two ways. Gradually, then suddenly."
I am not so interested in the gradual bankruptcy. What is interesting is how these funds used derivatives so that they caused a contagion that would have collapsed the bond market if not for the Bank of England stepping in to buy bonds.
They successfully attached themselves to something that was too big to fail and were bailed out as a result.
I think you need to separate government jobs from the private sector. The government can always print more money to satisfy defined benefit pensions (although the cost is spread across all of us) whereas the private sector is out of luck if they fail to account for these liabilities.
This is why most private organisations have been moving away from DB pensions (at least in the UK).
I think you need to separate government jobs from the private sector. The government can always print more money to satisfy defined benefit pensions (although the cost is spread across all of us) whereas the private sector is out of luck if they fail to account for these liabilities.
This is why most private organisations have been moving away from DB pensions (at least in the UK).
Yes although the government does 'insure' private sector pensions (of both types) up to £25 000 (?) annual income. So if a private sector pension goes bust the taxpayer still has to foot the bill.
I think you need to separate government jobs from the private sector. The government can always print more money to satisfy defined benefit pensions (although the cost is spread across all of us) whereas the private sector is out of luck if they fail to account for these liabilities.
This is why most private organisations have been moving away from DB pensions (at least in the UK).
Defined benefit pensions are fine provided actuaries do their job - that's what they draw their pay for, after all.
I disagree. It's too hard a calculation to get right. You are stating at point A that person B can receive X amount 30 or 40 years later but the market can do a lot in that time.
It's a similar concept to people believing WR's are set in stone when they aren't. It's not the same but the point is you can't accurately make these future predictions.
I worked in IT. People think that you can solve business problems with IT solutions but you can't. This is a business problem.
I disagree. It's too hard a calculation to get right. You are stating at point A that person B can receive X amount 30 or 40 years later but the market can do a lot in that time.
It's a similar concept to people believing WR's are set in stone when they aren't. It's not the same but the point is you can't accurately make these future predictions.
I worked in IT. People think that you can solve business problems with IT solutions but you can't. This is a business problem.
You can solve a lot of actuarial problems with actuarial math, some of which include Markov chain Monte Carlo simulations - fitting, as life insurance mathematics' origins share a common ancestor with statistics and gambling - 350 years ago.
I'm not just stating that you can sell a policy to person B at point t to receive an amount X at time t+30, I'm stating that this is a profitable endeavour.
I'm not just stating that you can sell a policy to person B at point t to receive an amount X at time t+30, I'm stating that this is a profitable endeavour.
You might be right but in this instance - i.e. the defined benefit fund we can categorically state this isn't true.
It's a bad business proposition and there will be very few companies doing this and it's such a bad proposition that it is causing problems within the financial markets.
These funds are not sustainable longer term.
It's simply facts. The real world data doesn't conform to your point.
The business is *fine*, so are the pensions. They were never the problem!
The problem always was the unwillingness of municipalities, states and the federal entities - and big firms - to actually offload DB plans to a separate foundation, or pay up the annual charges required!
Edit: That's the big fat joke about the UK pensions debacle we're seeing at the moment. It's not that their plans aren't profitable, it's that they used leverage in ways that are now getting called -- all the while being as profitable as not for a long time! See e.g. https://twitter.com/jeuasommenulle/stat ... 5402383360
The business is *fine*, so are the pensions. They were never the problem!
I'd be exceptionally surprised if this is really the case. These funds were phased out in Australia due to these risks when I started working which was 25 odd years ago.
It's been a known risk for a long time. I shouldn't really state surprised. I'd be astounded.
The problem always was the unwillingness of municipalities, states and the federal entities - and big firms - to actually offload DB plans to a separate foundation, or pay up the annual charges required!
Edit: That's the big fat joke about the UK pensions debacle we're seeing at the moment. It's not that their plans aren't profitable, it's that they used leverage in ways that are now getting called -- all the while being as profitable as not for a long time! See e.g. https://twitter.com/jeuasommenulle/stat ... 5402383360
I really doubt what you are stating and Twitter is not the best place to get that information.
I wonder if there is a good breakdown on this specific issue elsewhere. I mean a detailed logical breakdown with alternative viewpoints.
Does anyone have a good breakdown on this issue ?
Like I said the market should know and I think it does that these funds are not profitable long term.
