Father Really Did Know Best — but that was 1954

The lead character in Father Knows Best, Jim Anderson, played by Robert Young, had a pleasant lifestyle. At some point, his children grew up and he thought about how he could continue that lifestyle without working. He knew that his company had a pension plan and he wondered if he qualified. Father had what we call a Defined Benefit Pension Plan. This means that the sponsor of the plan, the employer, defines the benefit. The employee will receive some percentage of his salary for the rest of his life. When he dies, his wife will continue to receive some portion of that. The onus was on the employer to figure out how to fund it—i.e., how much money to put aside and how to invest it. They used an actuary to perform these calculations. An actuary is a practitioner of a highly specialized science, and well-rewarded for his or her expertise.

Father, on his end, performs a simple calculation: he sees his social security payment, in today’s dollars, say $25,000, adds to that his pension payment, say $35,000, totals them, gets $60,000, and sees if he can live on that amount. He knows that he has a “nest egg” of investments which acts as a backup to be there if he needs it, or he can leave that amount to his children. That amount is a bonus. His house is paid for, he figures he can live on $60,000, and so he retires.

Fast Forward to 2012

Over the last 20 years, this arrangement, like the TV show, has largely disappeared. Some companies have these defined benefit pension plans, but very few. Public sector employees still have them and that, as we know, is a matter of controversy. Now we have what are called Defined Contribution Plans. In these plans only the contribution, not the benefit or payment, is known, or “defined.” What the payout will be is not known. The benefit is “un-defined.” So when Father begins to think about retiring, he performs a similar calculation. His expenses are $60,000, he has social security of $25,000, but where does the additional $35,000 come from? He has some money: a 401K, and IRA’s, and an investment pool. But how does he know if it will support withdrawals of $35,000/year? And for how long? How long will he live? How long will his wife live? How should the money be invested? What about inflation? There is no actuary to answer these questions. He has to do it himself. That's why you need a retirement planner.

Do you know anyone in this situation? Why not have them contact us?