Retirement plans

[English]

Can someone enlighten me regarding retirement plans? I'm familiar with 401ks and 403bs, but not A plans or B plans.

For an example, let's say an airline has an A plan with a 1.8% multiplier. What does that mean?


What is an A plan? What is a B plan?

 

[80drvr]

Can someone enlighten me regarding retirement plans? I'm familiar with 401ks and 403bs, but not A plans or B plans.

For an example, let's say an airline has an A plan with a 1.8% multiplier. What does that mean?


What is an A plan? What is a B plan?

A Plan = Defined Benefit. Years of service X Final Average Earnings (FAE) X Multiplier. The components of the formula vary by company. This is where all your underfunding brouha spouted in the media resides.

B Plan = Defined Contribution. The company contributes xx% of earnings to a managed growth fund which pilots receives lump sum at retirement. Again, varies by company.

 

[English]

80drvr,

Thanks...what is final average earnings? Is that your last year of pay or an average of the sum of all years pay?

Do most companies have both an A and B fund?

 

[80drvr]

The formula for computing FAE varies by company.

Not all companies have an A & B fund. Some have one or the other and a few have both.

 

[English]

Thanks!

 

[Singlecoil]

Some companies use the best 3 years of your last five years of earnings, some use best 5 of your last ten, etc.

A funds are coming back, don't worry. Right now, they've been getting hammered due to low interest rates and poor stock market returns in the last several years. During the boom times, the companies didn't have to contribute a dime to meet their obligations since their market returns were so good.

The larget federal budget deficits we are now seeing are going to lead to higher interest rates, which will make the costs of A plan funding obligations cheaper for the companies that have them. Its very simple. The government is going to have to borrow money to fill the deficit. They do that by selling bonds. More bonds on the market mean higher rates of return( interest rates) to get people to buy the bonds.

 

[English]

Do I have this right?

Let's say the FAE is $140,000, and I have 25 years of service. The multiplier is 1.8%. Do I just take 140,000 x 25 x 1.8%?

How do I know how much would be drawn at retirement? The figure I come up with doesn't seem right.

 

[Launchpad]

Certainly no expert here, but my view is this. Usually you'll use the highest of your last 3 years or 5 years or whatever the company goes by. Usually with the seniority system, your last 3-5 years are your highest paid but that is not always the case. Then it's my understanding that you'll get 60% of FAE, so 60% of $140,000 or, $8400.

I'm not sure how the multiplier works....

 

[Falconjet]

English

English: In your example, the retirement pay would be 5250 per month, or 63K per year. 1.8 X 25 years equals 45%. Final average of 140 times 45% equals 63K per year. Monthly check before taxes would be $5250. Different companies use different numbers of years to average, and some have a cap on the percentage, like 50%, so if the multiplier was 2% and you worked for 30 years, the max would still be 50% of the FAE, not 60%. Each plan is slightly different.

Launchpad: In your example, 60% of 140K would be 84,000, and the monthly check would be 7,000.

FJ

 

[Launchpad]

Falcon, thanks for the clarification. I knew I forgot some zero's somewhere.

 

[English]

falconjet,

Thank you! Now I get it.

Now, the last question...does the A plan pay out for the rest of one's life or is it for a finite period of time?

 

[Falconjet]

A fund payout

The A fund usually pays out until death. Some have the option of a survivor's benefit as well. You take a little less each month, but your spouse gets a continuing (albeit smaller amount) for as long as he/she outlives you. Some pilots prefer a lump sum cash out right at retirement of both funds, but I don't know of any carriers that allow that.

FJ

 

[Singlecoil]

falconjet,

Thank you! Now I get it.

Now, the last question...does the A plan pay out for the rest of one's life or is it for a finite period of time?

At my company, there are bunch of options. The above example would yield the "Single Life Annuity" which is payable for the rest of your life.
You can also take a 10 or 15 year Certain Life Annuity, which pays a sum for a 10 or 15 year period, regardless of how long you live. If you are dead, it pays to your estate.
Then there are the joint and survivor options; 100%, 75%, 66 2/3%, and 50%. These options pay one amount for the rest of your life, then pay another amount for the rest of your spouse's life. The 100% pays the same amount for the rest of both your lives, the 75% pays one amount for the rest of your life, then 75% of that for the rest of your spouse's life, etc.

For all of these options, you start with the single life annuity and make corrections from there. The joint and survivor options depend on your age at retirement and your spouses age at retirement. If she is young, statistically she will live longer, so her monthly payout would be less than an older spouse.

My company has a 50% lump sum option, which pays half of the assumed value of your retirement plan up front at retirement. You can roll that tax-free into an IRA. Then all of the above options are reduced by 50%. It is interesting to note that many of the options utilize actuarial numbers updated annually by the government which are based on life-expectancy. For the 50% lump sum option in 2004, the factor is 13.099874 for someone retiring at age 60, meaning your average life expectancy is 73.099874 years. If you live longer than that, then you would have been bettter off not taking the 50% lump sum option. Of course, if you took the 50% lump sum option and invested it wisely then it would be a wash, but you are assuming the risk, not the company at that point.
A lot of people take the 50% lump option because they get at least some of the money right now, and they won't be totally SOL in case the company goes broke at some point in the future. I think it makes sense to do that.