Job Change - What to do with pension

[Scommm]

I'm thinking of going to the private industry from a government job.  Currently I have a pension.  When I leave I can take my portion with me (not their match), or leave it and start drawing as early as 55.

Info about pension:
Normal retirement age is 65, you can start pension as early as 55 but you take a 5% / year penalty for doing so.
Accumulation is 2% / year of worked service.
Pay is based on highest 3 years of last 10 worked.
No COLA when the payments start.

I would have 12 years of service, or 24%
My highest average salary would be about 68k

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I am contemplating taking the approximately 80k of contributions and moving to a Vanguard IRA or leaving it and taking pension later.

My calculations have basically been around what my payments would be if I started at 55.  For that I calculated 24% of 68k = 16,320 then the 50% penalty for starting 10 years early = 8160.  So 8160 with no COLA for rest of my life starting in approximately 2025.

Or take 80k out and put in Vanguard now, using a future value calculator and using an annual figure of 10% growth I see the value in 8 years could be 171,487.  Taking 4% of that gives me 6859.

I know I am missing something or likely doing something wrong.  Please help me figure out this problem.

[beltim]

In my view you're doing the calculations correctly, although I have a few thoughts.  In particular, good job on not adjusting for inflation in this case and doing the comparisons on a level playing field with 2017 dollars.

However, although 10%-ish is the long-term average for US equities, there is significant variability, particularly over as short a time frame as 8 years.  There have been 8 year periods where US equities have lost money, and of course there have been 8 year periods with returns much higher than 10% annually.

The results, then, demonstrate the trade-off.  Doing it on your own has a higher average value, but a significant chance of you winding up with less money than the government pension (ball parking it, I'd guess about 40%).  Some of these possibilities result in significantly less money (a 0% return over 8 years, for example, would result in a 4% rule of just $3200/year).  In contrast, the government pension results in you having a guaranteed good amount, at the cost of giving up some of the upside. 

The other trade-off, of course, is inflation adjustment.  The 4% rule includes inflation adjustments, but your government pension does not (incidentally, are you positive about that? this could be the biggest factor).

Interestingly, the decision calculus could change depending on when between 55 and 65 you would take the pension.  The difference between taking it at 55 and 56 is a 10% increase (55%/50%), which to me would be a no-brainer.  In contrast, the difference between taking it at 64 and 65 is much smaller - 100/95 = 5.26% increase.

[Scommm]

Thank you for the reply.  I will check again but I am sure it has no COLA.  Sometimes they will just give an extra payment if the market performed well I am told by current retirees, but that is not guaranteed.

[Left]

Instead of taking the money and investing it

what about using the pension as your "fixed" income/bonds allocation? How would that alter your AA/networth if you could have more stocks by reducing current bond allocation? unless you are 100% stocks as is

to me, lack of COLA isn't much of an issue because if you can amass enough money, you won't miss the pension later on. The pension only needs to carry you from retirement until you have enough money that pension amount becomes irrelevant. Or use it to delay taking social security, at at 70, use SS + investment, and pension can be play money

[frugal_c]

How old are you an how much do you already have in your stash?  If you have a substantial stash I would be tempted to keep the pension as a hedge.  You say there is no COLA once you start taking it out, but do they adjust the start point for inflation at least?

[Scommm]

How old are you an how much do you already have in your stash?  If you have a substantial stash I would be tempted to keep the pension as a hedge.  You say there is no COLA once you start taking it out, but do they adjust the start point for inflation at least?

47, about 250k, from what i understand they start the distribution at whatever you had accumulated when you left.

[Hargrove]

Pension, pension, pension, pension.

If you own your house and have that pension, the rest of the 'stache you need is at a guaranteed tiny minimum.

If the pension were NOT reduced by taking early and that was the final figure (the 8k), I would do Vanguard easily for a 20 year span, and I would be on the fence around 14 year spans, but I would still keep the pension. AND, with your pension penalized under 65, the other way to look at it is that it grows SUBSTANTIALLY from age 55. It grows guaranteed returns better than you can expect from stock market averages (over a 30 year period) in almost every year you wait.

Taking it at 55 is crazy. Cover 55-65 yourself and you would have your retirement covered by almost just the pension in a MMM lifestyle, then upgraded by SS and every dollar you save from now.

If you have 250k, you're basically all set even if you save nothing else. Definitely keep the pension.

