Author Topic: Help me choose a retirement plan  (Read 1370 times)

historienne

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Help me choose a retirement plan
« on: February 27, 2016, 12:52:35 PM »
I'm about to take a new job, at a public university.  It has two retirement plan options.  The first is a pension, the second is an investment plan (like a 401k, but not).

Option A: I contribute 6.25% of salary.  At retirement, pension formula is:
2% x Your Participating Years of Service x Your Average of the Highest Three Years of Earnings
Vests at ten years; if I leave before then I get contributions + 4% interest returned.

Option B: I contribute 5% of salary, employer contributes 9.25%.  I choose investment products through TIAA-CREF (so, reasonably low-fee options are available, although it's not Vanguard).

Relevant information: my salary will start at $76000.  I anticipate working for thirty or so years (like my job, not interested in early retirement).  I would guess that my salary by then would be at least $125,000 (adjusted for inflation).

There are also supplemental retirement options available, both a 403b and a 457b.  I can contribute to both, so I can save up to $36,000/year tax-deferred in any case. 

I estimate that there is a 10% chance I won't get tenure at this job, in which case I'd leave after five years.  Maybe another 20% chance that I'd take another job at some point in the next 30 years, and 70% chance that I'll stay in this job until I retire.  Not a ton of mobility in my field - it took me four years to find this job, and it's a good one, so I'd only move for a spectacular offer somewhere else. 

I currently max out a 403b, and my husband maxes his 401k.  There is a significant chance that husband will switch jobs to an employer that does not offer a 401k in the next few years (he is in tech and is looking for a new job).  He also plans to retire early when we feel that we are financially secure enough - at minimum, we'd wait for me to get tenure at this new job, which would be in 5 years.  He makes approximately 150,000/year in his current job, but will probably end up taking a pay cut in order to work someplace more interesting (currently has a job offer for $100,000/year, which he will take if he can negotiate remote work; he applied for this job before I got my offer).  If he takes the new job, we may not be able max our retirement accounts for a few years, because we are expecting our second child this summer and will have a daycare bill of nearly $30,000/year for the next three years. We'll get close, though.

We are both 34 years old, and have about $150,000 in savings earmarked for retirement (not including cash savings, the 529 plan or house equity).  When we buy a house in this new city, we will have about $250,000 in mortgage debt.  No other debt.
 
Anyone want to play with these numbers for me?  Or offer a general opinion on the desirability of a defined benefit pension plan?
« Last Edit: February 27, 2016, 12:56:38 PM by historienne »

RWD

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Re: Help me choose a retirement plan
« Reply #1 on: February 27, 2016, 01:21:41 PM »
We faced an extremely similar option when my wife started her job. We ended up going for option B due to more flexibility.

I just ran the numbers with your specific scenario (assuming 7% investment returns and 3% annual raises) and it was vastly better to pick option B for any length of employment. Unless I did my math wrong. Spreadsheet attached.

RWD

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Re: Help me choose a retirement plan
« Reply #2 on: February 27, 2016, 01:34:21 PM »
Unless I did my math wrong.

Or if I understood wrong... Is the pension formula for a one-time payout or annual payments forever? If it's the latter, then the pension is probably better as long as you get vested.

lhamo

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Re: Help me choose a retirement plan
« Reply #3 on: February 27, 2016, 01:55:21 PM »
Congrats on the tenure track offer -- in History no less!  Not an easy feat in the current market.

I would go with option B.  I am also looking at potential jobs in higher ed (professional staff positions), and in my case the 403b option is vastly superior to the pension option because I'm not sure if I will work 2 more years or 5 or 10.  In your case, even if you end up staying long term I think the employer match and the portability of the investment plan make it superior to the pension option -- it gives you the maximum amount of freedom to change your employment in the future without having to worry about the sunk costs related to a choice of the pension.  Also, a lot of state university systems are experiencing serious financial issues at the moment (even UC schools) and I have serious doubts about the long-term stability of many government pension systems.  Personally I would prefer to be in control of my own accounts.

Wherever you go, there you are

historienne

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Re: Help me choose a retirement plan
« Reply #4 on: February 27, 2016, 01:56:52 PM »
Unless I did my math wrong.

Or if I understood wrong... Is the pension formula for a one-time payout or annual payments forever? If it's the latter, then the pension is probably better as long as you get vested.

The pension formula is for annual payments forever (as long as you vest). 

Rural

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Re: Help me choose a retirement plan
« Reply #5 on: February 27, 2016, 02:04:11 PM »

 Congratulations on the tenure-track job!


In nearly identical circumstances, I took option A. But I also can contribute money through payroll to a 403B and 457 account. Check and see if you also have these options you might get the best of both worlds.


historienne

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Re: Help me choose a retirement plan
« Reply #6 on: February 27, 2016, 02:31:32 PM »

 Congratulations on the tenure-track job!


In nearly identical circumstances, I took option A. But I also can contribute money through payroll to a 403B and 457 account. Check and see if you also have these options you might get the best of both worlds.

Yes, I have both of these options too, and would plan to use them.