Corporate Pension "Handcuffs"

[SnackDog]

I have heard for years about the golden handcuffs which tighten around one's wrists after 15 or 20 years in a large corporation.  I even know people who have quit their jobs after 15 years to avoid getting sucked down for 30 years.  For a long time, I just assumed the pension benefit accrued in some non-linear fashion to keep experienced people from jumping ship.  A couple years ago I graphed it up using the online calculator provided by my employer. What I found is that the annual increases in the lump sum do steadily rise in the later years, but not dramatically so.  They also max at 30 years (at least in my case) and decline thereafter (the rate of lump sum increase slows).  At the peak year, the one year pension lump sum increase is nearly double my current gross pay.

Recently I have focused on forecasting alternative scenarios between now and retirement.  The variations are significant.  After more years of experience and higher paygrades in the company, the increases in salary, bonus and stock grants from one level to another get quite large.  At the same time, savings have built up and the magic of compound interest begins to work.  All these things work in concert (pension increases, bonuses, savings, etc) to put a sharp increase in slope on the income graph in the later years.

Bottom line, using conservative assumptions, our net worth will double if I stick around 5 more years and quadruple if I hang around 10 more.  As long as the job is as much fun as it is so far, I'm not going anywhere.  But the rewards in 5 more years are amazing and after 10 just looks ridiculous.  As a frugal person, I can't quit and walk away.  I get the impression other frugal co-workers, including several with over 30 years here, can not walk away from the financial rewards they are offered.

How are others of you viewing the pension handcuff dilemma?

[zolotiyeruki]

I don't think it applies to you, since you enjoy your work.  You're in a very fortunate position indeed--you like what you do and you're being paid increasingly large sums of money to do it!

"Handcuffs" implies that you don't like what you're doing, but you're doing it anyway because of the money.

[seattlecyclone]

Your company is giving you some large financial incentives to keep working longer. Try not to think of these incentives as "handcuffs." If you like your job, keep doing it! If you don't, no amount of money should be enough to keep you working past your FI date. Once you have enough, what do you need more for?

[Bob W]

Jealous, as I have no handcuffs.   In your case,  since you like your job,  I would milk it.  Although my understanding of pensions is that they stop when you/your wife die.

A third option is to quit and start a business that will be self sustaining after a few years.  Use your imagination.   

A business such as this has equity,  a job does not as you are giving the equity to your company in exchange for your pay and pension. 

So what business could you start that would develop equity within a few years and be a cash generator?  What field are you in?

[MDM]

The company accountants and executives are also aware of how fast the benefits accrue in your later years.  That is one reason layoffs often target the "chronologically gifted" - you are fired so you don't get to collect those benefits.  Companies know they can be sued for age discrimination so they won't be blatant about it, but it would be good for you to save early so you are all set just in case....

[retired?]

The company accountants and executives are also aware of how fast the benefits accrue in your later years.  That is one reason layoffs often target the "chronologically gifted" - you are fired so you don't get to collect those benefits.  Companies know they can be sued for age discrimination so they won't be blatant about it, but it would be good for you to save early so you are all set just in case....

The pensions from each of my four employers that had some sort of pension in addition to a 401k had a vesting schedule for the pension that was similar to the 401k.  i.e. no worry about needing to make it to some sort of "retirement age" as with public jobs to have earned the pension.

But, to OP, I'll echo others.....handcuffs refer to jobs you would rather leave.  You are in a good spot, though it may not be enjoyable forever.

[MDM]

The company accountants and executives are also aware of how fast the benefits accrue in your later years.  That is one reason layoffs often target the "chronologically gifted" - you are fired so you don't get to collect those [higher] benefits.  Companies know they can be sued for age discrimination so they won't be blatant about it, but it would be good for you to save early so you are all set just in case....

The pensions from each of my four employers that had some sort of pension in addition to a 401k had a vesting schedule for the pension that was similar to the 401k.  i.e. no worry about needing to make it to some sort of "retirement age" as with public jobs to have earned the pension.

Good point - it wasn't clear that I was referring to an analog "higher" benefit and not a digital "some vs. none" situation.  See bold edit above.  It isn't (in my example) that companies are trying to avoid paying any pension at all, rather that they may look to avoid paying the much higher amounts one accrues in the last few years before "traditional" retirement.  Thus one should plan accordingly.

