A story about pensions

Pensions are becoming more and more rare. Earlier this year I was uncertain about making the 5 year anniversary mark to become a permanent member of the CSU pension given the pending strike. At that time I called the pension plan, CalPERs, and asked what would happen to all my contributions to date. I was told they would be returned to me if service ended before 5 years or I would have a choice to leave it in the pension after 5 years of service.

Long story short, I did the math and the returns offered by the pension plan were superior to what I could safely obtain, even with my fancy optimizer. Why are pension plan returns superior? A couple reasons come to mind. First, CalPERs is big and has access to investments that I do not. That can be good and bad. Second, CalPERs is subsidized by California taxpayers. If they run into trouble meeting their relatively high guaranteed return they have a couple tools at their disposal to make it happen: lobby for increased taxes or require larger contributions from newcomers.

Whole life is not a pension

The “savings plan” portion of a whole life insurance policy is much different than a pension plan. The returns are lower (on the order of one-half), fees are very high especially in the beginning, they are not subsidized by any taxpayers (unless they go bankrupt and get bailed out), and they are not managed to maximize your return. They are managed to maximize the insurance company’s profit while meeting the low guaranteed return to the policy holder.

Steady income at retirement

I understand and agree with the concern for having stable fixed income at retirement. It would be nice if your employer offered a pension rather than a 401k plan. Unfortunately most do not. In my opinion, the next best thing is a properly managed investment account not a whole life insurance plan. A properly managed investment account will be tilted toward equities (higher risk) earlier in one’s career then shift towards fixed income (lower risk) towards the end of the career. When all is said and done your portfolio at retirement will:

1. be you own, meaning, it is in your name as opposed to some complex process to recoup your “surrender value” with a life insurance plan,
2. be significantly higher value than the “surrender value”, and
3. spin off interest payments for steady income.

Regarding #3, once you get to 70 or 80 another calculation can be done to gradually sell off your portfolio based on your life expectancy. I haven’t created that app yet but I suppose I need to soon. I may run into clients 5 years away from retirement.

Conclusion

Starting the process of establishing retirement income for yourself is not difficult.  Open an account ($3,000 minimum) at a place like Vanguard, Schwab, Fidelity, etc. Contribute some dollar amount monthly to that account.   Invest the funds within that account according to the Relative Dynamics™ plan.  It will grow. We will shift it towards fixed income as you approach retirement. You will have retirement income.

DISCLAIMER: I can’t guarantee how large the portfolio will be nor the amount of monthly income at retirement.

Thanks for reading another long post. I hope it goes well with your coffee. Let me know if you have any further questions.

David J. Moore, Ph.D.
Co-Founder and President
Relative Dynamics™

2443 Fair Oaks Blvd #430
Sacramento, CA 95825
Cell: 916-790-4284
Email: David@relativedynamics.com
Web: http://www.relativedynamics.com