Stay in Pension or go?

[Gina23]

I'm in a unique situation where I have the option to stay in a PERA (state public employees retirement) pension plan at my new job that I will start beginning July 1. I have 6 years into the PERA plan already with my current employer. I contribute 8% currently to this plan, but the contribution amount for the new employer would be 10.75%. I have a one time irrevocable choice to stay in the PERA plan or switch to the regular 401(a) plan. The details of the 401(a) are I contribution 5% and they match at 10%, fully vested immediately.

My concerns are that I'm only 33 and only have 6 years into the PERA plan. Will this pension still be around when I retire?

I'm pretty good at managing my own money... I follow the 3 pillar approach to my investments outside of the PERA plan.

What would you do?

Thanks in advance.

[disneysteve]

Just to be clear...

If you stay in the pension plan, they contribute 10.75% or you contribute 10.75%?

And with the 401a, if you put in 5%, they'll put in 10%? So they put in $2 for every $1 that you put in?

[jIM_Ohio]

You need to know much more information to make a good decision.

Pension vs self funded retirement is about 3 issues

1) spending patterns in retirement
2) longevity risk of the portfolio (who bears this risk, and at what cost)
3) The expected investment return over a long time

For example, the stars could align right for #1 and #2, but if you invested in CDs and bonds, #3 loses big time.

Reverse is also true- you could invest like a pro, but if you don't project spending right, then investing loses big time.

[Petunia 100]

I'm in a unique situation where I have the option to stay in a PERA (state public employees retirement) pension plan at my new job that I will start beginning July 1. I have 6 years into the PERA plan already with my current employer. I contribute 8% currently to this plan, but the contribution amount for the new employer would be 10.75%. I have a one time irrevocable choice to stay in the PERA plan or switch to the regular 401(a) plan. The details of the 401(a) are I contribution 5% and they match at 10%, fully vested immediately.

My concerns are that I'm only 33 and only have 6 years into the PERA plan. Will this pension still be around when I retire?

I'm pretty good at managing my own money... I follow the 3 pillar approach to my investments outside of the PERA plan.

What would you do?

Thanks in advance.

I would not cash out my service credits. They are extremely valuable. You "only" have 6 service credits. They are "only" worth 12 - 18% of the salary you will be earning 25 years from now, annually, for the rest of your life. That's "all".

What is your benefit formula, 2% at 60? Does the new employer have the same or a different benefit formula?

The pension funds of public employees are generally very well run, and very well funded. If you have concerns about yours, research it. Plenty of information is available on the web.

Also, definately contribute 5% of your salary to your 401a. Take your employer up on their offer to immediately triple your money.

[Gina23]

Just to be clear...

If you stay in the pension plan, they contribute 10.75% or you contribute 10.75%?

And with the 401a, if you put in 5%, they'll put in 10%? So they put in $2 for every $1 that you put in?

Hi Steve, thanks for the response.

I contribute 10.75% in the new pension plan at the next employer. The employer contributes 13% but it's a pension.

Also correct, They put in 2 and I put in 1.

Thoughts?

[Gina23]

You need to know much more information to make a good decision.

Pension vs self funded retirement is about 3 issues

1) spending patterns in retirement
2) longevity risk of the portfolio (who bears this risk, and at what cost)
3) The expected investment return over a long time

For example, the stars could align right for #1 and #2, but if you invested in CDs and bonds, #3 loses big time.

Reverse is also true- you could invest like a pro, but if you don't project spending right, then investing loses big time.

Agree... I only have a few days to make a decision...

The most important points that I am concerned about that you mention above are 2 and 3. I know the pension is lower risk, but after seeing what happened in Minnesota last year I'm concerned that being 33 and having my money in something low risk that might end up being a bust anyway is worth the risk.

Ultimately, I guess I could rephrase the question as this:

"Do any of you have all of your retirement in a 401(k) and what is your level of comfort knowing that?"

[Gina23]

I would not cash out my service credits. They are extremely valuable. You "only" have 6 service credits. They are "only" worth 12 - 18% of the salary you will be earning 25 years from now, annually, for the rest of your life. That's "all".

What is your benefit formula, 2% at 60? Does the new employer have the same or a different benefit formula?

The pension funds of public employees are generally very well run, and very well funded. If you have concerns about yours, research it. Plenty of information is available on the web.

Also, definately contribute 5% of your salary to your 401a. Take your employer up on their offer to immediately triple your money.

Unfortunately, it's one or the other... I can't have both PERA and the 401(a) match. I have researched it as much as I could so far... the plan is the same plan... however, there have been so many changes to it recently that I seriously doubt the matrix that shows what my payout would be upon retirement will be the same in 30 years when I finally do retire.

