Two stories about retirement planning

I never know where the personal-finance lessons are going to come from. Today, I heard two stories about retirement from my own family. First, my wife told me that her retirement program at work might be cut. Next, I learned that my family's box company has had a bizarre retirement crisis of its own.

Don't Count Your Chickens

Kris came home frustrated tonight. She's worked for the state government for almost twenty years (eight of those as a high-school science teacher), and though she's proud of the hard work she's put in, she hates how she and her colleagues are often caught in the crossfire of political battles.

This year, public employees are feeling the pinch again. There are no fewer than eight legislative proposals to alter the Oregon public-employee retirement system. In other words, the retirement rules that Kris (and her co-workers) have been playing by are about to change — perhaps drastically.

Fortunately, Kris has been a diligent saver all her life. She's squirreled away far more than the minimum so that her retirement isn't left to chance. In fact, just a few weeks ago, she proudly announced to me that she's saving 30% of her income through various sources. That's impressive. So while the proposed cuts to her retirement benefits make her cranky, and while they'll hurt her savings rate, they're not going to thwart her retirement.

What's the moral here? Be prepared. Your retirement benefits can change at any time. And it's not just public-sector employees whose retirement programs can be suddenly altered. The same thing can happen with private businesses, too.

Note: I don't want this post to turn into an argument over public employees and their benefits. Please don't use this as a forum to start a debate about whether government employees are over- or under-compensated. I don't give a fig. Derails and vitriol will be deleted.

Thinking Outside the Box

My family owns a small business that manufactures custom boxes. In 1995, just before he died, my father established a profit-sharing program so that the employees (most of whom were family members) would be able to have the retirement savings he never did.

Here's how our plan worked: Every tax season, we looked at how much the company earned the previous year. If times were flush, the company would contribute up to 15% of each employee's earnings into a profit-sharing account. So, if I earned $30,000 in 1998 and profits were high, then the business might set aside $4,500 into my retirement account. When times were lean, we set aside nothing. Most years were between 0% and 15%.

Soon after I quit my job to blog full time, the business made some adjustments to the retirement plan. I'm unclear on the details (because I wasn't involved with the process), but it seems that things were juggled so that employees could have direct control of their retirement investments. As a side effect, it also became much easier for them to withdraw the money from the profit-sharing plan. Which they did.

In fact, many of the employees yanked all of the money out of their retirement to go on trips, buy new cars, and so on. (They did this even though they suffered a 10% early withdrawal penalty and, I assume, had to pay taxes.)

When the company funded the profit-sharing plan the following year, these same employees promptly pulled the money from their accounts — again taking the 10% hit — and spent it.

The company's solution? They simply stopped funding the profit-sharing plan. Now they give the employees cash bonuses at the end of the year instead, which averts the 10% penalty. But this hurts the folks (like my mother) who hadn't been cashing out their retirement plans. And if I were still with the company, this would hurt me.

This is another situation where an existing retirement program has suddenly had its parameters changed, and it's an example of why it's important to take as much control of your personal finances as possible.

The Moral

Remember, folks: Nobody cares more about your money than you do — and that includes your retirement. You've heard all the horror stories about the future of Social Security, but your other sources of retirement income are also subject to change. It's up to you to take an active role in saving for the future.

Here are some steps you can take to make sure you save enough for the future:

  • Diversify your savings. Though much of Kris' retirement savings has been through the public-employee retirement system, she's been diligent about pursuing other options. She has a Roth IRA. She has an ING savings account. And she has her mutual funds, which are regular taxable investments.
  • Save early. Over the past few years, pension plans (public and private alike) have taken a hit. Employers aren't funding retirements as much as they did when times were flush. People who waited to start saving are missing out on the generous employer matches of the past. (Plus, by waiting, they also sacrificed the extraordinary power of compounding!)
  • Save often. Obvious perhaps, but the more you save now, the more you'll have in the future. In fact, the number-one thing you can do to boost your retirement income is to save more when you're earning money. Nothing else is nearly so important.
  • Pay attention to your investments. As Robert Brokamp will share tomorrow, it's important to watch what your money is doing. You shouldn't monitor it every day, but it certainly pays to look in yearly (or even quarterly) to be sure everything looks the way it ought.
  • Don't touch the money until you need it. The employees at the box factory were perfectly happy when they couldn't access the funds in their retirement accounts. To them, it was like money they never had. As soon as they had access, though, they found reasons to spend it. Don't be that way. Pretend your retirement funds are locked in a vault that cannot be opened except by Father Time.

