new career with pensions and such--game plan?

[up.up.away]

Hello all! I've almost worked my way through the MMM blog archives, but this is my first venture into the forum. We're complete beginners in the financial world...

My husband and I are mid-20s, and he will be finishing his Master's degree (no debt!) in the spring and entering ordained ministry. His starting salary will be $47,000, which does NOT include an 18% pension and a housing stipend (all told, I think the package is worth around $80K). We live in the the south-central part of the country... so, living expenses should be pretty low wherever we end up.

Here are our current numbers:

Checking: $4000
Savings: $6000
Vanguard Index Funds (split equally between stocks and bonds): $17,000
Debt: $0
Car: 2007 Yaris (paid off)
Income (church support, my part-time job, etc. This is a super rough estimate--I just signed up for Mint to start tracking): ~1500/month... will drop by ~300 next semester
Future Income: $10,000 from selling our share of some family land to another family member. Should go through some time next year

Spending has been high, as we've been traveling all during this past summer, but we're getting back down near a normal level, which lines up with our income fairly evenly (but needs to come down lower). We don't really budget, but we're starting to track things, especially restaurants and gas. We both commute by bike, but drive to the closest city (45 min.) once a week, and have to do this until December. My goal for the rest of the time in school is to turn the frugality dial up... but my major question concern is what comes next. Once we move and have an income beyond financial aid (which covers tuition and rent, plus a little extra) and part-time work, what do we do with it? Esp. considering the pension--I haven't seen MMM talk about those at all. The pension will be available in 30 yrs, and will pay 18% of my husband's highest salary.

Also, my life goals: never work more than part-time; build a house (myself) for 30-50K using natural building techniques like straw bale and cob; run a working homestead with orchards, gardens, animals, and potential B&B type cottages.


Thanks for any insight y'all might have!

[up.up.away]

Also, showing my beginner-ness: Would you still contribute to a 401K (no matching) if you've already got the pension?

[lauren_knows]

Also, showing my beginner-ness: Would you still contribute to a 401K (no matching) if you've already got the pension?

Can you live off of 18% of your husbands salary? If not, you probably need to save more.

The reason that pensions aren't usually talked about here, is because they often lock you into being employed for 30-40 years before they're even remotely worth it. People sometimes refer to pensions as "golden handcuffs" because you're stuck waiting for this supposed payout.  MMM is more about early retirement, and thus the 30-40year timeframe isn't ideal.

I would continue to track your expenses, and once you get a good idea of what they are, compare it to your income and look where you can cut back on expenses, and look into other avenues of investing.

[up.up.away]

Well, we won't know if we can live off 18% for many years, because it's based off his highest salary during his career, and he's just starting out next year... We want the financial independence, but not necessarily the retirement--when you view your job as more of a calling/vocation, it changes some things (or so he says... I have no desire for anything that even looks like a career).

I'm wondering how having the pension might change a strategy to be FI in, say, 15 years. I just really have no idea how a lot of this stuff works. (That $17K in Vanguard was actually just sitting in savings until very recently... dumb, I now know.) Also, what should we do with the expected $10,000 coming in next year? Just add it to our other investments or try something different?

Edit to add another question (I'm full of 'em): MMM talks about emergency funds in the form of a line of credit on your house... so what's a good option for non-homeowners? My husband wants something that is very easily accessible (like a regular old savings account), but I don't want to miss out on potential gains from $$ just sitting around.

[sol]

I'm wondering how having the pension might change a strategy to be FI in, say, 15 years.

As a federal employee on a short track to retirement, this was exactly my situation when I started out.  The federal pension is a good deal if you work 40 years.  Much less so if you retire early.  The pension problems:

1.  Most pension payouts are based on the number of years you work, e.g. work 40 years and recieve 40% of your highest salary.  Working ten years and receiving only 10 years of your highest salary is less helpful.

2.  Most pensions don't pay out until you hit some pre-determined retirement age, regardless of when you have enough money to quit.  If I'm FI at age 40 but can't collect my pension until age 60, then I need to have 20 years of living expenses stashed in addition to my pension, even if my 10% pension were enough to live off of.

3.  Even when a pension plan allows you to defer taking payments for 20 years between quitting and collecting, the payment amount will be based on your salary at the time you quit.  20 years is a looooong time for inflation to eat away at your planned income, so even if my 10% pension was enough to live off of this year, it certainly won't be enough to live off of 20 years from now.

4.  Pensions are never safe.  Virtually every pension plan in the country is in financial trouble, and either has already had it's benefits slashed or is on the chopping block.  Even if I thought I could live off of my 10% pension after 20 years of inflation, I have very little confidence that I will actually receive that amount in 20 years.

Having said all that, I still count on my pension as (a very small) part of my retirement projections.  It's important to understand your benefit structure and the effects of inflation on your living expenses, but with a little research and some careful planning all of that can be figured into a retirement spreadsheet that still predicts what you think you will eventually collect.


edit:  for everyone WITHOUT a pension, remember that all of the same arguments apply to social security, which is essentially a federal pension plan for all taxpayers.

[up.up.away]

  sol--A few details on the pension... It's through the Church Pension Group (for Episcopal priests and lay employees), which I've always heard is doing pretty well (thanks in part to owning a big chunk of land underneath Wall Street), but I should probably do my own research into that. My husband is young enough that he'll hit 30yrs before he hits 72 (mandatory retirement age), so he can retire, if he wants, in 30 yrs (age 58). It looks like the payments are based on an average of the highest paid seven out of eight continuous 12-month periods on which assessments (18%) have been paid, so even if he worked at a small parish or part time at the end of his career, he would still get pension based on a higher salary from earlier on (I think??). I don't think he would want to stop working before he hits 58 years old/30 years in, but I want us to be financially independent long before then... 10 or 15 years would be good. So, we'd still have an income coming in and assessments getting paid to the pension fund, though maybe he could work in a less demanding or part-time position after we hit FI. I'm guessing that would help alleviate any concerns with inflation eating away at the income? The more I read, the more I get the feeling I need to go talk to someone who has experience with the CPG...

[Jamesqf]

I would go with the 401K myself, for several reasons.  First, it takes the annual contribution off the table right away, so you have to build your lifestyle around not having it to spend.  Second, you don't KNOW that your husband is going to continue in the ministry all his life, or even long enough to qualify for the pension (people do change), so having the 401K is a backup.  Then there are the tax deduction and the chance to use it as ultimate emergency fund...