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Be an ant and not the grasshopper November 30, 2010

Posted by Jill (@bonnjill) in Business practices.
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Have you heard the Aesop fable about The Ant and The Grasshopper?

One summer day a grasshopper was singing and chirping and hopping about.  He was having a wonderful time.  He saw an ant who was busy gathering and storing grain for the winter.

“Stop and talk to me,” said the grasshopper.   “We can sing some songs and dance a while.”

“Oh no,” said the ant.  “Winter is coming.  I am storing up food for the winter.  I think you should do the same.”

“Oh, I can’t be bothered,” said the grasshopper.  “Winter is a long time off.   There is plenty of food.”   So the grasshopper continued to dance and sing and chip and the ant continued to work.

When winter came the grasshopper had no food and was starving.  He went  to the ant’s house and asked, “Can I have some wheat or maybe a few kernels of corn.  Without it I will starve,” whined the grasshopper.

“You danced last summer,” said the ants in disgust.   “You can continue to dance.”  And they gave him no food.

I was reminded of this by a recent ProZ.com poll on private pension plans. I was shocked to see that 64.4% of the respondents do not have a private pension plan and only 31% do. I started paying into a private pension plan (well, a German annuity) when I was 30, and I also have a Roth IRA set up here in the States. I currently pay about $400 a month into my various pension plans. I reduced the payment to the German annuity when I moved back to the States, but I still continue to pay a small amount into it every month from my German earnings.

I saw how tight things were for my great-aunt when she was living on Social Security – plus I have no doubt that Social Security will be bankrupt by the time I am old enough to collect on it. When I get older I plan to continue translating, but I am certainly not going to keep going at the pace at which I am currently working. This will require some savings, which the private pension plans will provide. This gives me some peace of mind.

Oliver Lawrence did a very good job summarizing exactly how I feel: “I think that those without their own pension provision may find themselves with the choice of continuing to work into their old age or living in something close to poverty in 20-30 years time. Given that more and more people are living longer and longer, combined with the somewhat short-sighted public resistance to increasing the retirement age, where is the state going to find the money to pay all these pensions?” I couldn’t agree more!

So how about you, dear readers? Do you have a private pension plan, and why or why not?

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Comments»

1. Oliver Lawrence - November 30, 2010

Thanks for mentioning my remark, Jill :). I suspect there may be an awful lot of people grumbling at the state in a few decades’ time – unless individual habits change…

2. Amybeth - November 30, 2010

That’s one of my favorite fables. The lesson is so simple – take care of your own business; do what others are not willing to do and you’ll have what others won’t have. So many people today look everywhere but at themselves to find someone to take care of them. More personal responsibility needs to be taught and embraced!

Thanks for sharing Jill 🙂

3. Cat - November 30, 2010

That poll got me thinking, too! I had actually planned to start one next year, when I turn 30 (when I started working as a translator a few years ago I decided that would be the landmark because I’d be more or less established by then). I guess it depends on the country, in Spain it’s quite uncommon, for example (I mentioned it to a Spanish friend once and she said, “Of course, it’s a very Anglo-Saxon thing…”).

4. Alejandro - December 1, 2010

Good food for thought, Jill.

5. Craig Morris - December 1, 2010

Jill, pension plans are only a good idea if you live a long time. Germany’s Verbraucherzentrale (a consumer protectionist organization) has been telling people for years to do the math and decide whether they want to pay into a system over decades that does not begin paying out until they are 65 (or, perhaps, 67+ by the time we get there). It turns out that, in many cases, you have to live to be 80 in order to break even.

Obviously, you need money to stay alive, but whether pension plans are a good option depends primarily on how long you live. Keep in mind that you cannot bequeath your pension plan on to your kids.

The consumer protectionists over here recommend that you invest in property, bonds, stocks, and other such things.

Also keep in mind that retirement is something for people who are either employed or do not enjoy their freelance occupations. If you are a freelancer and your work at least gives your day a little bit of a structure and your life a little bit of a meaning, you will probably continue to translate until your health prevents you, which could be a very long way into your retirement age.

