IBM freezes pension, switches to 401(k)

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Wrong numbers.

You forgot that the interest is paid each year and there's interest on the interest from past years and salaries increase.

Let's say that we have someone just hired by IBM, so only the 5%/1% figures apply. And let's say further, and weirdly, that this individual has a 40 year career with IBM somehow.

As long as we're using strange numbers, let's say that this individual's pay averages $25,000 for 10 years and $50,000 for the next 10 years and $75,000 for the next 10 years, and $100,000 for the final 10 years.

And, a bit complicated, let's say that the interest earned each year is 4% of the total contributed, which is the total from the prior years (including interest) plus the 5% of the person's salary maximum plus IBM's 6% of the person's salary.
To reach 4%, the percentage paid every month (say) would have to be a bit over 4% because all of the money won't be there until the year ends.
I'm not going to add any further complications.

In that case, the 401(k) will contain a total of $551,679, of which 23% came from the employee, 27% came from IBM, and $277,000 (rounded) is interest.

Not much for 40 years work, is it?!

And that interest mostly comes in the final years. Takes 18 years of the 40 to obtain only 10% of the 40 year total. And the interest reaches 50% of the total after 32 years, so half the interest arrives in the final 8 years of employment.


So let's move the interest rate up to 10% per year, every year.

Now our friend is much better off, having a total of $2.1 million on which to retire, and $1.8 million of that is interest.

But, worth noting, takes him 34 years to reach 50% of that interest total. For the final 6 years he's finally getting a huge amount of interest.

So that's why they tell you to take risks in the early years, though whether someone can afford to be cautious toward the end is a whole other issue.

Looking at these calculations, I think I'd invest in a company providing inexpensive food.

Posted by: Anton Philidor   Posted on: 01/06/06 You are currently: a Guest | Members login | Terms of Use

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