A pleasure to get such thoughtful comment, thanks. Just to be clear I am not against retirement savings plans. I just think that they should not displace pensions.
I may be wrong but I assume you are young (<50) and have no memory of a large sector of the population of older Americans living nicely off a pension and S.S. benefits. Remember that I am talking about the current middle class who have had little ability to save 5, 10, 15% of there income. You sound like you are doing a little better than most along with me (I’m just lucky I guess) but I still see the statistic that most people over 50 years old have less than $50K in their retirement savings account.
Comments on your comments:
“The way ours is structured, employees contribute a mandatory 5.5% (less than I'd be contributing to SS, but enough to make sure I'll have some savings when I retire) and my employer matches with another 5.5%”
Force investment for employment is interesting to me and isn’t much different than SS tax if you think about it. My wife has the same type of plan. It is not typical, just remember, you are paying fees and I think you probably are limited to equities funds, bond funds, or cash (e.g. money market funds). Unless you were lucky like me in 2000 and 2008 you probably lost a lot of money and were told that dollar cost averaging would save you. If you are back to where you were in 2008 with all the contributions you are probably doing better than most.
As far as the company match goes, based on my personal experience a pension for someone who works 25 to 30 years is worth about $250-450K. I don’t think your company is willing to cough that much up. (About $8-10,000/yr/employee)
“It will be taxed as normal income though, so I believe your assertion that it will be taxed "at 25 - 35%" is incorrect. It will actually be taxed based on how much I withdraw every year since the withdrawal is considered income.”
Unless your income is pretty low in retirement I doubt that you will pay <25%.
“In addition to the mandatory 403b, we can also set up an optional, supplemental account and contribute without matching from the employer. The optional account deductions can be either pre-tax (we'll have to pay taxes upon withdrawal) or after tax (the money is already taxed, so whatever is in the account when I retire is tax free).”
Yes, I assume you are talking about Roth. You are taxed as income.
“1. The money is mine. I can withdraw it at whatever rate I want instead of getting a fixed amount every month. I can also pass it on to my heirs when I die. Since I have a disabled son, this is very important to me.”
I don’t believe you can withdraw it without penalty until you are 59.5 although there may be exceptions for circumstances like yours. Then after 70 I believe you are required to withdraw at least a minimum amount per year. You are correct about passing it on but make sure that you talk to a lawyer early in retirement so that you can avoid inheritance tax. It takes at least 5 years of planning.
“2. I can borrow against it. In fact, I did. My wife wanted to buy a rental property but there was no way we could afford it. Then I found out I could borrow from my 403b, so now we own a rental property.”
Well that is a choice you can make but is the investment in the vacation property equal to the appreciation of the plan? Probably not in the last 6 years but maybe the real estate market will get better. Oh yeah, you have less money in your retirement fund now. Trade off. If you had a known pension you could buy a house with the funds you put in your retirement plan knowing you still had a pension.
“3. I don't have to wait until I'm an old man to start withdrawing my money. This is also important to me since my family has a history of males dying relatively young. With SS, there is a huge cut in benefits if you start drawing it too soon. With my 403b I can start drawing at 59-1/2 with no penalty.”
Wow, you really sound like me. Women live forever in our family—Men maybe 75. I just retired at 55. So to spill the beans I have a 401K and a pension. So I can draw from the 401K now and the pension funds later. So, again I say I am lucky and younger people are getting a raw deal.
“4. I have more control. The money is held in a Fidelity account and I get to choose how it's invested. I can buy stock funds, bond funds, or just hold it as cash. If I quit my present job, I can convert it to a "self-directed" account and have even more control (buy individual stocks, real estate, etc - not that I WOULD buy individual stocks).”
Yes, as I said if you know what you are doing. So, I guess you anticipated the crash of 2000 and 2008. You bought apple at $150/share. No, I think working people with no knowledge just took “self direct” loss of savings.
