Author Topic: How to break out of the "Working for the Pension trap"  (Read 6342 times)

techwiz

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How to break out of the "Working for the Pension trap"
« on: April 07, 2016, 12:28:34 PM »
Just starting to wrap my mind around the whole "FIRE" concept and am sorry I didn't have the advice and knowledge provided by MMM years ago. I would have liked to retire when I was thirty.

I would really like the option to not work anymore and be home more with the kids. When doing some "FIRE" calculations I keep running into the trap that I can't throw way a defined benefit pension. Everyone says I am so lucky to have one. I am grateful and proud of my long career in IT with the Canadian federal government.  However with over 20+ years of pensionable service it's is a very difficult to get out without losing that great pension.  The penalties of retiring early have huge deductions (60- your age X 5%) not to mention the loss of the good medical/dental coverage plans. I keep coming to the conclusion that I must work until at least 55.

Is there something I am missing? Or is it just greed that is keeping me here.





giggles

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Re: How to break out of the "Working for the Pension trap"
« Reply #1 on: April 07, 2016, 12:33:26 PM »
Following.   US fed gov't employee if anyone has feedback there.

forummm

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Re: How to break out of the "Working for the Pension trap"
« Reply #2 on: April 07, 2016, 12:40:45 PM »
Do you have enough money to quit now? How much happiness would that extra pension bring you? It sounds like you don't need the money. What would you do with it if you had it? Only you can decide whether the extra money is worth the extra years of your life.

Lagom

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Re: How to break out of the "Working for the Pension trap"
« Reply #3 on: April 07, 2016, 12:50:38 PM »
I suppose it somewhat depends on the exact details of your pension plan, but we've had to deal with this as my wife is a teacher with a pretty good pension. For us, it's really a question of the "one more year" syndrome that "regular" people have with regards to saving. By retiring early, her pension will be half of what it potentially could be (even with our strategy to delay payments until she's 55), but that money will still meet all of our expenses when it kicks in (with my smaller pension and additional savings being nothing but cushion), so why bother working longer for an unnecessarily larger payout?


okits

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Re: How to break out of the "Working for the Pension trap"
« Reply #4 on: April 07, 2016, 12:57:36 PM »
The way out of the trap is to not need the pension+benefits.  If you don't need them but still feel compelled to trade years of your life for them, then that's a free choice you make based on your values.  But admit that one is never forced to choose something simply because it pays the most money.  The money should be worth more than whatever it is you give up in order to get it.

Dee18

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Cannot Wait!

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Re: How to break out of the "Working for the Pension trap"
« Reply #6 on: April 07, 2016, 01:30:04 PM »
Is there something I am missing?
Sounds like you might have missed the MMM post where he talked about how much money he would have now if he had stayed with his first career job.  Hint:  He doesn't regret it.
I just gave up 50% of my government pension to RE with no regrets - I traded it for a LIFE!  😀
Take a look at 'everybody' who is telling you how lucky you are to have a pension; do they lead lives that you would like to emulate?   My old coworkers that told me I was crazy 'couldn't' ER because they either "liked expensive things too much" or "wouldn't know what to do with themselves".  To each their own, but I can't relate to those problems.
Enough = Enough!  Find out what your magic number is -  then enjoy!

apricity

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Re: How to break out of the "Working for the Pension trap"
« Reply #7 on: April 07, 2016, 01:38:15 PM »
I have confused, swirling thoughts regarding this issue, as I have a DB pension, as well.

I've gone back-and-forth between feeling lucky, then cursed, then lucky, then cursed, then confused!

With my relatively "late start" regarding saving and my salary not being super high, I'm not sure I can afford to disregard it. But I just don't know, I feel more will become clear with time. Right now I am just focused on the FI portion of FIRE.

doggyfizzle

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Re: How to break out of the "Working for the Pension trap"
« Reply #8 on: April 07, 2016, 01:57:58 PM »
Following.   US fed gov't employee if anyone has feedback there.