Jill (@bonnjill) - December 1, 2010

Actually, Craig, that isn’t true. My uncle passed away in July, and I’m his executor. The money he set aside in his various plans isn’t just disappearing. His pension plans and life insurance policies have been/are going to be paid to his estate. My sister and I are getting the annuities outright because we were named the beneficiaries. My sister is the beneficiary on my German annuity. My grandmother passed away a couple years ago at age 92, so I have some good genes on my side. Having a little money set aside that I can use once I get older and may not be able to work as much for various reasons gives me peace of mind. It’s a good idea to diversify, so other investments are a good idea too.

6. Craig Morris - December 1, 2010

Life insurance policies are by definition for other people, so it’s not fair to throw them in with pension plans here. But I will grant you that a lot of private pension plans, if not most, at least provide for spousal support beyond the policyholder’s death.

You do, however, have to actually take a look at the matter when you sign the policy. It is not a foregone conclusion that pension plans can be bequeathed upon family members as property, stock, etc. can. Of course, the kind of pension plans you are describing are apparently stocks and bonds.

It’s a bit off-topic, but I have two such plans as life insurance myself, and they are now worth less than I paid into them because of the real estate crisis in the US. Back in 1998 when I signed policy with my bank in Germany, they told me that a third of the package was real estate in the US, and I told them I didn’t want any part of that because the US market is BS. My banker (from “die Beraterbank”) told me they did not have anything completely divested of US papers, so I could either sign this or do without completely. I should’ve at least bet my banker a beer that the market was going to go bust by the time the insurance policy is paid out, which is at the end of 2011.

I hear a lot of people’s 401(k)s have performed even worse. I can tell you that, when you get less out than you put in, you will never listen to anyone advise you to set up a retirement fund again.

I was right in 1998, and I’m out now for good.

Anyway, glad to hear you have good genes 😉

7. Judy Jenner - December 1, 2010

Good post, but I feel so sad/bad for the grasshopper. They can come to my house for bagels; I am all about helping — and yes, I know it’s just a fable. 🙂

Personally, I pay into a private pension fund in Austria, to which I started contributing at the age of 20, and I have a Roth IRA here in the US. I also have a pretty substantial 401K from a previous in-house position. I pay roughly $500 a month. Having a plan for the future is absolutely essential!

8. Alex Eames - December 1, 2010

I totally agree with the sentiment of “setting something aside for the future”, but I have always disliked the whole concept of annuities. I don’t know how it is elsewhere, but in the UK you pay into your plan (receiving tax relief on your contributions) and you can withdraw 25% of it as a tax-free lump-sum on retirement. But here’s the kicker – you have to use the remaining 75% to buy an annuity (although they have relaxed the rules to allow some flexibility of the timing on this).

I got out of that game the same year I became self-employed. Why? I had a feeling (back in 1997) that the government would – at some point in my lifetime – change the rules to my detriment.

It wasn’t long after that that Gordon Brown started raiding pension funds by removing the tax credit on dividends. How do we know that they won’t abolish the tax-free lump-sum? We don’t. It’s a long-term punt.

No. I’m a firm advocate of personal responsibility, but that means being in control of what your money is invested in. Sadly, most pension funds have very little transparency in this regard.

Look at the poor Irish folks. Their pension pot has just been raided to prop up their economy. What if it doesn’t recover?

For some people, a pension fund is the right choice. For others, I don’t think it is. But clearly, if you are not accumulating something, somewhere for the future, you are currently living beyond your means (I just wish our politicians would grasp that simple point and stop spending money our children haven’t earned yet). 😦

9. Corinne McKay - December 6, 2010

Great post, Jill! I have an individual 401K through Charles Schwab and I’m very happy with it. Like you, I assume that Social Security will either be bankrupt by the time we retire or that I will get so little from it that it won’t be nearly enough to live on. Although I really enjoy translating and could envision working into my old age, the last thing I want is to be worrying about paying the heating bill when I’m 80, so I think that investing a fair amount for retirement makes sense.

Our accountant had an interesting observation: although it’s much, much easier to borrow money for education than for retirement, many people save aggressively for their kids’ educations but not for their retirement. His theory (interesting) is that education expenses are much easier to quantify: you know when your kid will be old enough for college, about how much it will cost and about how long it will last. Retirement is a lot more amorphous: you don’t know how long you’ll live, what your expenses will be, whether you will be healthy or you will need long term care, whether you will end up inheriting money from your own parents or end up supporting them and yourself, etc. etc. But I do think that with most of us looking at a reasonable probability of living into our 80s or 90s, it’s a good idea to put the power of compounding to work and start saving now!