By no means will I touch me existing years of service credit. The 6 years will sit there until I retire.

[Slug]

I think it comes down to how much you trust the government. For me, I would not be comfortable having all my eggs in a pension basket. The match you are offered on the 401a is also outstanding. Most of us would be jumping for joy for months for half of that match.

[JoeP]

I think it comes down to how much you trust the government. For me, I would not be comfortable having all my eggs in a pension basket. The match you are offered on the 401a is also outstanding. Most of us would be jumping for joy for months for half of that match.

This. I don't trust my government, and have very little faith they will provide any SS to us, and also doubt there will be too much as far as post-retirement health care. I'd take a close look at other options before banking my future on a pension plan, because those are losing popularity with taxpayers as states grapple with monster budget deficits.

[disneysteve]

"Do any of you have all of your retirement in a 401(k) and what is your level of comfort knowing that?"

I don't have a pension or a 401k so I can't really answer this question from personal experience, but my feeling would be if I had to choose, I'd rather take the plan that puts me in charge rather than someone else in charge. And that 2-for-1 match is pretty sweet.

[snafu]

My 1st reaction to your post was to wonder...how clear is your crystal ball? Will you continue with that state's employment for your entire career? Will pension plans years of service change in the next 33 years since the general life expectancy is increasing significantly? Is your state one of those more heavily indebted? Is that pension plan fully funded or is there a huge unfunded liability? Is there is not an insurance scheme in place to protect employees? Defined Benefit Pension Plans have nearly vanished except for public section, does this offer suggest state government is encouraging new hires to manage their own investments?

[my .02] Most pension plans have a 'conservative,' low risk mandate which at present offers little increase and possibly loses out to inflation. If you have a higher risk tolerance, feel comfortable with your level of knowledge, time to research/follow market trends and have a portfolio outside of retirement designated funds, I'd go to 401a. Yes, the market will roller-coaster around you but you get incrementally more conservative as you get within 8 years of retirement.

[kv968]

The pension funds of public employees are generally very well run, and very well funded. If you have concerns about yours, research it. Plenty of information is available on the web.

Well funded? I'd REALLY check into that.

From the Cleveland Fed:

"According to the funding-status measure prescribed by the Government Accounting Standards Board (GASB), the largest 126 pension plans were underfunded by around $800 billion in 2010. On the other hand, some critics of GASB’s accounting methods estimate the aggregate pension fund shortfall to be as much as $4 trillion."

I'm sure there are some public pensions that aren't doing that bad but I wouldn't want my entire retirement nest egg tied up in one. Pensions are going the way of the rotary phone and with the current pressure on states and communitites to save money there are going to be, if there hasn't already, drastic changes to the public pensions. It's already happened with the OP's seeing as she already has to contribute 2.75% more. How many more changes are to come?

[LivingAlmostLarge]

What age do you have to be to draw on the pension? How much do you get? Is it 2% per year of service? Do you have a minimum? Are you grandfathered in or could your benefits could be cut in the future?

[jIM_Ohio]

Agree... I only have a few days to make a decision...

The most important points that I am concerned about that you mention above are 2 and 3. I know the pension is lower risk, but after seeing what happened in Minnesota last year I'm concerned that being 33 and having my money in something low risk that might end up being a bust anyway is worth the risk.

Ultimately, I guess I could rephrase the question as this:

"Do any of you have all of your retirement in a 401(k) and what is your level of comfort knowing that?"

Few people have the choice of 401k or pension, so if no choice, the 401k is the only choice.

If the pension locks in 80% or 90% of the last few years pay, and the 401k contribution percentage is less than 15%, the math needs to be done as to which payout is higher.

15% to 401k in X years is $Y, 4% of $Y is the annual benefit
Pension in X years is $Z, then annualize benefit, then do 25X to compare to 401k amount of $Y

And an even BIGGER question, does the pension have a health care option tied to it? if opt out, does that benefit get lost? I know many public employees which have government healthcare in retirement, that might be worth more than the Pension...

I have a ppt designed to walk people through this because I do get paid to advise clients on pension buyouts

[Like2Plan]

Gina,
Do you also contribute to SS if you are in the PERA plan? I assume you would be contributing to SS under to 401K plan.

As others have pointed out, there can be problems with pensions. No one can predict how safe it will be (or won't be). On the same token, there are no guarantees that the 401K match will remain as generous as it currently is.

I am assuming that you would continue to invest money on your own for retirement even if you remained in the PERA plan?