Author Topic: Pension vs 401(a)  (Read 1200 times)

civil4life

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Pension vs 401(a)
« on: June 23, 2018, 02:51:16 PM »
I am pretty sure that I will go with the 401(a) option, but wanted to run it by the community first.

Currently, I am a part of a pension program.  I will be vested in 18 months.  Currently, I contribute 4% and earn 4.25% interest per year.  If I were to stay 30 years and retire I would be able to start receiving payments at 54.  However, I will probably leave well short of that, which then I would not be able to receive payments until I am 60.  Annually I would receive 2% x number of years of service x avg. of highest 3 pay years.  I most likely will leave within the next few years.  This would mean I would receive ~$20k a year at age 60.

My employer has started a new option which I have a one time chance to switch over too.  The new option is an individually managed 401(a).  I would contribute 4% and the employer contributes 8%.  I would already be 100% vested in my employer contribution.  They would transfer my current pension contribution ~$50k to the new account.  I then would be responsible for managing my fund and would not have any defined benefit in retirement.  I would have access to the same funds that I have through my 457.  Most likely I would just put it in the T. Rowe Price targeted fund. 

The only reason I am slightly hesitant that I am giving up a guaranteed payment at 60.  The thing is that I am about 99% sure that I will not stay at this job anywhere near retirement.  I know for FIRE I am much better off having the portability and access of the 401(a).

I guess I just need the reassurance that I am better off with the 401(a).

erutio

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Re: Pension vs 401(a)
« Reply #1 on: June 23, 2018, 04:45:26 PM »
Actually, that's that's a really great pension.

The decision to transfer to 401k depends on how much you have saved in your 457, if it has COL adjustments, and other things.

For your pension, each year you work, your annual payment goes up by 2% of your salary.  That's equivalent to saving 50% of your salary annually (2% x 25 for WR of 4%).  If maxing the 401a + the 8% match puts you over 50% of your salary, then make the switch.  This is kinda simplified way of looking at it, because the pension you can't start receiving until a certain age.

civil4life

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Re: Pension vs 401(a)
« Reply #2 on: June 23, 2018, 06:18:04 PM »
I currently have about $100k in my 457.

If I stay in the Pension....
I will have 10 years service in 18 months.  So at minimum I would be eligible for $20k a year at 60 years old.  It does have regular COLA.  I know it is a very good pension.  The issue is more the lack of access until early retirement would be 50 (16 years) or if I leave before that I have to wait until I am 60.

I live over 400 mi. from my entire family.  I am hoping to move back within the next couple of years. 

I am 34, I hope to FIRE by 40.  I am looking at $25k of expenses needed to live my current lifestyle.  If I take SS at 62, I am currently looking at $2k a month which it is almost my needed expenses.  So to some extent I really just need to bridge the gap from FIRE to 62.  However I do not want to rely on that assumption either.

Another Reader

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Re: Pension vs 401(a)
« Reply #3 on: June 23, 2018, 06:31:46 PM »
If your pension system is not on the ropes, I would keep the pension and max out the 457 plan.  If you have sufficient funds, I would open a taxable account and/or a Roth IRA.  Roth contributions can be withdrawn without penalty at any time.  Does your employer participate in Social Security?

$25k of expenses today will be twice that at age 60.  Keep that in mind as you plan.

civil4life

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Re: Pension vs 401(a)
« Reply #4 on: June 23, 2018, 06:57:28 PM »
This is the first year I am able to max out my 457 and a roth IRA.  I was only a few hundred dollars short last year.

Between myself and my employer my 401a contribution would be $12k a year.

Yes my employer participates in Social Security.

I contribute 4% to my pension.  The employer amount varies based on what actuaries determine is necessary to remain solvent.  Right now it is ~7%.

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Re: Pension vs 401(a)
« Reply #5 on: June 23, 2018, 07:12:48 PM »
I'm on the retired side of this discussion.  I'm a huge believer in the multi-legged stool approach to retirement income.  You will have two annuities - Social Security, at whatever percentage of the promised benefit is allowed when you retire, and the pension.  You will also have your 457 plan, your Roth contributions, and any taxable money to see you through to 60.  I would start with that plan and compare all other options to that.

How did you calculate your Social Security?  Are you familiar in detail with how your payment is calculated?  Did you run the calculator, assuming all years after a certain point have zero income? 

civil4life

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Re: Pension vs 401(a)
« Reply #6 on: June 23, 2018, 07:34:02 PM »
The SS is based on the statement I received from SS. 

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Re: Pension vs 401(a)
« Reply #7 on: June 23, 2018, 10:00:06 PM »
That statement assumes you work until you retire at the specified ages.  You should do a worksheet showing no additional earnings after your anticipated retirement date.  The annuity will be lower.  However, the incomes for the years you did work will be indexed up by the National Wage Index, so the annuity will be indexed up through age 60.  Because the National Wage Index for the future is not known, you can guess using the inflation rate as a proxy.

civil4life

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Re: Pension vs 401(a)
« Reply #8 on: June 24, 2018, 08:45:00 AM »
I have used the one in the Case Study. 

I have worked 10 years in my professional career, but I have worked since I was 16 I already have 20 years of SS work history.