If you are a FERS employee with at least 5 years of creditable service, you can bail on Federal service and wait until 62 to draw your service-duration-based annuity.  If you have 10 years or more of creditable service, you can bail and draw a reduced annuity (5% per year for each year of age under 62) at your MRA (which is between 55-57 depending on hire date).  You lose your retiree medical, but thanks to ACA, many of us ER'ers will qualify for insurance subsidies due to diminished incomes which can help bridge the years between FEHB and Medicare.  One PITA (from what I've read) is using the TSP to 72t out, so you might have to roll your TSP into a tIRA and then set up a SEPP/72t plan if you choose to go that route.

forummm

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Re: How to break out of the "Working for the Pension trap"
« Reply #9 on: April 07, 2016, 02:07:26 PM »
Following.   US fed gov't employee if anyone has feedback there.

If you are a FERS employee with at least 5 years of creditable service, you can bail on Federal service and wait until 62 to draw your service-duration-based annuity.  If you have 10 years or more of creditable service, you can bail and draw a reduced annuity (5% per year for each year of age under 62) at your MRA (which is between 55-57 depending on hire date).  You lose your retiree medical, but thanks to ACA, many of us ER'ers will qualify for insurance subsidies due to diminished incomes which can help bridge the years between FEHB and Medicare.  One PITA (from what I've read) is using the TSP to 72t out, so you might have to roll your TSP into a tIRA and then set up a SEPP/72t plan if you choose to go that route.

I believe you can only take 2 distributions from a TSP (one partial and one full), so you would need to roll it to an IRA.

And I don't think the FERS is that generous. And there isn't a big cliff where holding on for X time gives you a huge bump in pension--it's 1 year gives you 1%. The health and life insurance benefits have some value. But not huge.
« Last Edit: April 07, 2016, 02:09:53 PM by forummm »

JZinCO

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Re: How to break out of the "Working for the Pension trap"
« Reply #10 on: April 07, 2016, 02:09:43 PM »
This is why I opted out of a pension in exchange for a DC plan...
(I realize most don't have the option)

Villanelle

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Re: How to break out of the "Working for the Pension trap"
« Reply #11 on: April 07, 2016, 02:12:36 PM »
Do you have enough money without the pension?  If so, working for 10 years (or whatever) more pension is no different than working an extra 10 years for more salary to pad your stache.  It is time worked for money you objectively don't need.  So ask yourself this: Would you work an extra X years for $Y in saved salary?  If not, why would you work an extra X years for 4% of $Y in pension?  It is the same thing--X years buying you 4%Y in lifestyle, yet it seems much easier to justify the latter than the former.

We talk about this a lot with my DH's pension.  He wouldn't face a reduction, but the longer he works, the more he gets of course.  Back of the napkin math was something like an extra 25k per year for 4 extra years of work, IIRC (higher base salary plus 10% more of that salary; based on a couple assumptions that are likely but not guaranteed)  That's a tempting amount of money, but our plan is to stay the course and be ready for him to retire when we have what we need, unless he stays because he enjoys the work, which is a strong possibility. 
« Last Edit: April 07, 2016, 02:16:06 PM by Villanelle »

BFGirl

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Re: How to break out of the "Working for the Pension trap"
« Reply #12 on: April 07, 2016, 02:32:22 PM »
I'm in the same boat.  I feel FI enough to quit if the situation becomes intolerable (which if they stick me in a pseudo-cubicle office instead of my tiny office where I can at least see outside - it may become intolerable), but since I'm not totally miserable, it seems prudent to stay another 4 years, 8 months and 23 days.

Cassie

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Re: How to break out of the "Working for the Pension trap"
« Reply #13 on: April 07, 2016, 02:38:14 PM »
Techwiz: can you just quit and then wait until retirement age to take your pension?

Fishindude

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Re: How to break out of the "Working for the Pension trap"
« Reply #14 on: April 07, 2016, 02:39:00 PM »
Many have relied solely on pensions fore retirement, spent all of their income, and wound up getting burned when their pension fund collapsed.
Don't count on somebody else to fund your retirement.   Take care of yourself, and if you do get a pension (or social security) consider it gravy.

techwiz

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Re: How to break out of the "Working for the Pension trap"
« Reply #15 on: April 07, 2016, 03:11:49 PM »
Thanks for all the replies.
I did go back and read that MMM post from 2013 on the topic. That person already had the money required which I don't.  But I agree with MMM these great pensions are a trap. The great pension I have does limit my options and eats up most of my tax advantage investment room which also slows down my plan to grow my self directed stash.