I'm almost afraid to ask, but: Have you heard any retirement horror stories lately? I know people who have cashed out retirement accounts worth $100,000 in order to get at the money early. Is this common? What other dumb things do people do with their retirement savings?

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LifeAndMyFinances
LifeAndMyFinances
9 years ago

I often write about my life experiences on my website, but I’ll give a brief summary here as well. My wife and I are digging ourselves out of debt and will soon begin to save and invest for our future. We definitely do not depend on anyone’s aid for our retirement, especially the government (not sure if I’ll ever see a Social Security check in my lifetime). We’ll have our debts paid off in March (through a highly aggressive savings plan) and we can’t wait to begin investing in our future! Thanks for the post. It’s a good reminder of… Read more »

Luke
Luke
9 years ago

Luckily (although maybe not for all?) it’s a lot harder to pull money out of pension plans in the UK. Typically the only way to get money from your pension before retirement (whether early or regular) is to die! I’m in a government pension scheme and while the future returns are currently generous, I make additional payments that more than double my contributions. In addition to this, my fiancee and I pay into our emergency fund, a credit union account, social lending and a range of stocks and shares funds held in tax-efficient accounts. The more I read in the… Read more »

fantasma
fantasma
9 years ago

Hey JD,

Does Kris not have a 457b plan or a deferred compensation plan? If she does it would be better than a Roth IRA because she can save 16,500 a year on that instead of the 5,000.00 allowed in a Roth IRA.

Tootie
Tootie
9 years ago

I worked once as a tax preparer and I was shocked at how many people (who are not of retirement age) were taking money out of their 401Ks. Almost all that I saw did so for non-emergency reasons. Most did not realize that they would have to pay taxes and a penalty on that. It was sad to see!

Nicole
Nicole
9 years ago

Another reminder is not to invest your retirement money in company stock. That is the opposite of diversification– when the company does badly you get laid off and you lose your retirement savings.

Bogey
Bogey
9 years ago

JD, Just a quick question for you. I have read numerous posts on your site regarding the fact that you and Kris maintain separate finances (such as your “laundry agreement”). How does having separate finances come in to play when you all are planning for retirement? Do you do any type of combined planning? Do you look at your combined asset allocation and make adjustments? What if something drastic happens so that either or your’s or Kris’ retirement funds are completely wiped out just prior to retirement? It seems that maintaining separate finances would make it rather hard to work… Read more »

DIY Investor
DIY Investor
9 years ago

This reminds me of the experiment with the kids where they could eat the marshmallows in the middle of the table but if they waited for 20 minutes they could have 2 marshmallows. The kids were observed behind two way glass and some fidgeted and couldn’t wait while others had no problem deferring gratification. I wonder if an advisor had spoken to the employees. A good advisor would read them the riot act and stress that most of us will one day wake up and it will be our 65th birthday and the actions we have taken beforehand will determine… Read more »

Everyday Tips
Everyday Tips
9 years ago

You know, in a way, I almost have to disagree with this statement “Remember, folks: Nobody cares more about your money than you do”. (For some people.) Take your box company. When the company controlled the retirement savings, people had money. The moment they let go of the reins, people started withdrawing their money willy nilly and spending it. Obviously everyone didn’t do that, but I think some people need some controls imposed on them or they just can’t handle the thought of all that money just sitting there, calling their name. I do know people that took out their… Read more »

Chickybeth
Chickybeth
9 years ago

When I was a child, my parents decided that they needed new cars. So, they cashed out the only 401k my father ever had, bought two used (and pretty horrible) cars that lasted about 3 years each. I’m pretty sure that’s the last they ever saved for retirement. They are now divorced and both live pretty badly, so I guess it taught me to be a saver so that I won’t become them. The thing that bothers me the most about individual retirement accounts (instead of a pension, etc.) is that it seems like the rules are always changing! It… Read more »