[Gone Fishing]

Just remember that money comes at the cost of time. If there is nothing else you would rather be doing, by all means, keep working.  Might be beneficial to start thinking about what you will do with all that money, though.  As a responsible frugal person, blowing it on material goods is not a good solution, nor is giving it to your children (did someone say kegger?).  That leaves you with charity.     

[Greystache]

I accepted the handcuffs.  The pension is not even that great. It will pay about $450K lump sum. We also have another $1.1M in various retirement accounts. I sort of always knew I would work to age 55 (minimum age to collect pension payments). Until I discovered MMM, I never imagined there was a choice.  I planned it so that my mortgage would be paid off, the last kid would graduate from college and I would qualify for the pension in the same year. In my case it really has been a case of golden handcuffs.  I have a good paying job, a nice office and a decent boss and coworkers, but there is nothing inherently satisfying about my job. No real joy. For a long time now, I have only been there for the money. Now that I am about to become financially independent, there is no reason to stay a minute longer. My magic number is 18 days away.

[Spartana]

I ditched the handcuffs 8 years before I could actually start getting my government pension (combo military time and government civilian job). Could start collecting once I was 50 but was ready to leave the work force before that (at 42) fully knowing I would get less when I started to collect.  I knew I could live off savings until I could begin collecting my pension. It was well worth it to me and I haven't regretted that decision. Like the OP I lived very frugally, however, unlike him/her, that made me want to quit once I had "enough" rather than stay working longer just to gain more income I probably would never really need.

[Spartana]

I accepted the handcuffs.  The pension is not even that great. It will pay about $450K lump sum. We also have another $1.1M in various retirement accounts. I sort of always knew I would work to age 55 (minimum age to collect pension payments). Until I discovered MMM, I never imagined there was a choice.  I planned it so that my mortgage would be paid off, the last kid would graduate from college and I would qualify for the pension in the same year. In my case it really has been a case of golden handcuffs.  I have a good paying job, a nice office and a decent boss and coworkers, but there is nothing inherently satisfying about my job. No real joy. For a long time now, I have only been there for the money. Now that I am about to become financially independent, there is no reason to stay a minute longer. My magic number is 18 days away.

Congrats on the retirement in 18 days! You'll enjoy it!

[kendallf]

I've been thinking about this a lot lately.  I work for the gov't (DOD) and I have several "inflection points" coming in the next few years.  In six years, I hit 30 years of service; this marks the point where I can retire and take a deferred pension later without penalty.  That's sort of attractive, but not compelling.

In eight years, I hit 56 yrs, 4 months of age.. which is my Minimum Retirement Age (MRA).  I can leave then with immediate pension and the big carrot.. I can keep my health insurance and, more importantly, the gov't keeps paying the majority of the premium.  Even with the ACA now available, this is a big incentive to stay.

I don't hate my job, but I'm increasingly doing acquisition milestone work that I find futile.  Since finding MMM and starting to really get my finances in order, I am working toward job satisfaction in doing some direct technical work, more overseas travel.. the things that motivate me in a work setting.  Knowing that I don't need to try for promotion to a competency job I'd hate is freeing.  I'm also thinking seriously about applying for an overseas position for my last few years; my wife was an Army brat in Germany and Italy and loves this idea.  :-)

[retired?]

Gubment different.  Cannot comment, except to say it usually appears good, but can be subject to change, e.g. the city of Chicago.  Oooos, we cannot afford all those above market promises we made.

In that case, it might be best to roll it over to a personal/private IRA like Vanguard or Fidelity. 

[SnackDog]

Thanks for all the advice and comment.  I realize the job may not be as much fun in the future, but in my experience non-fun periods tend to be short.  I have switched bosses and work/living countries every 3-4 years.  In fact, the anticipation of where we might live the last 3-4 hitches is exciting and keeps me around. We could end up in some very cool places in Asia, Europe, or Africa and I would hate to miss out on that experience, particularly doing it frugally on "expense account".

