NYS: pension vs 401a

[Mariposa]

DH just started a new job as a public servant in New York, and we have about 3 more weeks to decide if he's going to participate in the state pension program or the voluntary defined contribution program (401a). After that, we won't be able to change our minds.

In either case, there's a mandatory 6% of his salary going into either the pension system or the 401a. His pension vests after 10 years of service and pays out starting at age 63. There's a small COL increase each year that I'm ignoring for the analysis. If you leave before the pension vests, you get your own contributions back plus some amount of interest. If he chooses the 401a, his employer will also contribute 8%, and the 401a vests after 1 year. The investment options in the 401a look pretty crappy as far as I can tell, consisting mainly of variable annuities.

I'm not going to show my work, but:

<10y service: 401a clearly better, since you get the 8% employer contributions.

10y service:
   pension taken at 63yo: $25k a year
   401a after 10y contributions and then sitting there until 63yo: $530k (4%WR = $21k)
==> 401a still probably better because the money is yours, and you can pass it on.

25y service:
    pension: $83k a year
    401a: $1.1mil (4%WR = $44k)
==> This is where it gets murky for me.

My DH is 40yo and expects to work for at least 10y, when we're likely to be FI. It's at least as likely, though, that if he likes this job, he'll work for 25y, since he derives so much of his identity from working, and he's very risk-averse when it comes to money. I can show him the numbers, but he feels how he feels.

Pros of 401a: You direct your own investments and can roll it over to better investment options once you leave; the money is yours and can pass on after you die; not subject to local government default.

For the pension, there's the option of survivorship benefits for your spouse, but you have to take a permanently reduced payment determined by actuarial tables.

But I'm also thinking, since we have additional investments in 457 / 401k / Roth IRA / taxable, maybe going with the pension would be a way to diversify, since new workers continue to pay into the pension system. Of course, if the stock market crashes and doesn't come back for a long time, it's likely the state would default on pension payments too.

Before MMM, when I didn't know anything about investing, I'd have advised DH to go with the pension for sure. But I've done a ton of reading, and I'm fairly comfortable with our simple 3-fund passive investment approach.

What would you do?

Tagging @Yankuba if he's around, who might have already thought through this. Also @aceyou who I know has some sort of pension / 401a. Thanks in advance!

[Cassie]

I would take the pension because you already have other retirement savings.

[zygote]

I sent you a PM.

[Pigeon]

I was in a similar situation in NYS.  I took the defined contribution option instead of the pension.  I am now pretty close to retiring slightly early, after about 30 years.  I am kicking myself daily for not taking the defined benefit option. 

The details of my situation are slightly different because there are new tiers since I started.  But it all comes down to whether or not you'll stay in the system for a long time.  I didn't think I would, but I like my employer and have been happy.

[Mariposa]

Thanks so much for the feedback. After going back and forth, making multiple calculations, exploring the investment options in the 401a, I've come to the conclusion that I'm probably over-thinking it: we'll be fine, with plenty of options either way!

I'm leaning more toward the pension because:

1. DH's has a 5-year appointment, and most people get reappointed every 5y; it's extremely unlikely he's going to work less than 10y, at which time the pension at least vests.

2. When I talked to him about being FI in 10y and the possibility of quitting employment altogether, he said that if he finds the job meaningful, once he's accumulated 10y of knowledge and experience at it, he'll want to continue working. He has colleagues who are still working in their late 70s.

3. If DH actually does work for 20+ years and gets an $80k pension, our child will inherit plenty in non-pension funds.

@Pigeon You're absolutely right. I can do as many calculations as I want, but it comes down to how long you'll stay in the system and the health of pension system in the future, both of which we can't predict. And: no looking back! You didn't know you'd like your employer so much, and that's a good "problem" to have had! Sounds like you're looking forward to a comfortable retirement regardless.