[frugal_c]

If I understand you correctly and the pension is not adjusted for inflation then it gets complicated.  If you wait to 65, that 16k will be 8-12k assuming standard ranges of inflation.  Then that amount just gets reduced every year after.  However, if inflation is only 2-3% then it will take awhile to work down.

If you assume you get 3% real  in the market on 136k and then do a 4% WDR, that would be $5,400 but it should match to inflation.

At 4% real in the market, you would have $6,500 per year.

At 5% real, you would have $192k or about $7600 per year. 

You would probably have less with the market initially than the pension at 65.  However the 4% withdrawl should do a better job of matching inflation than the pension.  It just really depends on what inflation is over the next 30 or 40 years.

Personally, with a $250k stash I would probably just keep the pension as I like having options.  The other variable I guess is how stable your former employer is and in turn how likely you are to see the promised pension.  If your former employer is not government then that shifts things further towards taking the payout.

[Scommm]

Pension, pension, pension, pension.

If you own your house and have that pension, the rest of the 'stache you need is at a guaranteed tiny minimum.

If the pension were NOT reduced by taking early and that was the final figure (the 8k), I would do Vanguard easily for a 20 year span, and I would be on the fence around 14 year spans, but I would still keep the pension. AND, with your pension penalized under 65, the other way to look at it is that it grows SUBSTANTIALLY from age 55. It grows guaranteed returns better than you can expect from stock market averages (over a 30 year period) in almost every year you wait.

Taking it at 55 is crazy. Cover 55-65 yourself and you would have your retirement covered by almost just the pension in a MMM lifestyle, then upgraded by SS and every dollar you save from now.

If you have 250k, you're basically all set even if you save nothing else. Definitely keep the pension.

I talked to a retiree today, even though COLA is not mentioned in the plan anywhere, I just read it, he said they have been getting COLA or a 13th payment from the board most years.

I rent currently, sold my home.

Thanks for the info.

[Scommm]

If I understand you correctly and the pension is not adjusted for inflation then it gets complicated.  If you wait to 65, that 16k will be 8-12k assuming standard ranges of inflation.  Then that amount just gets reduced every year after.  However, if inflation is only 2-3% then it will take awhile to work down.

If you assume you get 3% real  in the market on 136k and then do a 4% WDR, that would be $5,400 but it should match to inflation.

At 4% real in the market, you would have $6,500 per year.

At 5% real, you would have $192k or about $7600 per year. 

You would probably have less with the market initially than the pension at 65.  However the 4% withdrawl should do a better job of matching inflation than the pension.  It just really depends on what inflation is over the next 30 or 40 years.

Personally, with a $250k stash I would probably just keep the pension as I like having options.  The other variable I guess is how stable your former employer is and in turn how likely you are to see the promised pension.  If your former employer is not government then that shifts things further towards taking the payout.

I talked to a current retiree today, he said they are getting a COLA some years and other years a simple 13th payment from the retirement board, so there's a little bit extra there.  Nothing guaranteed.  The employer is govt, fully funded plan.  Not worried. 

[frugal_c]

Based on this I would keep the pension.  Unless you have health issues or inflation really starts to spike I would wait until I was 65 to take it.  I am on the other side where all I have is a stash and general public pension, I can tell you that having a guaranteed $16k per year would make me a lot more comfortable than an extra $80k in my account.   

[Babybalrog]

One thing I haven't seen mentioned is: Do you have kids?

Odds are you can't leave them your pension but if you take the money and run, it is your money to do as you will. My generally philosophy when I talk about my pension is that it serves as the backup plan. But If you stash is decently large, you can ride out market fluctuations. If you are older with a smaller stash, a pension is a lifeline.

Also with a pension rate of 2%/year I should ask. Are you eligible for SS? Sometimes good pensions opt out.

[Scommm]

One thing I haven't seen mentioned is: Do you have kids?

Odds are you can't leave them your pension but if you take the money and run, it is your money to do as you will. My generally philosophy when I talk about my pension is that it serves as the backup plan. But If you stash is decently large, you can ride out market fluctuations. If you are older with a smaller stash, a pension is a lifeline.

Also with a pension rate of 2%/year I should ask. Are you eligible for SS? Sometimes good pensions opt out.

No kids.

I'm late 40's.

I am eligible for SS, this pension did not opt out and required us to pay SS in addition to pension contributions.