| Airline Pilot Retirement Plans | Part 1 |
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Page 2 of 2  Also many folks ignore the effects that future inflation will have on their retirement income. If you figure that inflation will average 3% per year and you are earning 8% your real return is only 5% per year.A friend of mine who recently retired began his career at Continental at a very young age in the early 70's. At that time a top captain made $40,000 per year. A nice car cost $3,000. A very nice home was $40,000. That top captain could have retired on $28,000 per year. That was great in the early years of his retirement, but as inflation kicked in through the 70's retirement undoubtedly became much harder. Don't be surprised if that quarter-pounder at Mickey D's will be going for $15.00 plus before your retirement is over. The other area where pilots tend to overestimate their financial success is in managing the withdrawals from their retirement accounts. Many have told me that they expect to be able to withdraw 7%, 8% or even 10% per year from their accounts. There has been a lot of good financial analysis done on this and it is the widely held opinion of finance professors and financial professionals that anything more than about 4% is imprudent and puts you at serious risk of outliving your money. At 4% per year a diversified mix of stocks and bonds should allow you to live 30 to 35 years in retirement with periodic increase to adjust for the effects of inflation. In other words, every million dollars you acquire in your savings prior to retirement will yield $40k per year in retirement. That is a sobering figure. We have had a DC plan at our airline since 1988. The percentage of total pay has varied between 8% and 12% and the wages have grown considerably since our early years. What have we learned by observing the results in the real world? Well first off, we don't have any Warren Buffet replacement candidates. We have had a few folks who have done very well for short periods of time, but have failed to sustain those returns for long periods. It should be pointed out that our B Plan and 401k allows participants to invest in individual stocks and bonds as well as mutual funds and will even allow the purchase of options under certain limited circumstances. We have always tried to give our members the widest range of investment choices and greatest investment freedom possible. We have had a large number of folks who have done average or a little better. By the way average is pretty good. As was pointed out above most investment professionals do not "beat" the averages. On the other hand, we have had quite a few who do considerably worse. Why? Well, I have observed many try to time the market. They move from money market funds to stocks in an attempt catch investment swings. Almost no one can do that. Some have taken extraordinary risks and achieved extraordinary returns for a while. Eventually, double zero comes up on the investment roulette wheel and things end badly. A few are overly conservative. They hang out in money market funds or intermediate bond funds rather than take a risk. They seem befuddled and uncomfortable by investing. All of these investment faults will tend to depress group averages. Another objection I hear from pilots is that because of their demanding schedules, crossing time zones flying on the backside of the clock that their lives will be shortened reducing their retirement needs. While it certainly is true that circadian disruption is a negative factor when determining longevity, pilots tend to have many factors that work to increase longevity. Compared to the general population pilots tend to have higher education levels, smoke less, eat better, have a lower body mass index and higher rates of marriage. These are all factors that favor increased longevity. You should plan on living a long while after retirement. If you make it to 60 over half of you will make it to 80 and a considerable number will live into your 90's. The other thing that I hear quite a bit especially from younger pilots is "Just give me the money and I'll take care of my own retirement". Well, that sounds good but the fact is that it is very difficult to acquire and build wealth from ordinary income that is subject to federal and state income taxes. While one may have good intentions the fact is that most people do not save that much outside of their 401k and IRAs in real life. In fact, when one is paying a marginal tax rate of 30% or higher plus on one's income, it is very difficult for most people to acquire substantial wealth outside of their qualified retirement plans Pilots have an investment style that reflects their innate personality traits, aggressiveness, self-reliance, optimism, competitiveness, and independence. DC plans appeal to those of us who want to be in control of our lives, and we all want to believe that we are better than average. We are not, but thinking we are we often over estimate the likelihood of our investment success. Many years of experience with B Plans have convinced me that DC plans will be an important part of the pilot retirement mix in the future, but because of government limitations on how much money can be contributed to them and the reality of real life investment returns, they will not by themselves be adequate to guarantee our retirement futures. (stay tuned for Part 2...)          |
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