As far what to do with all the savings, we don't have kids so it will be going to charity and we already know which two will get most of it.  Both are amazing local charities which benefit people and the environment.  If we do blow any money, it will be on interesting real estate so that's not exactly lost.

Whoever said companies target people with large potential pensions for layoffs is wrong in my experience.  People at companies are valued based on their contribution first.  If you are not contributing, then you probably need to go, regardless of your years of experience.  They layoffs I have seen have all been fair and pushed out people who were contributing the least (or in some cases extracting a toll on those around them and actually impeding work; we refer to these people as "creating 1/value").  In many cases, the layoff ended up being best for the employee as well as they found a better fit elsewhere.

[hybrid]

I've often said I wear Golden Handcuffs, but not because I hate my job. I make decent money and the benefits (tangible and intangible) are great. I get 29 days PTO, the normal work week is usually less than 40 hours. My commute is short, and I have zero traffic issues. I like the people I work for. The job is uber-stable. Handcuffs aren't always about the money.

The DW definitely is in a different boat, she will be with the Feds until she retires in a few years. She has no better options than the one she has right now, not by a long shot. Especially with the pension looming just over the horizon (about 30% of her pay, indefinitely).

[Seņora Savings]

No golden handcuffs for me.  My job has a defined contribution plan and I love it.  I may not want to do the same thing in five years (that's why I'm on this site), and I'm not going to have to walk out without my fair share of the retirement pie.

When I left a previous pensioned job, several of my older colleagues said that they would have liked to leave but couldn't because they'd loose the pension.  It feels good to know that I'll never be in that position.

[Gone Fishing]

The real handcuff set around here is not the pension, it is the stock options/grants.  These vest on a rolling 5 year basis unless you retire (minimum age of 55).  So if anyone with grants/options leaves before 55 they are leaving 5 years worth on the table.  They have raised the bar several times over the past few years so I have never qualified, but almost kind of glad I didn't.  One less thing on the list of things I will give up when I quit.

[DoubleDown]

I've been thinking about this a lot lately.  I work for the gov't (DOD) and I have several "inflection points" coming in the next few years.  In six years, I hit 30 years of service; this marks the point where I can retire and take a deferred pension later without penalty.  That's sort of attractive, but not compelling.

In eight years, I hit 56 yrs, 4 months of age.. which is my Minimum Retirement Age (MRA).  I can leave then with immediate pension and the big carrot.. I can keep my health insurance and, more importantly, the gov't keeps paying the majority of the premium.  Even with the ACA now available, this is a big incentive to stay.

I feel you. And in your case, if you're going to stay 6 more, you might as well go 2 more to get the whole package...

I've decided to forego the big carrot (working to MRA, which is also 56 yrs. 4 mos. for me), and instead go for 20 years total (2 more years). That lets you draw your pension at age 60 without penalty, even if it gives up other significant benefits you mentioned like health care for life. But no way I'm working until age 56.

Also, are you aware of the "Special Social Security Supplement?" If you work until MRA, you get approximately 75% of your Social Security pay until you reach the age when you can draw Soc. Sec. (age 62). That's another huge benefit to staying -- about 6 years of Soc. Sec. pay at 75% -- although I've already concluded I'm giving that up in favor of retiring years sooner.

Here's another huge bonus I stumbled across unintentionally: Taking a year of Leave Without Pay (LWOP) gives half of the time credit towards retirement! That is, you can take a year off and get credit for 6 months towards retirement. That shaves another half-year off your intended retirement date. Add on all your unused sick leave, annual leave, etc. and you can easily retire a full year or 1.5 years earlier!

[MDM]

Whoever said companies target people with large potential pensions for layoffs is wrong in my experience.  People at companies are valued based on their contribution first.  If you are not contributing, then you probably need to go, regardless of your years of experience.  They layoffs I have seen have all been fair and pushed out people who were contributing the least (or in some cases extracting a toll on those around them and actually impeding work; we refer to these people as "creating 1/value").  In many cases, the layoff ended up being best for the employee as well as they found a better fit elsewhere.

In most cases what you are saying is true.  But not in all cases.  And perhaps not true in enough cases that one ought to consider the possibility and plan accordingly.  It would be nice if all employers behaved perfectly ethically 100% of the time - but they don't.