Carl Creasman
Carl Creasman
9 years ago

I tell you JD, this scares me a lot. I’ve only been a tenured faculty member for 2 years, though I’ve taught at this College for almost 10 years. So, we had to choose between the state pension system or managing it ourselves. Based on the past 10 years, the pension system in Florida was much stronger and much more secure than self-control of the money, though obviously some had done well the other way. However, in the past year, we’ve been hearing scary rumbling just like Kris has and now we are pretty worried about whether we made the… Read more »

Nancy L.
Nancy L.
9 years ago

What’s even worse than the shifting is that much of that shifting comes on top of being a transient worker. I’ve worked at three major companies for 6+ years at each, where during my employment at each of those companies I earned minor pensions and 401Ks. Since 2002, every one of those plans has undergone some sort of major change to their structure at least once. That’s 6 separate plans to try and keep track of. I’m presuming that, given the way industry works now, I will have at least 2-3 more major jobs before I choose to retire. I… Read more »

s
s
9 years ago

Carl, I am with you. I signed up for the FL state pension plan in additional to my private retirement savings – best of both world, right? Now, the changes being proposed undermine my very planning. Also, I don’t like the fees charged by the approved investment company.

Capnwayno
Capnwayno
9 years ago

I am a state employee as well and haven’t seen a good comparison of the retirement accounts available. What are the virtues of 401K, Roth 401K, 457B, Self Managed accounts, and Roth IRAs. If I invested the max in each account my take home would be near $0. I would particularly like to see a Roth 401k vs a Roth IRA.

getagrip
getagrip
9 years ago

More a cautionary tale than a horror story. I knew a guy who was counting down the days until he was eligable to retire. The day came and he left with lots of hooplah and well wishes. If he’d been smiling any wider he’d have popped his ears. A year later I ran into him at a Home Depot. He’d taken a part time job there and was selling his house to move to another state, and lower cost of living area. He didn’t want to move since all his adult kids were staying local, but he couldn’t afford to… Read more »

Anonymous
Anonymous
9 years ago

@Nancy, why don’t you consolidate some or all of your 401k accounts? It’s easy. I suspect it might be too late to roll some of the money into a Roth, but you might want to look into that. @Chickybeth: While I can sympathize, if you think a bit about the history of this country or any country, you’ll realize the kind of stable ‘rules’ you’re looking for are the exception, not the norm. They’re an ideal, but there’s absolutely no guarantee any society can ever consistently live up to them. We simply don’t vote/think that way (i.e., aren’t smart, altruistic… Read more »

Meg
Meg
9 years ago

J.D.-
First time commenter here – I love your site.

I work for the federal government, so I have a TSP account. They have an option to take out a loan from the account, which is then repaid through payroll deduction with some interest (currently about 2.8%). The cost is a fee and lost earnings on the money(less the interest you paid yourself). People definitely use this to take vacations, buy stuff, etc because they think it’s “free.” At least it has to be paid back though, unlike a raided 401k.

~Meg

David C
David C
9 years ago

When it comes to employment and retirement savings, I take nothing for granted anymore. My wife and I are about 15 years from retirement and are trying to put more in our 401k’s every year. As soon as our son is out of college, it should be much easier. Even if we play our cards right, changes can occur to throw us off course. We just have to adapt and keep on pushing.

Nicole
Nicole
9 years ago

@13 Capnwayno http://nicoleandmaggie.wordpress.com/2010/07/19/retirement-saving-part-1/ gives a brief explanation of each of the options your standard state employee faces. re: Roth 403(b) vs Roth IRA If your employer matches, then go with the 403(b). If your employer doesn’t match, then the Roth IRA will give you an infinite number of investment options and you can pick a nice Vanguard fund. But the Roth IRA will only take 5K, and presumably you want to put more money away than that, in which case setting your 403(b) on autopilot might cause you the least pain and result in more savings overall because you never… Read more »

Kelley
Kelley
9 years ago

Very recently the Blue Ribbon Commission put the military retirement pension on the chopping block by altering it in ways that most members would not be prepared for at the 20 year mark. It didn’t even make it into consideration by President Obama, but it should make people realize that the only way to retire with dignity is to do so debt-free and mortgage free and by saving at least 15% of your income. It makes me very sad that so many people retire from the military and then have to go get a second job because their pension doesn’t… Read more »

Nancy L.
Nancy L.
9 years ago

@Anonymous I did consolidate some of the older 401Ks, but the pension plans are the real ones I’m worried about. It’s real easy to forget that you are supposed to be getting $65/month from somewhere if you don’t start collecting for another 30 years or so down the road.

