Are my pension and ROTH IRA enough?

[LivingAlmostLarge]

Tripod that is not true at all. Teachers are state based. The state can and does change it. If you aren't retired already they are allowed to change the benefits as they see fit. If you are retired they can cut retirement.

My mom is a retired state social worker and she told me that their 100% medical premiums are still paid 100% but the benefits of the plan are being cut! Because of the monetary issues.

Thus nothing is set in stone. Like she told me, they are considering asking retirees to fork over 10-20% of the premium in the next few years.

Before she retired there were already changes like people who were not retired and under the old system did not get a paid spousal medical for life! That change happened under the system.

[tripods68]

Livingalmostlarge,

I am only referring to pension formula or vesting requirement, not health care coverage for retirees.

[LivingAlmostLarge]

It changed during my mom's working years. People went from 2% per year of service to 1.25% year of service. The vesting went from 10 years to 25 years.

[jIM_Ohio]

with 7.5% of income going to pension, you are living on "92.5%" of your base pay. You want to do as much as possible to push the living on number at or below 80%. This means every 4 years you set aside 1 years worth of expenses... if you push it down to 75% that means every 3 years you set aside 1 years worth of expenses.

The pension may get an age limit- like you have to be X years old to access it- maybe 65, 67 timeframe. It is very possible your Roth will be more valueable than that by the time you are 55 and you say to yourself "I want to retire early". If this becomes your goal, then you will need more savings (the earlier you retire, the less the pension helps).

You have 2-3 key issues with pension
1) you cannot control the risk the pension takes with the investments. In this regard you may not want to hold as many bonds early on investing because the pension is there. The reverse of this is true later in life- because you have little control over the pension, you may want more bonds to balance this risk (you may want more bonds once you need the pension to draw an income). The pension changes the risk tolerance point while investing in all stages (accumulation, growth, stability, draw down).
2) you cannot control the rules for when you withdraw from the pension. This was covered above. The earlier you retire, the more assets you will need outside the pension.
3) It is generally not optimum (IMO) to put bonds inside of a Roth IRA. In some ways you can treat the pension like a bond early on (like now) and invest the Roth in 100% equities and growth based investments (like stocks, REITs and similar). When you need to add bonds, I would look to add them in a taxable account (muni bonds for example) and this would probably start about 10-15 years from retirement.

**
remember that there are 5 phases in my view of investing which everyone goes thru.

1) starting out: deposits are more than account balance and yearly deposits are higher than previous year's account balance
2) accumulation: yearly deposits are a high percentage of account balance (5-10%) and yearly deposits are higher than growth of portfolio
3) growth: the portfolio grows annually higher than the deposits you contribute
4) stability: the portfolio generates an income sufficient to live off of without selling anything
5) draw down- when you sell shares to generate income needed

the pension changes the curve for much of above in many different ways. In 1-3, you cannot "measure" the pension, even though it is there- that is the tough part. Because you cannot even predict what your average salary is going to be when doing 1-3 for #4, it is tough to see pension as "money".
In #4 your pension has a clear value (you know what income it is providing you).
Your pension may prevent #5 from ever happening- that would be my goal if I had a pension.

If you are living on 80% or less of gross income (even if only 15% including pension is going to retirement), I would be very confident that whatever plan or investments chosen would be sufficient.
a) you clearly spent less than you earned
b) money is accumulating in many accounts
c) you are showing how to handle money wisely for spending and investing

[tripods68]

It changed during my mom's working years. People went from 2% per year of service to 1.25% year of service. The vesting went from 10 years to 25 years.

You must be referring to future employees not current employees. Those two aren't treated the same.

For the state of california where I work, the governor wants to change the formula for NEW employees and vesting requirement. The governor wants 25 years service years before the new employees qualify for 100% health care coverage. He also wants the changed 2% age 60 from 55. But i think the legislatures aren't having any of it.

[GREENBACK]

Existing Government Pension formula for current government workers, teachers, firefighters, and police cannot be changed abitrarily It's like changing the rules during the game. The US Supreme Court has ruled against this decades ago. I for one, have a government pension.