It will likely take me 8 years to grow the stash to the amount I need to be FI. The kids by that time will be heading out just as I become FI and able to spend more time with them.  I wish I had started earlier and had the same super saving powers MMM has. 

Another option I have been thinking about ,but would likely be seen as sabotaging my FIRE plan was to take a time off (maybe even a year) without pay and spend time and travel with the kids before they are too old and don't want to hang out with the parents.

I still need lots of more planning but started working on the major points. 
-Approval (Getting management approval will be tricky)
-Living without salary (drawing on my stash aka adding years to FIRE plan)
-Limit travel expenses. It's a one time thing so I would not want to limit ourselves too much and we would likely spend lots on airfare for the locations we are thinking to visit Hawaii, Australia, New Zealand...) been reading about lots of ways to travel cheaply on this site which should help.

Thanks for all the support. 

BFGirl

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Re: How to break out of the "Working for the Pension trap"
« Reply #16 on: April 07, 2016, 03:18:09 PM »
Many have relied solely on pensions fore retirement, spent all of their income, and wound up getting burned when their pension fund collapsed.
Don't count on somebody else to fund your retirement.   Take care of yourself, and if you do get a pension (or social security) consider it gravy.

I agree with this.  The pension should hopefully be part of your financial plan, not the whole plan.  Too many people have found themselves trying to make ends meet when their pension gets cut. 

Villanelle

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Re: How to break out of the "Working for the Pension trap"
« Reply #17 on: April 07, 2016, 04:29:43 PM »
Thanks for all the replies.
I did go back and read that MMM post from 2013 on the topic. That person already had the money required which I don't.  But I agree with MMM these great pensions are a trap. The great pension I have does limit my options and eats up most of my tax advantage investment room which also slows down my plan to grow my self directed stash.

It will likely take me 8 years to grow the stash to the amount I need to be FI. The kids by that time will be heading out just as I become FI and able to spend more time with them.  I wish I had started earlier and had the same super saving powers MMM has. 

Another option I have been thinking about ,but would likely be seen as sabotaging my FIRE plan was to take a time off (maybe even a year) without pay and spend time and travel with the kids before they are too old and don't want to hang out with the parents.

I still need lots of more planning but started working on the major points. 
-Approval (Getting management approval will be tricky)
-Living without salary (drawing on my stash aka adding years to FIRE plan)
-Limit travel expenses. It's a one time thing so I would not want to limit ourselves too much and we would likely spend lots on airfare for the locations we are thinking to visit Hawaii, Australia, New Zealand...) been reading about lots of ways to travel cheaply on this site which should help.

Thanks for all the support.

So what is the time difference between reaching FI and receiving the full pension?  Is your projected RE truly a comfortable level, or are you looking at a number with which you aren't truly comfortable?  If it is 8 years to FIRE and only 10 (as an example) to full pension, and if you look at your FIRE annual budget and feel it's a bit lean, maybe it's worth it.  If it's 5 years and you are fairly comfortable with your 4% (or whatever you are using) number, then maybe it's not.

And could you take off that year to spend time with kids, but travel cheaply in the US, like a long road trip during the summer?  I actually think that taking off a year makes a lot of sense, even if it means working another year and a half.  If this stage in your kids' lives is what is important, it may be worth that sacrifice.  If you can't get work to sign off on 6 months or a year, what about just 2 moths in the summer? Is there some side gig you can start for an income stream for a year off, even with traveling?  That could help mitigate the time added to FIRE.

human

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Re: How to break out of the "Working for the Pension trap"
« Reply #18 on: April 07, 2016, 05:00:05 PM »
I'm a civil servant in the cdn federal government as well. I also started saving late, never had big debts but blew all my money thinking - "well I have my pension I don't need to save". Only started considering saving at 37 (last year). If I save hard I could have a good chunk of change at 50 with 25 years in. That would give me an annual allowance or whatever the call it. Work 5 more years and you get quite an increase.

