Author Topic: Leaving state job - roll over/cash out pension?  (Read 1876 times)

bryan995

  • Stubble
  • **
  • Posts: 188
  • Location: Southern California
Leaving state job - roll over/cash out pension?
« on: February 18, 2016, 09:07:54 PM »
I am leaving my job with the state for a new job in the private sector.
I have 8.5 years of qualified service with the state, in order to 'vest' I need 10 years.
(I am 30 years old)

My salary will jump ~2.5x when leaving, and will have a much higher potential for growth.

I have about ~70k in the state retirement system.

Three options:
1.  leave the money in the state, and return at some point in the future to 'vest'.
2.  take refund - roll money into a qualified IRA (+3% interest credited, -20% taxes withheld)
3.  take refund - cash (+3% interest credited, -20% taxes withheld, -10% early withdrawal fee)

My thoughts:
I doubt I will ever return to the state...
70k is a relatively small amount (we are on track to save >70k/yr now)

We are ready to buy our first home, unfortunately it is in a HCOL area, which means a jumbo loan for the mortgage and a required 20% cash down (~160K).   Cashing out the pension would accelerate our home purchase by about 1 year.
We have about a ~250k net worth at the moment.

Personally I value a home > investments when considering FIRE-ability.
I am leaning towards simply taking the refund in cash and then using it for our downpayment...

Has anyone had to make a similar decision?
« Last Edit: February 18, 2016, 09:13:52 PM by bryan995 »

Axecleaver

  • Magnum Stache
  • ******
  • Posts: 3365
  • Location: New York
Re: Leaving state job - roll over/cash out pension?
« Reply #1 on: February 18, 2016, 09:17:48 PM »
I spent the first two years of my career at a state job, converted the pension to cash and put it in my IRA at 24, and never looked back.

Your situation is different.

You have just 18 months of service to realize a pretty awesome benefit. Not sure if you realize this right now, but that 10 year benefit is pretty kick ass. You're smart to take the 225% salary bump, but at some point - maybe 30 years from now - you may want to put 18 months into state service and enjoy the sweet nectar of government pensions courtesy of the taxpayer. We don't get anything remotely close to that in the private sector.

bryan995

  • Stubble
  • **
  • Posts: 188
  • Location: Southern California
Re: Leaving state job - roll over/cash out pension?
« Reply #2 on: February 18, 2016, 09:57:10 PM »
I spent the first two years of my career at a state job, converted the pension to cash and put it in my IRA at 24, and never looked back.

Your situation is different.

You have just 18 months of service to realize a pretty awesome benefit. Not sure if you realize this right now, but that 10 year benefit is pretty kick ass. You're smart to take the 225% salary bump, but at some point - maybe 30 years from now - you may want to put 18 months into state service and enjoy the sweet nectar of government pensions courtesy of the taxpayer. We don't get anything remotely close to that in the private sector.

I totally agree - the benefit is quite something...

Though I do worry that in 30 years either:
1) the vesting rules would have changed and I would not be grandfathered in
2) the state pension would be raided to pay for the states debt
3) the state pension no longer exists...!

If my plans were to return within a few years to hit the 10 years vest, then I would certainly leave the money where it is.
But 30 years out just seems too uncertain to me.

Plus even if everything does stay the same for the next 30 years, I would be making 0.8% - 3% interest on the money in the state, compared to the 8%+ if I were to convert it to an IRA or invest into a home.

Zamboni

  • Handlebar Stache
  • *****
  • Posts: 2217
Re: Leaving state job - roll over/cash out pension?
« Reply #3 on: February 18, 2016, 10:10:47 PM »
I left my state employee money in their plan just so I can access the state employees' healthcare plan in 20 years!

Pensions tend to be insured these days . . . I don't think you should worry too much about it disappearing. You can always look into that, but the govt nipped pension raiding in the bud through legislation.

I did a series of calculations on the pension payout they were trying to give me last year, and I'd have to realize 7% actual returns every single year from now until retirement just to break even. No, thank you, I've got plenty of other money in the market and I'll keep that defined benefit pension intact for grocery money for guaranteed old-lady me; there is a 5 year payout to my heirs if I die which pretty much adds up to the amount they were trying to give me now. So, I figure if I die unexpectedly, the kids will get the payout they offered me anyway, and if I live to be feeble and old, I'll end up way ahead. But I am vested (they changed the vesting rules dramatically since I vested, but I am grandfathered in.)

Your situation might be different, but I think you really owe it to yourself to run the numbers on what the pension would actually be worth if you do vest at some future date. Taking the money now for a house could be a great idea, or it could be very short sighted.

AZDude

  • Handlebar Stache
  • *****
  • Posts: 1298
Re: Leaving state job - roll over/cash out pension?
« Reply #4 on: February 19, 2016, 08:19:28 AM »
Even at 10 years, you will probably only be getting a limited pension. For me, I know it was a combination of service time and age, used in some crazy formula to show what you will earn. I cashed out, but that is because I was young, stupid, and broke.

If you roll over to an IRA, that 20% taxes withheld should not apply, unless its a ROTH-IRA. You pay taxes at 59 1/2 or whenever you withdraw the money. Which brings up the idea that you roll over into a ROTH, pay the taxes, and then in 5 years that money can be accessed without penalty, giving you more options.