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!