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Extra Credit Winter 2016

Do you know the difference between defined benefit and defined contribution pension plans? You should! Our handy chart explains the pluses and minuses.

Ready for Retirement?

Half of all Americans haven’t saved enough

The key to a secure retirement is a defined-benefit or DB plan. These are traditional pension plans, in which employees and employers invest, and the participants know exactly the benefit they’ll get each month in retirement, based on a formula that includes years of service. Much less secure are the alternative retirement plans that have been urged by many in the financial sector, and supported by lawmakers who have pushed forward state budgets that fall short of their fair share for public employees’ pensions. The main alternative is defined-contribution (DC) plans, like 401(k) plans, in which the money available to retirees can vary greatly, depending on the timing and severity of market booms and busts, how much has been put aside, fees paid to Wall Street, and whether these accounts are tapped before retirement. These do-it-yourself plans, which transfer the burden of planning from the employer to the employee, are very risky—and guess what?

The risk is on you!

PICTURE THIS:

A 25-year-old teacher earning $30,000 a year, invests 10 percent of her paycheck into her retirement, and retires at age 60. Whether or not she’ll be able to comfortably afford her mortgage, heating bills, and groceries will depend greatly on her type of retirement plan: DB or DC?*

 DB  DC

(pension plan)

Her annual pension will provide about one-HALF of her last year’s pay. 

(401k-style plan)

Her annual pension will provide about ONE-QUARTER of her last year’s pay.

WHAT CAN YOU DO?

In a few states, employees have a choice between DB and DC plans: Make the smart choice for a secure retirement. In other places, especially where lawmakers have not been responsible, it’s critical to advocate for full funding. Finally, don’t allow elected leaders to sell out the next generation of educators! Check with your NEA state affiliate to learn more and join the fight for retirement security.

*These calculations assume annual pay raises of 4 percent. Returns for the DC plan are assumed to start at 6.5 percent (at age 25) but gradually decline to 4.5 percent at age 56, as DC participants should invest more conservatively (in funds with lower risk, and consequently lower yields) near and during retirement. Returns for DB plans, which can continue with a long-term investment approach, are assumed to be 7.5 percent. (DB plans have historically outperformed DC plans by about 1 percent per year, despite having more mature demographics.)  Inflation is assumed to be 2.5 percent, and retirement income is based upon an inflation-protected 50 percent joint and survivor annuity. These calculations do not anticipate any market crashes. Source: NEA Collective Bargaining and Member Advocacy

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The National Education Association (NEA), the nation's largest professional employee organization, is committed to advancing the cause of public education. NEA's 3 million members work at every level of education—from pre-school to university graduate programs. NEA has affiliate organizations in every state and in more than 14,000 communities across the United States.