Jason
Jason
9 years ago

Yikes. Pretty scary stuff.

My sister and brother in law have showed me almost entirely what NOT to do financially. In the last 3 years, they have not once but twice emptied their 401k to pay off their credit card debt. I don’t even want to think about how their retirement years will look for them.

chett daniel
chett daniel
9 years ago

There should be a moratorium on the word “vitriol.”

J.D.’s note: I think there should just be a moratorium on vitriol. Can’t we all just get along?

Tommy
Tommy
9 years ago

Agreed with Everyday Tips. This is exactly why things like 401k participation needs to be mandatory. For every person that’s financially savvy enough to plan for their own retirement, there are several more that aren’t (and won’t). What will happen when these people reach retirement and Social Security is either defunct or diminished? When pension plans were common they weren’t voluntary….why should todays form of retirement savings be?

Jackie
Jackie
9 years ago

I think it’s very common that folks cash out their retirement funds. I’m sad to say that I did it myself once too years ago. Somehow, seemingly urgent needs or impatient desires seem to trump the distant and often unimaginable future.

Betsy
Betsy
9 years ago

As a member of Gen X who’s been told for at least 15 years that my retirement will be underfunded, and that Soc Sec won’t be there for me, etc., I’ve socked away and socked away for retirement — at the expense of current savings. The 28% immediate return on 401k / retirement savings (because of their tax-advantaged status) has also been a huge incentive to sock away more for the long term. But all of this has come at the cost of extreme present-day thrift. For 20 years I’ve barely spent a dime on present needs. Thrift-store furniture, hand-me-down… Read more »

Rosa
Rosa
9 years ago

This was a couple years ago, but a coworker asked me how much I put into the 401k plan during open enrollment, because she was thinking about starting to contribute. She never thought she’d need to, because she was going to get married, but turning 30 changed her mind. The thing that really worried me, though, was that I know from my friends that a lot of high-salary guys also aren’t saving anything – a number of my friends have had to force their fiances to pay off debts & at least start at 0 before they’d marry them –… Read more »

Rene
Rene
9 years ago

I am a government employee so I have a pension, TSP (which is similar to a 401(k)) and a Roth IRA. I contribute 5% to the TSP and the government mathes that, first 3% dollar for dollar and then the last 2%, something like .50cents for every dollar. I also contribute about $50 per month to my Roth. When I run my numbers to see how much I need to save, I don’t include the pension money or the social security numbers. According to this website I go to, I am saving about 90% of what they recommend. Hopefully once… Read more »

Alison Wiley
Alison Wiley
9 years ago

I feel like Kris’s financial twin: employed by the state of Oregon, Roth IRA and ING savings account, saving much of what I earn, not wringing my hands over what may or may not happen to the state employees’ retirement plan.

lil
lil
9 years ago

What frustrates me so much is the lack of control any of us have in our ability to plan accurrately for retirement, even using the tips above. Just a few years back, tons of horror stories about retirement were everywhere when people were just a few years shy of retirement and the stock market crashed. Suddenly, people’s retirement funds was slashed in half. Now they have to work longer and will have much less in retirement than they planned. My mom is one of those, and to make it worse, this recession has hit hard those that are over a… Read more »

Kaytee
Kaytee
9 years ago

“People who waited to start saving our missing out on the generous employer matches of the past.”

our or are?

J.D.’s note: Blarg! The curse of the homonym strikes again. Thanks, Kaytee.