10. Riccardo - December 6, 2010

Good post, Jill,

It’s sad seeing how some people are improvident… and others misguided, such as the French translator who is going to invest in real estate “because I’ve never heard of house prices falling here” (or words to that effect) – and this in 2010, after seeing how badly real estate had done recently in the States, Spain, Ireland and so on.

As for us, yes, of course, we have several IRAs, in addition to other investments – also, I plan to work into my seventies at least, not so much for the extra income, but to keep the brain sharp.

11. Daria - December 7, 2010

Do I have a private pension plan – yes and no. Here in Australia employers are required to pay you 9% superannuation into some pension fund, and since I’ve worked as an employee in the past, I’ve about 30K sitting there. Frankly, it’s useless – you get taxed on depositing, taxed on withdrawing, you get charged fees that you have no control over, and then you can’t touch it until you are 55. In any case, 30K really won’t go far – Australian minimum wage is 47K per year, and it’s extremely hard to scrape by on anything less than that, especially considering the size of rents or mortgage repayments.

Of course, any future financial crash will wipe out a large chunk of any super as well – my in-laws lost about 30% of their hard-saved super in 2009 and found that they couldn’t afford to retire. And to think that they were doing a salary sacrifice for years, pouring thousands of their cash into that fund, and then ptooie! All gone!

My husband and I did the maths, and to have a decent annual passive income (about 40K or so per person, or about 60K for two), one needs to invest about half a million at current interest rates (6-7% for trust and managed funds). So, we’ve started a investment portfolio last year instead, it’s small but it’s a start. In the future, when we have more savings, we will be looking at property and other investments as well, so that we are not putting all of our eggs in one basket.

P.S. I did look at starting a self-managed super fund, but it’s very restrictive and you need to have at least 200K to qualify.

12. Alex Eames - December 9, 2010

Further to my previous post, it seems that from April next year the UK legislation is changing…

http://www.bbc.co.uk/news/business-11949166

“From April, there will be no obligation to buy an annuity from an insurance company with money saved in a pension.”

…but the sting in the tail is…

“However, the government intends to increase the tax rate from 35% to 55% on any lump sum left over to your inheritors from this pension pot when you die”

My stance towards official pension plans is unchanged. I still prefer to forgo the up-front tax relief and retain control of the accumulated resources.

13. Sharron Clemons - December 21, 2010

Life insurance policies are by definition for other people, so it’s not fair to throw them in with pension plans here. But I will grant you that a lot of private pension plans, if not most, at least provide for spousal support beyond the policyholder’s death. You do, however, have to actually take a look at the matter when you sign the policy. It is not a foregone conclusion that pension plans can be bequeathed upon family members as property, stock, etc. can. Of course, the kind of pension plans you are describing are apparently stocks and bonds. It’s a bit off-topic, but I have two such plans as life insurance myself, and they are now worth less than I paid into them because of the real estate crisis in the US. Back in 1998 when I signed policy with my bank in Germany, they told me that a third of the package was real estate in the US, and I told them I didn’t want any part of that because the US market is BS. My banker (from “die Beraterbank”) told me they did not have anything completely divested of US papers, so I could either sign this or do without completely. I should’ve at least bet my banker a beer that the market was going to go bust by the time the insurance policy is paid out, which is at the end of 2011. I hear a lot of people’s 401(k)s have performed even worse. I can tell you that, when you get less out than you put in, you will never listen to anyone advise you to set up a retirement fund again. I was right in 1998, and I’m out now for good. Anyway, glad to hear you have good genes 😉

14. Peony - January 4, 2011

Alex Eames said: “I still prefer to forgo the up-front tax relief and retain control of the accumulated resources.” Well put – all the more so since we translators/interpreters tend to move around a lot, especially those employed by international organisations. My own unfortunate experience was to pay in to a tax sheltered retirement savings plan in country A, move permanently to country B, and then discover that I would be taxed roughly 40% if I withdrew from the RSP in country A…all this after the financial crisis had depreciated the value of my holdings by 25%. Caveat emptor. Read all the fine print. If your career plan includes a stay abroad in the foreseeable future, know the impact that will have on your savings plan.


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