The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: auntbecky on October 23, 2013, 10:19:23 AM
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My husband and I both work for our State Government. He is leaving to work for a local hospital next week. He is vested in our Public Employees Retirement System. So can someone tell me if he should leave his ~$15,000 in the pension for a guaranteed ~$750 a month starting at age 59.5 or if we should take it out and roll it into something else? Current age is 32. Thank you so much!
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That's a nice deal! My calculations show that $15k would grow to an amount to give you a $750 per month withdraw rate under the following circumstances if you did it on your own:
1) With a 5% withdrawal rate, annual investment gains of about 9.3%
2) With a 4% withdrawal rate, annual investment gains of about 10.2%
If someone gave me the opportunity to invest $15k and get a guaranteed 9+% on it for 28 years, I'd jump at the opportunity.
That said, there may be other potential factors. For example, is you state's pension system in a good position right now? And is there any sort of inflation adjustment once your husband starts receiving his pension?
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Another way to think about it that gets you the same result is that if you invested that 15k and got a 7% return over those 28 years you get a value at retirement of about 99k. Which sounds awesome, but with a 4% withdrawal rate that only gets you about $332 a month. So if you trust your pension plan to stay solvent that long, absolutely go for it.
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That said, there may be other potential factors. For example, is you state's pension system in a good position right now? And is there any sort of inflation adjustment once your husband starts receiving his pension?
That is always questionable. There are inflation or COLA adjustments from time to time, but they are not guaranteed.
Another way to think about it that gets you the same result is that if you invested that 15k and got a 7% return over those 28 years you get a value at retirement of about 99k. Which sounds awesome, but with a 4% withdrawal rate that only gets you about $332 a month. So if you trust your pension plan to stay solvent that long, absolutely go for it.
Well, it is a State, so the state we can all hope/assume will still be here in future, but they have been robbing the pension to cover costs, and not fulling funding it for almost a decade now. The "fixes" for this tend to be on new employees with higher % taken out automatically, and the years of service multiplier being lowered. So far that hasn't been on existing vested employees. I'm not confident, but so far we got "in" just before they started making changes to fix the cash flow problems.
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The state pension in my state pays something like 8% interest as long as you keep the money in, and it sounds like yours pays a smiliarly high rate - so it makes sense to keep the money there.
You can always move it later if you wish, but that is an unbeatable rate for the risk, in my opinion.
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The math with almost any asssumptions favors leaving it in the pension - Ignoring the possibility of a default by the state.
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Is he vested in his employer's contributions? My guess is the $15k might represent only his contributions if he has been there long enough to be vested. I left my money in CalPERS and it "accrued" interest at around 7 or 7.5 percent. I took the pension when it was available and was never sorry I did that.
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Sounds like we should be leaving it alone. Thank you for doing the math for me! I tend to be a bit hard on the state, but this still looks to be in our favor.
Is he vested in his employer's contributions? My guess is the $15k might represent only his contributions if he has been there long enough to be vested. I left my money in CalPERS and it "accrued" interest at around 7 or 7.5 percent. I took the pension when it was available and was never sorry I did that.
He is vested after 6 years (first year doesn't count). The $15K is what we could withdraw if we wanted (so I am betting that is his contribution). I have no visibility on what the state puts in. There isn't a match or clarity at all. We get statements once a year with a "if you were to leave state service right now, your monthly payments would be $$$ when you are eligible to start receiving benefits." We have a mandatory amount taken from our checks and we don't see how much the state is adding/matching. It is very frustrating.
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Is he vested in his employer's contributions? My guess is the $15k might represent only his contributions if he has been there long enough to be vested. I left my money in CalPERS and it "accrued" interest at around 7 or 7.5 percent. I took the pension when it was available and was never sorry I did that.
I can't imagine why most state pensions are vastly underfunded - sure some is the result of not making contributions but the math is just so egregious in most, which is far more impactful.
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My advice is to login to the website for your state pension and look for a document called a "summary plan description"(SPD), there may even be a FAQ or example of exactly your situation and what happens.
This SPD document will explain how the benefit accrues, your contributions, and how and when the benefit is paid.
I would guess there is a chance that the 15,000 only represents your $ contributions, even if that money is taken there could be a residual "vested" employer portion of the benefit In making the decision it would be critical to understand what amount (maybe $0) does your spouse get at retirement if they take the EE$'s now.
There is likely a phone number on the statement as well - the person answering the phone could also be a great source for your questions.
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If he is vested in his employer's contributions for the purpose of receiving a pension but not for withdrawal then in your shoes, I'm leaving it all in the system. Otherwise you are leaving free money on the table. Usually the contributions are at least the same as the employee's, but the plan documents should show the details. There should also be a public annual report that shows how well funded the system is.