Include Your Employer’s Pension Contribution in Your 25% Savings Goal?

May 7, 2023

Should you count your pension contributions towards your savings rate? In this highlight, we discuss what you should count in our 25% savings rate rule.

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Moving on to Steven’s question, he asks, “Is it fair to count the employer’s pension contribution, which is 20, when calculating the 25 savings rate that you talk about if we make under 200k?”

Alright, is it fair to count the employer’s pension contribution? What he said was 20, that’s what he wrote in parentheses. Even if you have a clarification, I’ll watch for it in the chat. Of course, it works, but so here’s what I’m just, I want to follow the line of thinking, and then I want you to answer the question, Brian. If my company or the entity for whom I work, entity that I work for, I don’t know, that came out weird, is putting in 20, does that mean all I have to save is 5% and 25 is where the rationale and line of thinking are going, right? And so I guess mathematically, yeah, you could arrive at that place. Okay, great, there’s 25% of what I make going towards that, but it seems to me that there’s just a lot of faith and weight in a future promise that is yet to come to fruition. Now, odds are if it’s government, odds are it’s going to be there, but what I would say is, hey, if they’re putting in 20 and you’re thinking, “I’m gonna put in five,” well, what would happen if you start saving 20-25% on your own?

What additional doors would that open? What additional flexibility would you have earlier on in life if you knew you had this fat pension setting out there, but then you also had all of these assets built up? How might your 40s, 50s, and 60s look different if you’re able to double-team it from both sides of the equation? So, the pension is 60% of the income. It might be his wife, but this is a teacher’s pension. Got it. So, I have a few thoughts on this, and this is where I love it because normally I listen to non-fiction, but I’ve been going through this phase where I listen to Jack Reacher books, and I love it because Jack Reacher is like encyclopedia brown, but he kicks butt too because he has his deductive reasoning where he always can figure stuff out, but then if things don’t go right, he just goes and smashes some heads to figure out stuff, so it’s a cool series. This feels a little bit like it because I feel like Jack Reacher without the brawn. I see a red flag here, and I want to be honest with Stephen.

Look, I think it’s great for you and your family that they’re doing 20%, but because you only have to put in 5%, especially because your household is under the 200,000, but there’s a red flag here. If the government, because I’ve been involved in government, so I know this red flag, it’s this experience. If they’re having to put in 20%, that means they have an unfunded, really underfunded pension plan. Because I’ve been part of one of those plans where in a lot of municipal governments, a lot of teacher funds and other things have really realized that some of the assumptions they made back in the 70s, the 80s, and the 90s, they might have been a little rosy on what they were putting.

So now they’re kind of desperate to shore these things up so they’ve had to create these crazy funding formulas where they’re putting 14-20. Like you’re showing, that is great for you in this moment in time. However, it could be that they are also a sign that this thing is not on stable financial ground, that they have to fund it at such a level. So, I would just encourage you, it’s great for you now, but it’s also one of those things where it could go away tomorrow, and I would hate for you to be in the situation where your consumption of your lifestyle is built on that. You get to spend after taxes 95% of whatever comes in, and then all of a sudden, the governor, the music stops, you try to find the chair, and now you can’t do it because you’ve already accounted for every dollar in your budget going towards consumption and housing and everything else. Just be careful because, um, you know, because that could be a thing to plan for. So, I’d probably go for a more balanced, moderate approach. You don’t have to save 25% yourself if your employer’s putting in 20, but maybe you and your spouse should work to try to be saving 15% of your gross income, um, just so because that’s gonna give you more margin so you have more options in the future. Um, but it gives you a lot more freedom, and good on you that you’re getting that extra money, but I do want you to be careful. What does this mean that they’re putting 20 in? That means that there is, there is this is a symptom of something going on that they’re trying to catch up and fix.

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