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Author: Ohashi5 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19483  
Subject: Retirement options Date: 10/16/2000 5:50 PM
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Following a recent job change, my new employer is offering me two options:

1. A defined benefit plan which appears to offer a guaranteed benefit at retirement (if I stay for ten years), BUT it includes health insurance (assuming that the plan continues to offer health insurance when I retire)

2. A defined contribution plan that allows me to invest a portion of my income pre-tax into a selection of mutual funds.

The health insurance issue has me worried. The cost of health coverage if I have to get it on my own could be a lot, and it could be a lot more by the time I retire (could be 30 years).

I would appreciate your thoughts.

Thanks in advance.
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5307 of 19483
Subject: Re: Retirement options Date: 10/16/2000 5:59 PM
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Greetings, Ohashi5, and welcome. You wrote:

<<Following a recent job change, my new employer is offering me two options:

1. A defined benefit plan which appears to offer a guaranteed benefit at retirement (if I stay for ten years), BUT it includes health insurance (assuming that the plan continues to offer health insurance when I retire)

2. A defined contribution plan that allows me to invest a portion of my income pre-tax into a selection of mutual funds.

The health insurance issue has me worried. The cost of health coverage if I have to get it on my own could be a lot, and it could be a lot more by the time I retire (could be 30 years).>>


The promise of health insurance 10 years from now isn't worth the paper it's written on. That can be revoked at any time, and many employers have done just that. I suggest you not make your choice based on that part of the promise. Instead, IMHO it makes far more sense to make your decision based on which plan would give you the most income in retirement.

Regards..Pixy

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Author: jpkiljan One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5310 of 19483
Subject: Re: Retirement options Date: 10/17/2000 1:22 AM
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Ohashi wrote . . .
Following a recent job change, my new employer is offering me two options:

1. A defined benefit plan which appears to offer a guaranteed benefit at retirement (if I stay for
ten years), BUT it includes health insurance (assuming that the plan continues to offer health
insurance when I retire)

2. A defined contribution plan that allows me to invest a portion of my income pre-tax into a
selection of mutual funds.

The health insurance issue has me worried. The cost of health coverage if I have to get it on my
own could be a lot, and it could be a lot more by the time I retire (could be 30 years).

I would appreciate your thoughts.


Hello Ohashi,

Interesting predicament. There are way too many possibilities here for anyone to give you a definitive answer. No answers in this reply either, but here are a few questions that would come to mind if I were trying to decide for myself or a friend:

Is this a government job that you are guaranteed to be able to keep for 30 years? If it is a private company what is the possibility it may go out of business or be acquired in three decades? Are the future health insurance benefits guaranteed by some sort of contractual agreement (most aren't)? Are your co-workers mostly taking the defined benefit or the defined contribution? Does the company match the defined contribution? At what percentage? Do you get the match if you do not vest? Is the match in real money or some sort of company stock or option? You asked them, didn't you? Is this the kind of company that values and rewards employees with experience or one that is in a market with a lot of job turnover with employees constantly leaving for other opportunities? What about your quitting sometime in the next 30 years and wanting to move your contributions to another company? Are you sure you can even hack the 10 years needed to be vested? Can the defined contribution (and the company match) be moved to your new employer like a 401(k) plan can? Will you (or your spouse) be over 65 when you retire and qualify for much cheaper insurance as a Medicare supplement? Is the defined-benefit plan indexed for inflation (most corporate plans are not)? And, most importantly of all, is how do the benefit numbers look when you put them on a spreadsheet and work your way through all the termination/retirement possibilities that you think are likely to happen? Are you aware that the many defined-benefit plans pay very reduced payouts if you do not meet something like a 'rule of 80' with a minumum retirement age that may rule out early retirement? You did do a spreadsheet using the company's benefit tables, didn't you? Well, maybe not and who can blame you?

These are not questions for you to answer to me, of course--just some things to think about when you decide. If I didn't want to do a lot of analysis, I'd probably go for the plan that gives me the best return over the next five to ten years and forget any insurance benefit. That will probably be the defined-benefit plan, but do try to crunch at least some numbers first--just for the peace of mind if nothing else.

Take care guy,

-- John (retired with a defined benefit plan and enjoying the guaranteed, but expensive, health coverage)

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Author: jpkiljan One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5364 of 19483
Subject: Re: Retirement options Date: 10/21/2000 12:06 AM
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Ohashi,

jpkiljan wrote . . .
. . . These are not questions for you to answer to me, of course--just some things to think about when you decide. If I didn't want to
do a lot of analysis, I'd probably go for the plan that gives me the best return over the next five to ten years and forget any
insurance benefit. That will probably be the defined-benefit plan, but do try to crunch at least some numbers first--just for the
peace of mind if nothing else. . .


I've got to do a better job of proof-reading before I hit the send button. What I meant to write was the defined-contribution plan will probably come out the best for this short a period. Sorry 'bout the goof up. -- JPK

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Author: telone One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5401 of 19483
Subject: Re: Retirement options Date: 10/24/2000 1:30 PM
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You wrote: "Following a recent job change, my new employer is offering me two options:

1. A defined benefit plan which appears to offer a guaranteed benefit at retirement (if I stay for ten years), BUT it
includes health insurance (assuming that the plan continues to offer health insurance when I retire)

2. A defined contribution plan that allows me to invest a portion of my income pre-tax into a selection of mutual funds.

The health insurance issue has me worried. The cost of health coverage if I have to get it on my own could be a lot, and it
could be a lot more by the time I retire (could be 30 years).

I would appreciate your thoughts."

I reply: Also, re the "promised health insurance," in many companies you have to work up to 25 years to have the same health benedits as active employees at the same cost once you retire. And, you may have to work a minimum number of years to even qualify. After retirement, if you have health insurance, it usually plays off of Medicare and still does not give you 100% cost benefits. In addition, even with health insurance, the company can raise the deductable, increase the cost, place a reduced cap on the max payout, reduce benefits, switch you to an HMO-only option, etc. at will. Just some thoughts.

Re the defined benefit: It normally is based on years of service combined, say 1.4% per year. (You are normally vested after say 5 years, which means if you leave within that period, you get nothing.) Thus, if you worked there 25 years and retired, your benefit would be 25 X 1.4% or 35% of average of hi-three years of salary. This would be reduced by 8% (92% X 35% X average of hi three year avg salary) if you chose 50% benefit (upon your death) to your wife; or by about 18% (82% X 35% X hi three year avg) if you were to chose 100% benefit to your wife. Please also remember that the benefits are also usually reduced (by about 2% per year) if you retire below 60. Lastly, the benefit is fixed at that level for ever -- NEVER increased for inflation. By contrast if you worked for a municipal institution or the government, and retired your benefits are normally increased with inflation, like SS. I work for the USGov and my USG retirement will be, upon retirement under the FERS plan, increased each year at inflation less 1% (if inflation is 3.5%, my increase will be 2.5%). Doesn't sound like much but in 10 years, it would mean a 25% increase.

On the last item, the company doesn't have to stay with the defined benefit plan, even if this was part of the "going in" package. They can (like IBM) switch plans around, to suit their benefit.

Just some thoughts. Good luck!!!!


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