Gomez
Gomez
9 years ago

Great post JD!!! From the comments posted people are passionate about this subject. I was with a large bank in the midwest that failed and I had all of my 401-K in their stock (at the urging of the in house financial advisor). I lost everything that I put in, (20% plus a 5% mathch for 5 years!). Luckily I have invested in real estate and in 15 years when the mortgages are all paid I will still have an income from the rent. I have decided to participate in my company’s 401-k plan only to the extent that they… Read more »

KC
KC
9 years ago

I hope things work out for Kris. If it’s any consolation she isn’t the only one in this position – with the state/municipal budget shortcomings many will be seeing cuts. It’s unfortunate, too, becuase gov’t employees generally receive less pay BECAUSE they get get benefits. It’s the only thing making the job worth having. (Yes, I was a gov’t employee for years – state for 2 years, County for 4 years, and municipal for 6 yrs – they are all the same LOL).

Ely
Ely
9 years ago

Retirement is a total crapshoot.

I save as much as I can in my 401k and Roth IRA, but I don’t make near enough to max them out. It doesn’t seem possible that there will be enough money to live on into my 90’s, which I must plan for. I’m young enough that I don’t expect social security to be around. The only solution I can see is to keep working as long as I can, which is fine with me barring health problems. If I do get sick or disabled too young though, I am completely out of luck.

KDB
KDB
9 years ago

A few years ago my “day job” employer took our retirement contribution from several months and used it for some type of operating expense. Not good. They paid it back, supposedly with interest, but the message was clear. And the guy who did it was fired. But the big boss said he couldn’t promise it would never happen again. Talk about an eye opener!

KM
KM
9 years ago

My parents were both public educators and they did the same to them that they did to Kris, changed all their benefits at the last minute after they’d both worked their careers for the system. Good for Kris for having other options….

the other Tammy
the other Tammy
9 years ago

My employer recently stopped our 401K match, as have many companies in my line of work. It sucks!!!

I really need to make more of an effort to save for retirement, as my husband is self employed and I know I am underfunding mine, but we need to get out of debt first. Hopefully in a few years when we are under a lighter debt load I can contribute more.

John Jupin
John Jupin
9 years ago

(http://www.federaltimes.com/article/20101018/BENEFITS02/10180301/1052/PERSONNEL01 Not to argue for or against public employee pension plans, but federal employees(like myself) who retired have not received their full amounts which is causing severe financial isssues. It is going on 6 months for me and I am only receiving an interim check that might be 60 to 80 percent of what I should be getting. Luckily, I had savings, a working spouse, and a part time job. However, if my monthly pension check is not received by the 6th month(February), I will be filling a Congresional complaint. There is nothing worse that an agency that depends on… Read more »

Suzanne
Suzanne
9 years ago

I remember when United went into brankruptcy a few years ago and turned their pension fund over to the Government’s Pension program. When the government handles it, there is a cap on benefits. As a result, all pilots and employees making more than the cap had their retirement benefits slashed with no warning. Someone who had been expecting $100k+ per year was suddenly only going to receive $60k or something like that.

Today I would be very careful to fund my own retirement, even with a pension.

AMANDA
AMANDA
9 years ago

To all who are complaining about possibly not getting social security:

If you get disabled young you might be able to see some social security funds! How come no one considers the fact that social security is more than just retirement? It’s disability for you and spouse. Makes payments for disability to children. Pays death benefit to spouse and children. Then may pay for retirement for you and spouse of 10 years (albeit 50%).

NooraK
NooraK
9 years ago

I work for a company that pays us a bonus based on the previous year’s performance. We have the option to have it deferred into our 401(k) plan if we wish. This kind of gives the best of both worlds: The employees are rewarded for the company’s performance, they can get the cash now if they want, but they can also apply it to their retirement programs instead.

Claudia M.
Claudia M.
9 years ago

I too understand Kris’ pain. The future of public employee pensions is up in the air, and falling fast. However, I’m still young, and I’ve been preparing for possible disaster. Currently, my employer matches my pension contribution in whole. Since my state is in a really big hole, this will likely change. For this reason, I opened up a Roth IRA and put 15% of my savings away for retirement. The other 85% goes into an account I’m using to pay off by debt (hopefully my March!). If cuts are made to my pension, I’ll be out of debt, and… Read more »

Kevin M
Kevin M
9 years ago

People are going to figure out soon enough, there is no “retirement” anymore. It is amazing how fast we’ve gone from nothing, to Social Security, to full pensions, to 401(k)s, and almost back to nothing again.

