Page 16 - The Great 401k Rip-Off

certainty. Of course, that does not include an inflation hedge, which the 3% Rule does, but still, the
Wall Street Model reduces your chances of success to 90% rather than 100%.
Blast from the Past
What about the pension? Is that better, and why? Put simply, they spread mortality risk (how long
people would live after retirement and need to receive a pension) among many people. Everyone
gets a payout based on how much they contribute, divided by the life expectancy of the risk pool, not
the maximum potential lifespan as in the above illustrations. Life expectancy is the point in time
when half the pool has died, and half is still alive. It is NOT the maximum possible lifespan.
In this example, life expectancy is 13 years. So, divide $300,000 by 13 and your get $23,000. If you
live a long life and your money runs out, someone else who contributed and didn’t have the good
fortune to live as long as you also contributed to your longer payouts. Think fire insurance. It’s not
the premiums you pay that rebuilds a lost home, it’s the premiums of all the people whose housed
didn’t burn down.

This is pretty straightforward and easy to understand, so it’s often dismissed as unimportant. The
truth is, it’s practical magic. Everyone gets over twice as much income. Everyone gets a guarantee
they won’t run out of money. And if, for some reason, the actuaries made a mistake and
miscalculated the payouts, the plan—not the retirees—assume the risk and provide the security
desired and expected. No one ever has to cut back. No one ever has to spend less. No one ever has
to worry about the next stock market crash.
To reiterate the most important point in this report, it’s risk reduction and removal—not rate of
return—that provides the dramatic increase in income. The fact is you can maximize retirement
income without any rate of return at all!
Back in 1978, defined benefit pensions, along with Social Security and private savings, were the key
to secure retirements. About 60% of the working population had these pensions, and they were
considered part of the social contract between employers and employees. The worker would give a
lifetime of service, and the employer, in turn, would ensure that the waning years of the worker’s life
was lived in dignity and security. This was the norm. It was the expected outcome of a lifetime of
labor. This is the bargain my parents – and perhaps yours – made, and they enjoyed the fruits of a
lifetime of productivity to the very end.

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