[Spartana]

Gubment different.  Cannot comment, except to say it usually appears good, but can be subject to change, e.g. the city of Chicago.  Oooos, we cannot afford all those above market promises we made.

In that case, it might be best to roll it over to a personal/private IRA like Vanguard or Fidelity.

I think for those like me who have Fed or state pensions it's pretty safe. But I've heard of a lot of city and county pensions pretty much evaporating or being greatly reduced when the city or county goes bankrupt. Still probably more secure then a corporate pension in many ways though - most of which have been phased out anyways. Plus with a public pension, at least in my case, the vestment time is only around 5 years and you can quit and just leave the pension alone to collect at a latter time once you reach the right age (which was 50 in my case) so you don't really lose it if leaving. Of course you don't add to it (other then interest) unless you re-enter public employment on the same pension system.

[kendallf]

Also, are you aware of the "Special Social Security Supplement?" If you work until MRA, you get approximately 75% of your Social Security pay until you reach the age when you can draw Soc. Sec. (age 62). That's another huge benefit to staying -- about 6 years of Soc. Sec. pay at 75% -- although I've already concluded I'm giving that up in favor of retiring years sooner.

Here's another huge bonus I stumbled across unintentionally: Taking a year of Leave Without Pay (LWOP) gives half of the time credit towards retirement! That is, you can take a year off and get credit for 6 months towards retirement. That shaves another half-year off your intended retirement date. Add on all your unused sick leave, annual leave, etc. and you can easily retire a full year or 1.5 years earlier!

Yes, I'm aware of the FERS supplement, and it is indeed a large additional benefit.  That's interesting about LWOP -- Is a year the max?  I need to do some Googling now.  Thanks for the tip!  :-)

[hybrid]

Gubment different.  Cannot comment, except to say it usually appears good, but can be subject to change, e.g. the city of Chicago.  Oooos, we cannot afford all those above market promises we made.

In that case, it might be best to roll it over to a personal/private IRA like Vanguard or Fidelity.

I think for those like me who have Fed or state pensions it's pretty safe. But I've heard of a lot of city and county pensions pretty much evaporating or being greatly reduced when the city or county goes bankrupt. Still probably more secure then a corporate pension in many ways though - most of which have been phased out anyways. Plus with a public pension, at least in my case, the vestment time is only around 5 years and you can quit and just leave the pension alone to collect at a latter time once you reach the right age (which was 50 in my case) so you don't really lose it if leaving. Of course you don't add to it (other then interest) unless you re-enter public employment on the same pension system.

These are good points, every pension system is different. If I lived in NJ, IL, or CA among others I would be paying close attention to how well the pension system is funded. Haircuts, possibly big ones, are always a possibility. VA is better than most, but we could be better funded as well. I often forget I have seven years in with VRS and will get a nice steak dinner each month when I retire, as I am "vested" (at a pretty low level).

[DoubleDown]

Also, are you aware of the "Special Social Security Supplement?" If you work until MRA, you get approximately 75% of your Social Security pay until you reach the age when you can draw Soc. Sec. (age 62). That's another huge benefit to staying -- about 6 years of Soc. Sec. pay at 75% -- although I've already concluded I'm giving that up in favor of retiring years sooner.

Here's another huge bonus I stumbled across unintentionally: Taking a year of Leave Without Pay (LWOP) gives half of the time credit towards retirement! That is, you can take a year off and get credit for 6 months towards retirement. That shaves another half-year off your intended retirement date. Add on all your unused sick leave, annual leave, etc. and you can easily retire a full year or 1.5 years earlier!

Yes, I'm aware of the FERS supplement, and it is indeed a large additional benefit.  That's interesting about LWOP -- Is a year the max?  I need to do some Googling now.  Thanks for the tip!  :-)

I think each agency has their own rules, but you can generally extend LWOP more than one year if you get special permission from senior people at your agency. However, I'm pretty certain you cannot accrue more than 6 mos. of retirement credit with one year of LWOP. Any LWOP approved past one year gives no more retirement credit. Oh, and your health care coverage continues through LWOP with the employer continuing to pick up their portion of the premiums.