My state(Ohio) in deciding the current budget considered lowering the employer contribution on pensions from 14% to 8% or something similar. It didn't fly mostly because that applies to congress as well I'm sure. It would have taken no more than a congressional approval to seriously put a dent in my future pension. I'd be at this site seeking ways to invest more in taxable accounts. Whewww!!!!!

[swanson719]

15% to retirement seems like enough, but I don't understand the 20% to savings and 15% to retirement. I understand an EF, a new car fund, christmas club accounts, etc. - but 20% standard to savings seems a little bit much. When your goals are met for savings like those mentioned, why not just put 35% towards retirement? Like DS said - sometimes people don't get a 401K, and a roth isn't enough for most either, so the taxable account option is there. Why not take advantage? Or pay off your mortgage if you have one? I know this doesn't go towards the OP, but more a general question.

[disneysteve]

15% to retirement seems like enough, but I don't understand the 20% to savings and 15% to retirement. I understand an EF, a new car fund, christmas club accounts, etc. - but 20% standard to savings seems a little bit much. When your goals are met for savings like those mentioned, why not just put 35% towards retirement? Like DS said - sometimes people don't get a 401K, and a roth isn't enough for most either, so the taxable account option is there. Why not take advantage? Or pay off your mortgage if you have one? I know this doesn't go towards the OP, but more a general question.

Good question. Like all the rules of thumb, they are general guidelines, a starting point if you will. Everyone's situation is different. My family loves to travel so I know we need to set aside $6,000 or so each year for travel, sometimes more. Other folks rarely travel at all so they don't need that line item in their budget. They could put that money into an account earmarked for retirement instead. Some people like to get a new car every few years so they are always saving for the next one. I've had my car for 11 years and don't plan to replace it anytime soon, so I'm not actively saving for one.

How much you earn also matters a great deal. The more you make, assuming you manage it well, the more you've got available for discretionary spending. That affects what percentage needs to go to each goal.

[LivingAlmostLarge]

No, it was Hawaii. It was NOT only for new employees but everyone working for the state. People were told if you weren't past 10 years of service, the minimum years of vesting at that time (1982), you were switched from a contributory to a non-contributory system.

And you went from 2%/per year to 1.25%/per year of service. If you contributed 8.5% you got 2%/year and if you chose not to you got 1.25%/year of service.

Then if you had less than 10 years of service you needed 25 years to retire. Also if you had less than 10 years your spouse did not get free medical for life, only the state employee.

So yes it can and does change depending on the state and situation.

[am_vanquish]

No, it was Hawaii. It was NOT only for new employees but everyone working for the state. People were told if you weren't past 10 years of service, the minimum years of vesting at that time (1982), you were switched from a contributory to a non-contributory system.

And you went from 2%/per year to 1.25%/per year of service. If you contributed 8.5% you got 2%/year and if you chose not to you got 1.25%/year of service.

Then if you had less than 10 years of service you needed 25 years to retire. Also if you had less than 10 years your spouse did not get free medical for life, only the state employee.

So yes it can and does change depending on the state and situation.

You're right that they can change the formula for everyone working in the state (not just new employees). However, if you're already vested, then the total benefit that you've already accrued cannot be reduced. Yes, the amount you accrue per year can be reduced, but you're guaranteed (up to the PBGC limits) the benefit that you've already earned. In most cases, it is actually calculated as the maximum of the benefit you would have received if the pension was frozen when the % was reduced and the benefit you would receive if the pension was never frozen & you received the reduced % over your entire employment. I've shown an over-simplified example below:

Vesting requirement: 5 Years
Formula 1: 2% of pay per year
Formula 2: 1.25% of pay per year
Annual Salary: $100,000
If you work 7 years under Formula 1, then they change to Formula 2 & you work three more years, the benefit would be calculated as follows:
Frozen benefit at time of switch: 7 years * 2% per year * $100,000 salary per year = $14,000 benefit <-- This is the minimum benefit you can possibly get.
Benefit from Formula 2: 10 years * 1.25% per year * $100,000 salary per year = $12,500
Because Formula 1 has a higher benefit than formula 2 (Even though it's based on only 7 years instead of 10), you will have a benefit of $14,000 at retirement.
There are several variations on this example, but the point is that a change in the benefit formula will have a relatively small impact on your pension. The bigger issues are below:

You should be less concerned about changing the benefit formula. The real concerns should be changing vesting requirements (although this is quite rare, when it does happen it usually has a large negative impact) or freezing the plan (no future accruals at all - usually when this happens, they will offer a better match on the 401(k), 403(b), etc.).

