Author Topic: FIRE or State Retirement???  (Read 3524 times)

BeanCounter

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FIRE or State Retirement???
« on: September 03, 2014, 09:12:31 AM »
Should we opt out of the state retirement system in order to FIRE?
Some background info-
My husband has a great job opportunity at a state university. He loves the work.
There are two options for the retirement plan- State retirement plan- traditional retirement where he'll have to work a minimum 27 years for a reduced retirement or 32 years or age 67 for the full retirement benefit. Full benefit is 80% of last 3 years average pay.
-OR-
The Alternate Retirement Plan where they contribute 14% of salary to a 403B and we contribute 10%.

Which do you do? Obviously the State Retirement plan has the benefit of a guaranteed check BUT he'll have to work until he's 67 to obtain that check.
The ARP has the benefit of being able to retire as soon as we can afford it, BUT has the market volatility to consider.
Which plan would bring us the most money? My calculations indicate that we will come out even IF we can keep our investment returns at 8%.
More info about us-
Both 37 with two small children. Current combined income $127,000, combined income with new job- $147,000.
Save- $38,000 per year.
Investments= $536,000- mostly 401k's, Roth and traditional IRAs.
Debt= $111,000 mortgage

Threshkin

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Re: FIRE or State Retirement???
« Reply #1 on: September 03, 2014, 09:36:50 AM »
Does the state plan have a COLA or is it fixed are 80% of the last 3 years average salary?

Personally, I would go with the 403b plan for the reasons you list.  It is effectively a 14% raise right out of the start. 

Ultimately it really depends on your risk tolerance and your desired retirement date.

Even if he loves the job, will he still love it in 20 or 30 years?  Will he even be able to still work at 67?  What happens if he has to quit before then due to an accident or illness?

I keep leaning back to the 403b being the better option.

DecD

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Re: FIRE or State Retirement???
« Reply #2 on: September 03, 2014, 09:45:55 AM »
What happens with the state retirement plan if he leaves after 10 years for whatever reason? 




DoubleDown

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Re: FIRE or State Retirement???
« Reply #3 on: September 03, 2014, 09:50:28 AM »
The traditional pension plan is a fantastic benefit if you intend to work 25-30 years, but a central tenet of this blog is that by saving 50% or more of your pay you can do it in 10-15 years. With $536,000 in investments already, you are WELL ahead on that front and could be there in just a few years. If your expenses are low enough, you may be very close.

Also, I highly suggest looking at the vesting period to determine if the pension plan really is all-or-nothing. Many plans allow you to take a reduced benefit without having to put in a full 25 or 30 years, as long as you're vested. I opted to leave early, deferring the pension until traditional retirement age. It will be lower, of course, than if I had worked 30 years, but it will still be a non-trivial amount to provide some guaranteed income for life.

SunshineGirl

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Re: FIRE or State Retirement???
« Reply #4 on: September 03, 2014, 09:55:56 AM »
The state I live in has a provision that if you leave employment but keep what you've accumulated in the pension account, while new contributions obviously stop, the money earns an annual 8%, which is fantastic. Does the university pension have provisions for when you leave? It's not like you lose the money once you're vested, right? You can take what you've saved and whatever is vested and that is yours...right? It's often a five-year vesting period and then you get a certain percentage of the employer's contribution, which increases over time.

BeanCounter

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Re: FIRE or State Retirement???
« Reply #5 on: September 03, 2014, 10:21:08 AM »
Thank you for your responses! Some additional information-

-Yes there is an annual COLA- but they have suspended it in years past for economic reasons.

-There is a vesting schedule and it says - "5 years 33% of contributions and 10 or more years 67% of contributions". That's about all that I can find. No indication as to what portion of the investment earnings would be part of that if any.

-Anything under 30 years or age 67 but at least 25 years is eligible for a "reduced benefit" but I cannot find what that benefit calculation is.

-If he became disabled and was not able to work until age 67, he would be eligible for lifetime disability payments, but I am unsure about what percent of pay that is.

-Yes, we have low expenses. Becasue we have small children most of our costs are for education and childcare which would both be adjusted if we were to stop working, but we are afraid of the cost of insurance if we were to retire now.

-The other issue that I have with the plan is that for the next few years, the state can still make changes to his plan which would adjust his retirement date, COLA, vesting etc.

We had basically decided to do the ARP so that we could be in control, but our family (who isn't aware of our net worth) was appalled that we would consider such a thing. Which made me start questioning it. I ran several future value models to see where the investments would come out vs the retirement plan and that's how I determined that it wold likely take an 8% return for us to end up ahead and that concerns me. Maybe my math is bad?


Cassie

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Re: FIRE or State Retirement???
« Reply #6 on: September 03, 2014, 02:18:27 PM »
I think you should talk to someone in the department that handles the retirement plans because I don't think you understand the pension guidelines.   Usually you are vested in either 5 or 10 years and many set a minimum age that you can take it like 60.  Often you can leave it sit until you reach the magic age. Or some like mine allow you to take it early. I only had 15 years in & took a small penalty to take it early.

DoubleDown

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Re: FIRE or State Retirement???
« Reply #7 on: September 04, 2014, 09:56:03 AM »
Agreed, you will need to get the details of the pension and vesting in order to make an informed decision. It will be impossible to compare the two choices without knowing what they pay.