I see the same thing you do, JD, with many small businesses – their rank and file workers don’t contribute anything (not even to get the free employer match!) and when they do, will often drain their balance with “hardship withdrawals”. I hope Kris doesn’t lose her benefits, but it sounds like she is prepared either way.

EDIT: found this article on topic:
http://blogs.reuters.com/gregg-easterbrook/2011/01/06/american-exceptionalism-and-the-dmv-factor/

YD
YD
9 years ago

I briefly worked for a major telecom back in the 90’s, before our little business group was sold off to another company. One of the decisions I had to make was what to do with the small pension I had accumulated. Being 25 and still firmly convinced of my immortality, I cashed it out (all $800 of it), and used the proceeds to purchase a mountain bike. Had I rolled that $800 into an IRA, it most certainly would have grown into a larger amount by now, and even bigger by the time retirement rolls around. Truth be told, I… Read more »

Carla Y
Carla Y
9 years ago

My mom had a retirement investment account similar to the 401(k) but without many of the perks. She had to withdraw money for a surgery, and wasn’t able to contribute as before, but still contributed. She has been promised by her job (County Government) that the initial investment would not be touched by fees and such. Within a year of the surgery, fees ate the account alive and left her for broke as regards to retirement. ~_~ They changed the rules and didn’t inform anyone until after the damage was done.

Shauna
Shauna
9 years ago

My mother went through a divorce many years ago and received her divorce settlement in the form of a 401k that her ex-husband rolled over to her. She didn’t know much about how retirement plans work, so she withdrew the money and opted to pay the tax penalty at the end of the year, thinking because she had always made so little, it wouldn’t be much. At the end of that year, she owed the IRS $40,000 she could not pay. She has been living “off the grid” ever since, her finances were devastated and her credit ruined, and she… Read more »

Elysia
Elysia
9 years ago

My husband’s company is a bit like the box company — well, they contribute a percentage (not sure what it’s based on, to be honest) annually to profit sharing. People can take a loan out on it but MUST pay it back with interest through payroll deduction. So they get that money deposited every year. Then employees also get an annual bonus (and an option to purchase company stock), which is a percentage (determined annually) of their total earnings for the past five years. I guess it’s their way of making sure people save and rewarding loyalty. I understand this… Read more »

BrentABQ
BrentABQ
9 years ago

I’m in the uncertainty boat with a lot of other people. “Save Early”, but with so much time ahead how can it possibly be predictable. I like to assume that I might possibly live to 100. I’m 26. 74 years from now what will the retirement landscape look like. Its the changing landscape that I’m afraid of. I’m trying to fill a hole that I don’t know the depth of. It is also what scares me about the thought of early retirement. I may have passed a point of no return without knowing where I’ll end up.

retirebyforty
retirebyforty
9 years ago

I’m sorry to hear about the box company’s employee. Everyone’s situation is different, but I hate to hear about someone pulling their retirement saving.
The bottom line is – you are responsible for your own retirement. If the employer can contribute, that’s good, but don’t count on it.

Des
Des
9 years ago

It actually worked out well for me when my company did away with our pension, but only because I am young and they did it respectfully. They cut the pension for new, incoming employees and gave existing employees a choice: keep your pension as is, or opt out and instead take a bonus 2.5% fully vested contribution to our 401(k) every paycheck forever, regardless of how much we contribute. I was 23 at the time, so I opted out. At the same time they upped the regular 401(k) match from 50% up to 3%, to 100% up to 4%. It… Read more »

Debbie M
Debbie M
9 years ago

I work for the state an have a (required) pension plan that would pay basically all my expenses so long as my house was paid off and I didn’t change my spending much in retirement. Fortunately, when Roth IRAs were invented, I thought they were the coolest thing (once I put that money in, I can take it all out tax free, no matter how crazy the tax rate gets) and I’ve been maxing that out ever since. Let’s face it, tax rates are going nowhere but up–or at least they can hardly come down. (If this makes no sense… Read more »

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