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April 27, 2009

What’s a pension worth in your pocket?

Nicole Gelinas

A couple of weeks ago, the Citizens Budget Commission released a tabulation of the average annual benefits accruing to recent retirees from the New York City government, from firefighters to teachers to administrative assistants. How much would it cost you — if you’re a private-sector worker — to amass the same level of benefits?

Say you are expecting to live for 30 years after your retirement. (You may not; life isn’t fair. But that is what you expect. Therefore, you’re not going to retire until you’ve amassed enough money to support yourself for that long.)

And say you’d like to make $72,944 annually in your dotage — the average annual pension benefit a recently retiring New York City firefighter (including officers, as of 2006) can expect.

And say you want that benefit to rise each year with expected inflation of, say, 2.5 percent.

And say, finally, that you don’t want to take too much risk in your retirement. You’re not planning on putting all of your money in the stock market, for example (although good luck with figuring out what’s risky in this new world — mortgages, muni bonds, etc.). You figure that you’d like to take just enough risk to earn a return of 5 percent annually through your retirement.

To earn an average of $72,944 annually in retirement, then, you would need to have amassed a retirement-day nest egg of $1.5 million.

We can make the same calculation for …

Police: to earn the recently awarded average benefit of $56,617, you’d need $1.2 million in the bank.

Teachers: to earn the recently awarded average benefit of $54,931, you’d need $1.2 million in the bank, too.

Civilians and transit workers: to earn the recently awarded average benefit of $30,098, you’d need more than $635,000 in the bank.

Firefighters and police offcers, too, take in an extra $12,000 annually via a “Christmas” bonus. To assure yourself of such a bonus, you’d need $250,000 in additional savings.

How do these figures stack up against what the average private-sector worker has saved up?

According to the Employee Benefit Research Institute, a “long-tenured” 401(k) participant in his 50s, earning $60,000 to $80,000 a year at this point in his working life, has a median account balance of $160,324.

A similar worker earning $80,000 to $100,000 has a balance of $226,266.

Workers earning $100,000 or more have a median balance of $344,526.

Of course, some of these workers, particularly older ones, have other sources of private retirement income, including the old-fashioned pensions that public-sector workers continue to get. 401(k)s are only about three decades old.

But “long-tenured” private-sector workers in their 40s — the same age of many recently retiring firefighters and police officers, including one-fourth of recent police retirees – have an average balance of $194,832 if they earn $80,000 to $100,000, and $280,624 if they earn $100,000 or more – not enough to retire well on at that very moment.

In fact, if a person expected to live for 40 years in retirement, instead of 30, and earn $72,944, he would need $1.9 million today. If a person expected to live that long and earn $56,617, he would need $1.5 million.

Most people in the private sector must save up much of this money themselves. In New York, by contrast, as the CBC notes, “the city contributes nine times as much as employees contribute to their pension funds.”

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