Personal Finance

Company Offers Both DB and DC pension options - Which to choose

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  • Nov 8th, 2013 4:15 pm
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Deal Expert
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Dec 11, 2005
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What the heck does this mean, "DC Option 4% of my salary with a 7% company match"

I know a lot of people are jumping on the DB bandwagon but it seems kind of crappy to me if you actually do the math.

"2% of my final average salary per years of service". So say you make 50K / year at this company today, and you work for them for 20 years... let's also assume you get raises ewual to inflation so in 20 years you are making 168K / year. The "average" of your salary over these years of service would be 109K / year. 2% of that is 2.18K, * 20 = 43.6K.

So the year is 2023, you are making 168K / year, you retire, and now your pension is only paying you 43K / year. Can you live on that in 2023? For reference that is about 13,000 in today's dollars - OUCH.

What this looks like to me is this company has structured a DB plan in such a way that the resulting payout will be VERY LOW so that it is sustainable.
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Aug 11, 2005
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brunes wrote:
Nov 7th, 2013 2:02 pm
What the heck does this mean, "DC Option 4% of my salary with a 7% company match"

I know a lot of people are jumping on the DB bandwagon but it seems kind of crappy to me if you actually do the math.

"2% of my final average salary per years of service". So say you make 50K / year at this company today, and you work for them for 20 years... let's also assume you get raises ewual to inflation so in 20 years you are making 168K / year. The "average" of your salary over these years of service would be 109K / year. 2% of that is 2.18K, * 20 = 43.6K.

So the year is 2023, you are making 168K / year, you retire, and now your pension is only paying you 43K / year. Can you live on that in 2023? For reference that is about 13,000 in today's dollars - OUCH.

What this looks like to me is this company has structured a DB plan in such a way that the resulting payout will be VERY LOW so that it is sustainable.
Average is usually best 5 years
Deal Fanatic
Mar 24, 2008
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Toronto
brunes wrote:
Nov 7th, 2013 2:02 pm
...

"2% of my final average salary per years of service". So say you make 50K / year at this company today, and you work for them for 20 years... let's also assume you get raises ewual to inflation so in 20 years you are making 168K / year. The "average" of your salary over these years of service would be 109K / year. 2% of that is 2.18K, * 20 = 43.6K.

So the year is 2023, you are making 168K / year, you retire, and now your pension is only paying you 43K / year. Can you live on that in 2023? For reference that is about 13,000 in today's dollars - OUCH.

What this looks like to me is this company has structured a DB plan in such a way that the resulting payout will be VERY LOW so that it is sustainable.
Your math is flawed, DB calculations are based on on best 6 years (at least at my work). In any case, pensions are not there to cover all your expenses... you should put something aside in addition to it.

AFAIK, the downside of a DB plan is that you can't easily move to a different company and get a defined pension. You are pretty much stuck with the company for 25 years!
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Jul 15, 2009
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If he plans to quit after 5 years (presumably still at a young age), is the DB still better? Since it's based on final salary and not indexed, wouldn't that final salary be very low by the time he's 65, both due to raises and career progression (at a different employer)?

It seems DB plans encourage you to stick with one employer. Say you do 15 years at one employer, and your final salary there is 75k. Then you do another 15 years somewhere else, and your final salary there is 100k. You end up with 2%*15*75 from the first employer and 2%*15*100 from the second, a total of 52.5k. But if you just worked for the same employer for 30 years making the same salary, you would get 2%*30*100 = 60k.

Am I missing something?
[OP]
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Dec 12, 2008
36 posts
2 upvotes
Brossard
brunes wrote:
Nov 7th, 2013 2:02 pm
What the heck does this mean, "DC Option 4% of my salary with a 7% company match"

I know a lot of people are jumping on the DB bandwagon but it seems kind of crappy to me if you actually do the math.

"2% of my final average salary per years of service". So say you make 50K / year at this company today, and you work for them for 20 years... let's also assume you get raises ewual to inflation so in 20 years you are making 168K / year. The "average" of your salary over these years of service would be 109K / year. 2% of that is 2.18K, * 20 = 43.6K.

So the year is 2023, you are making 168K / year, you retire, and now your pension is only paying you 43K / year. Can you live on that in 2023? For reference that is about 13,000 in today's dollars - OUCH.

What this looks like to me is this company has structured a DB plan in such a way that the resulting payout will be VERY LOW so that it is sustainable.

I suppose I was not too clear in my first post (sorry English isn't my first language)

For the DC option: The company gives me 3% and matches me up to an additional 4%, so by putting in 4% I get 7% from the company for 11% total.
As for the DB option, the final average salary is calculated as the average of the top five years. So if I assume that my salary follows inflation and I retire at 65, I'll approximately 80% of my current salary adjusted for inflation.
[OP]
Newbie
Dec 12, 2008
36 posts
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Brossard
bubak wrote:
Nov 7th, 2013 4:15 pm
If he plans to quit after 5 years (presumably still at a young age), is the DB still better? Since it's based on final salary and not indexed, wouldn't that final salary be very low by the time he's 65, both due to raises and career progression (at a different employer)?

It seems DB plans encourage you to stick with one employer. Say you do 15 years at one employer, and your final salary there is 75k. Then you do another 15 years somewhere else, and your final salary there is 100k. You end up with 2%*15*75 from the first employer and 2%*15*100 from the second, a total of 52.5k. But if you just worked for the same employer for 30 years making the same salary, you would get 2%*30*100 = 60k.

Am I missing something?
This is what I'm particularly worried about, but it doesn't seem to be information that is easily available for comparison purposes.
Deal Expert
Aug 2, 2001
15582 posts
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bubak wrote:
Nov 7th, 2013 4:15 pm
If he plans to quit after 5 years (presumably still at a young age), is the DB still better? Since it's based on final salary and not indexed, wouldn't that final salary be very low by the time he's 65, both due to raises and career progression (at a different employer)?

It seems DB plans encourage you to stick with one employer. Say you do 15 years at one employer, and your final salary there is 75k. Then you do another 15 years somewhere else, and your final salary there is 100k. You end up with 2%*15*75 from the first employer and 2%*15*100 from the second, a total of 52.5k. But if you just worked for the same employer for 30 years making the same salary, you would get 2%*30*100 = 60k.

Am I missing something?
Yes, I believe you are.

In my province, most of the major pension plans have transfer agreements in place. If you move to another company they match up your old pension plan to the new one, and perform calculations to determine how it is carried forward (obviously, some are better than others some are worse). Obviously the limitation is that you have to find an employer that uses a DB pension plan (and transfers), however I would assume that many people find it more profitable to stay within the same sector (government, etc) and as such, find it easy to move around.
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Aug 17, 2008
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All this pension talk made me look at my plan...

It turns out I have a DB plan, and all this time I thought it was a DC plan...

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