We’re gonna kick it off with Matthew’s question. He says, “I’m a member of the carpenters union, and we have a pension savings and annuity plans. That being said, should I still be saving 25 percent, or hot take, would Ramsay’s 15 be okay?”
We get this question a lot. Someone says, “Hey, I work in a unique job. I have one of those things that most people don’t have – I have a pension. My employer is telling me, ‘Hey, when you retire, I’m gonna put money aside that I’m gonna commit to guarantee a certain income for you when you retire. I’m gonna have that pay for the remainder of your life, or perhaps someone have it pay for the remainder of you and your spouse’s life.’ So, knowing that I have this other type of retirement plan sitting out there, knowing that I have that income stream coming, should that change the way I approach saving now? Do I really need to do 25, or can I get away with doing less? How should I think about that when it comes to saving for financial independence?”
Fortunately, we’re very math-minded people, so we can actually give you all the answers and all the variables to look at to make this decision. A good portion of pension plans has an employer contribution where they say, “Okay, to get this pension, you have to give six to eight percent towards the pension, and then we, the employer, will go put eight to ten percent also in.” You can count that portion that you are giving towards the pension plan always. Now, for the portion that your employer is also giving on your behalf, if your income is below 200,000 as a household or 100,000 for a single individual, then you can also count the employer portion in that calculation.
Now, there is a big asterisk I want to put on this. I’m assuming this pension plan is something that has an annual statement that you can go see with the lump sum value is. Because a lot of times now with pensions, you will have the choice of, “Do you want to roll this money out, or do you want to take it as an annuity stream where you essentially get the payments monthly like a paycheck in retirement?” That’s what the pension is. Assuming you have a cash value, that’s how I want you to handle that component of it.
On your savings rate now, yes, the second part he asked about 15 versus our 25. If you’re in your 20s and 30s and you’re missing that 10%, it could literally be a seven-figure difference – a million-dollar difference. I know a lot of people will say, “Well, yeah, but I’m paying down a mortgage.” Think about how much cheaper this house is going to be because you didn’t have all that interest, more than likely. Now, I know that since 2021, mortgages are 6% and 7%, but for most people pre-2021, mortgages were 4% and less. The spread between that 4% you’re paying down on your mortgage versus the 8% to 11% you’re making on your diversified portfolio over the long term is just too much of a gap to be overcome. And don’t turn compounding and interest upside down. Let it work for you; harness the power of it.
So, don’t think just linearly when you think about paying off your mortgage when you’re in your 20s and 30s. You’re thinking in a linear fashion about the mortgage interest you’re saving. I want you to think exponentially about the $60,000 that the 20-year-old investing is turning into $1.5 million, or the $60,000 that the 30-something is investing that turns into over half a million dollars. That’s thinking exponentially; that’s thinking about compounding growth.
I tell all my pensioners this, right? Even though you might not quote-unquote have to have that high savings rate, what will happen is that, by doing it, you give yourself options. And when we get to financial independence, it’s all about flexibility. It’s about options; it’s about being able to do the things that we want to do. So maybe what the 25% savings rate allows you to do is, when you hit that retirement age – maybe it’s 55, maybe it’s 50 – you actually have enough resources built up that can last you for the rest of your life. You don’t have to go find an extra second part of your job.
I think that, while you can save at 25 because of exactly what Brian said – how powerful those dollars could be – I don’t think it’s a crazy thing to do at all.
Check out this show called, “Dave Ramsey vs. The Money Guy: Which Strategy is The Best?” for more information on which strategy makes more sense to you.