If I don't get another raise before 50 I'd have just over 30k net per year plus some very decent savings. The irony is that at 50 I would also have in savings what many people here feel is a great number for retirement so that 30k would be extra. Work to 55 (30 years) with one more promotion and the pension is 60k net (assuming I'm not making any other income).

What I hate is that trying to reach someone in Miramichi is impossible. I'd like to know what the cash out value of my pension would be at 45, they do not give a good way of calculating this. I don't trust that cheesy calculator they have online. I'm better off than 90-95% of cdns so can't complain, I just wish I had started investing 10-15 years ago.

My plan right now is save until 45 and then assess If I should keep going or live ere style. Most likely though will try to leave at 50.
« Last Edit: April 07, 2016, 05:50:32 PM by human »

Lagom

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Re: How to break out of the "Working for the Pension trap"
« Reply #19 on: April 07, 2016, 09:56:32 PM »
Many have relied solely on pensions fore retirement, spent all of their income, and wound up getting burned when their pension fund collapsed.
Don't count on somebody else to fund your retirement.   Take care of yourself, and if you do get a pension (or social security) consider it gravy.

I agree with this.  The pension should hopefully be part of your financial plan, not the whole plan.  Too many people have found themselves trying to make ends meet when their pension gets cut.

While I agree you shouldn't rely on a pension with 0 savings, I think being overly worried it will get drastically cut is needlessly pessimistic, akin to those who want a 2.5-3% SWR before they FIRE. Sure, it's the "safest" way to look at it and I know many have been hurt by pension cuts, but depending on the details (if you're working for the federal or even a state government, for example) I would be extremely surprised if your pension is likely to just evaporate.  Maybe I put too much trust in the government, but in my worst case scenario that isn't global economic apocalypse, a cut of more than say ~30%, is highly unlikely and is the margin of paranoia I am personally planning for. YMMV.

After all, just like the people retiring with 4-4.5%+ SWRs without pensions, you can always make more money. You can never reclaim lost time.

mustachianteacher

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Re: How to break out of the "Working for the Pension trap"
« Reply #20 on: April 08, 2016, 11:16:57 AM »
I too have a pension that penalizes you if start payments take it before age 62. Notice I said "start payments," not "stop working."

So, the way I see it, we have three options:

1. Work until age 62. Start pension payments immediately. No significant savings of one's own. (NO.)

2. Stop working at a younger age. Use your own savings to fund the years between when you stop working and when you start pension payments at age 62.

3. Stop working at a younger age. Start pension payments immediately, despite the reduction. Use your own savings to make up the difference between what the pension is paying you per month, and what you need for living expenses.

I ran my own numbers and found that Option 3 was our best scenario. I had expected that Option 2 would be the best, but Option 2 requires way more cash on hand (and sooner!) than Option 3, but obviously, your results may vary.

Run the numbers!

Cassie

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Re: How to break out of the "Working for the Pension trap"
« Reply #21 on: April 08, 2016, 11:46:09 AM »
I agree that state or federal pensions are not going to just disappear.  You can often quit and not draw and wait to draw or take a reduction to take it early. Both my hubby and I took ours earlier so had a penalty. It really is nice to have guaranteed $ coming in for doing nothing.  It makes other choices much easier.

tomatops

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Re: How to break out of the "Working for the Pension trap"
« Reply #22 on: April 08, 2016, 12:31:20 PM »
I'm in the same boat, working for a Canadian provincial government. Mind you, I'm 26 and only have about 1.5 years of pensionable time accrued. We have a "Factor 90" rule so I could technically retire full pension at age 58... but that's a long time to wait and it would not surprise me if that all changed over the next 32 year period (plus... not sure if I want public service the rest of my life!)

Granted, it's so far away, I've just been focusing on saving so I don't NEED the pension (i.e. accumulating to a safe 4% withdrawal rate). Once I get to that point, I'll figure out what to do. I will continue contributions, because hey, why not if they're matching me for now and it forces me to save?