Defined-benefit Plan (Pensions) vs Defined-contribution Plan (401K)

In my 17 years in the corporate world, I have never heard any of my peers my age speak of having a pension plan at work.  When I first started work at Pennzoil in 1990, the company had just recently offered early retirement to most of the older workers.  Many of those more mature workers at the time probably had some form of pension plan.  However, pretty much every new employee hired with me and afterwards did not have the option to participate in a pension plan.  Back then, pensions were becoming obselete.  Today, they are pretty much non-existent for new workers.

A pension plan is commonly known as a defined-benefit plan.  This is when the company pretty much takes care of funding your retirement.  You really don't have any say in how the money is invested.  The cash is automatically deducted from your paycheck and invested by the company as they see fit.  In a way, it's kind of like how Social Security works.

Today, however, workers are pretty much on their own to ensure they fund their retirement adequately.  The defined-contribution ( i.e. 401K ) is now the primary means by which workers handle their retirement.  For someone like myself who enjoys investing and keeps up with the latest information, a defined-contribution plan is superior to the old defined-benefit plan.  I prefer to have full control over my investment choices.  I don't want my money going into a black hole and to have someone else responsible for my financial destiny.

When to purchase another vehicle...

Dayna and I have two vehicles - a 1999 Acura TL3.2 with 79,000 miles and a 2000 Nissan Xterra SUV with 93,000.  The two cars are 8 and 7 years old, respectively.  At this point, my plan is to not purchase another vehicle until Morgan's fifth birthday.  That would make our cars 12 and 11 years old at that time.  Yes, I know, many folks have told me I'm a miser and have unrealistic expectations when it comes to the life of a vehicle.

Here are some stats for you from the National Highway Traffic Safety Administration...

In 1977, half the cars on the road survived until they were ten years old with an expected useful life of 107,000 miles

In 1990, half the cars on the road survived until they were twelve years old with an expected useful life of 127,000 miles

In 2001, half the cars on the road survived until they were thirteen years old with an expected useful life of 152,000 miles

When I do finally buy another car, it will not be new.  I will be looking at vehicles that are one year old at the time I make a purchase.  I have no need to have the latest and greatest popular vehicle to impress friends.  This all goes back to one of my core financial values... "Don't envy what others have".

Two packs of cigarettes

I was standing in line at a convenience store the other day and overheard the gentlemen in front of me ask for two packs of cigarettes from the cashier.  I was not paying too much attention until I heard the lady behind the counter say "that will be $9 sir".  NINE dollars!!!  As in niner!!!  Holy freakin cow I thought to myself.  Nine Dollars?!?!?

So, being the nerd that I am, I pulled out my Blackberry and fired up the calculator.  OK, so, if I smoked 2 packs of cigarettes a day at a cost of $9 a day for 365 days that would come out to $3,285.  To be perfectly honest with you, that is about the amount of money we paid for all diapers and baby food for Morgan's first year of life!!!

$3,285 is about equivalent to...

The amount McKesson matches my 401K for one year

Three times the amount I paid to fuel both our cars last year

Three times the out of pocket expense for the birth of Morgan

Slightly less than what I paid for a 10 day honeymoon in Paris in 2004

One-third of our annual housing cost

Same amount I will spend over 10 years on a $500,000 life insurance policy

8 times the amount I pay on our annual healthzone membership

Wow !!!  Nine Dollars.  That is something else.

Boom and bust economy

I've always been puzzled by the mentality of folks who believe their income will do nothing more than increase throughout the years.  So many people stretch themselves so far with mortgages because they truly believe they will be making more money each and every year that goes by.  Therefore, they justify to themselves that their income with catch up or exceed the necessary level to meet the demands of an out of bounds mortgage.

We live in a boom and bust type of economy.  There are no guarantees that one's income will always be reliable.  Of course, there is a small percentage of people in this country that seem fortunate enough to avoid the highs and lows of a fluctuating income stream.  These folks are among the lucky few who have wisely managed their careers in order to avoid such instability.

To illustrate my point about income fluctuations, let's consider a real life current event - the news that Toyota has now surpassed GM and Ford as the number one seller of vehicles in America.  What exactly does this mean for workers in this industry currently at GM or Ford ?  Well, the possibility of them being layed off is very real.  Where might they go work instead ?  I bet Toyota is hiring.  Why do you think Toyota is now number one in the industry?  I can almost guarantee you that their costs are less.  What does this mean exactly?  Well, for one, they are probably paying their employees less.  Hence, professionals in this industry can expect to be performing their work for less money if they wish to have a job.

Unfortunately, we in America make way more money than folks in other countries.  There is an entire planet out there prepared to do our work for a lot less money then we are.  We'll continue to see our jobs go offshore.  For those jobs that do stay here in America, the pay levels will continue to remain flat or decrease.