The next biggest concern is the funding level of the pension plan. Worst case scenario is that the plan goes bankrupt and the PBGC has to step in to pay your benefit. The PBGC is the pension benefits version of what the FDIC does for your savings account. Just like the FDIC insures your savings account up to a given level, the PBGC will insure your pension benefit up to a given level. Again, you are entitled to a portion of your benefit and you WILL get that portion.

The point of all this is to say that your pension IS secured - up to a point. To find out exactly what that point is, just ask around!

[jIM_Ohio]

15% to retirement seems like enough, but I don't understand the 20% to savings and 15% to retirement. I understand an EF, a new car fund, christmas club accounts, etc. - but 20% standard to savings seems a little bit much. When your goals are met for savings like those mentioned, why not just put 35% towards retirement? Like DS said - sometimes people don't get a 401K, and a roth isn't enough for most either, so the taxable account option is there. Why not take advantage? Or pay off your mortgage if you have one? I know this doesn't go towards the OP, but more a general question.

My guideline is this
15% to long term savings (retirement)
5% to short and mid term savings

short and mid term items (not inclusive, but suggestions):
College
paying off mortgage early
vacations
new cars
new hot water heater
new HVAC for hourse
new roof for house
replace EF if it got spent
gifts
car repairs
medical bills (such as HSA or other)

The idea behind the 5% is this- if something needs to get removed from budget, the 5% item is the first thing. This prevents a person from lowering retirement contributions at first sign of financial trouble. It also accounts for once per decade expenses (like car repairs, new roof, HVAC) without risking the EF to do it.

If you list the expenses and frequency to gain an expense per month above, you will see the 5% might not even be enough. For retirement planning, having these numbers included in the plan is important... so I also include it in the budget too.

Examples (remove what does not apply to you)
new roof, costs 10k every 30 years (360 months)=$27/mo
new HVAC costs $2400 every 10 years (120 months)=$20/mo
car repairs $2400/year=$200/mo
**or** say cost of a car is $30,000 and lasts 15 years (that would be a $15,000 cost and $15,000 of maintainance and repairs for example)=$167/mo
vacation $6000/year=$500/mo
kids college $120,000 one time (18 years of saving)=$555/mo

add that up
$27+$20+$167+$500+$555=$1269/mo
for us that is 10% of our gross (not 5)

here is the logic to how that money gets spent:
assuming you have the EF already in place, you can justify spending every penny of the $1269 every month.

Vacation coming? 5 months of saving you have the cash- more than likely plane tickets are purchased 2 months out, and a credit card bill comes 1 month after vacation, so the $6000 budget is not needed all at once.
Car repairs this month? Just spent the $1267 on them that month (pay cash) then move on.
New roof needed? Use the $1267 as deposit for repair, pay for the repair from the EF, then use subsequent months to replace the EF money spent.
If nothing "comes up" that month, you know to put a chunk of it in the kids 529 plan or college savings account.
Kids college- a few choices- I could skip the vacation, or downgrade the vacation when kids are in college, and also avoid buying a new car in same 4 years, so I apply the whole $1267, or most of it, to the tuition each month (that is 15k per year or 60k total for 4 years). Then I hope another 60k was sitting in a savings account based on months where no expenses were incurred (that would be 50 months over 18 years where "no expenses" were incurred).

My point is this- if people look at each of the items in isolation, it becomes a daunting task to actually save for each of them, or use the EF to pay for the non recurring ones then replace the EF. Some of these are once in a lifetime expenses (do you know anyone which has paid for a new roof twice??). But if you plan to retire on your current budget in your current house, and you are on your original roof, you need to account for that large expense which is a new roof during retirement.

I lump them all into one category- short and mid term expenses- then apply 5% as a guideline. Most people will NOT have all the above, putting a vacation, car, house repair in the 5% is enough for most.

If you run the numbers, to me it makes sense, however I have little idea if it makes sense for everyone.