401 K or pension

The average starting pay for a teacher in MN is $48,000 and the average pay at retirement is $63,000. Since 1990 teacher salaries have increased 2.4% per year. If a teacher starts today at age 25 earning $48,000 and works 37 years to age 62 and gets an annual raise of 2.4%, he will be earning $115,000 per year. Using the current pension multiplier of 1.9% his retirement pay will be $80,000. Teachers contribute 8% of their salary to retirement. The stock market has earned 10% per year for the past 100 years. If it earns 5% then the starting teacher today would have $540,000 in his account and that could purchase a $32,000 pension which is far less than the $80,000 under the current plan. The difference is made up by the state contributing $800,000 to his total. If the market earned ten percent his total would be $16 million which would provide a $96,000 pension with no contributions from the state. This is why pension plans are so dependent on the stock market and why they must be evaluated each year. Some years the state will have to add and some years they won’t. Too many states have adjusted the projected rate of return instead of adjusting the annual contribution and thus most pension plans are underfunded. A large amount of money sitting in a pension plan is too big of a temptation for many politicians. In time these pension plans will be replaced with 401K plans to eliminate the need for annual review but even that is not safe because the federal government has its eyes on 401K plans.