Choosing between a defined benefit (pension) or define contribution plan?

[JBHoward]

• About Me:
• 27 Years Old
• Have accepted a state government job
• Making mid 50s, will cap out around 100 - 120k if I stay at job
• Not sure I will want to stay here for the rest of my career but it is possible
• Only current retirement is a 401K with around $6,000
• Debt free
• Around 13K in the bank, emergency fund and working towards a house down payment

• Defined Benefit Plan (Pension):
• Employee contributes 9%
• Contributions accrue 4% interest
• Retirement benefit will be approximately 55% of income at retirement
• If you leave you take your contribution plus the 4% interest. Leave after 8 years you can take a deferred retirement benefit.
• State pension is significantly underfunded so some of this may change
• Would qualify for retirement at 58

• Defined Contribution Plan:
• Employer contributes 5% of your earnable compensation to your chosen service provider.
• Employee contributes 9%
• Immediately vested
• Four service providers to choose from, I have not looked into these much yet.

• Other:
• I will also have access to a 401(k) and 457 retirement account

I am currently leaning more towards the Defined Contribution plan but wanted to see what others thought.

[snafu]

It's critical to have details about each specific provider, their fees, management charges and Morningstar or similar ranking. You need to figure out your personal Risk Tolerance [lots of online questionnaires] for future allocations.

Based primarily on your age and the minimal information provided, I'd chose the Defined Contribution Plan, beginning with a low cost USA Index or ETF [if they waive fees]. You will need to stay the course prepared for a bumpy ride reviewing 10 y/o charts. Retirement plans require long term compounding...try to imagine how insecure you might have felt 2008 - 2012 seeing your hard earned contributions drop month after month. Will you notice newer contributions buy more units?

All too many government plans are underfunded. How much risk do you carry if your state declares itself bankrupt? The low interest rates may be good for government borrowing but those bonds haven't kept up to inflation. It's been a disaster for growing retirement savings for close to a decade and pension restrictions limit risk.

[~bs]

The DCP has a high level of employer contribution, so I would be tempted to go that route. Especially as the DBP has a high level of employee contribution, and your benefit is rather low at 55% of final salary. It's worrisome that the pension fund is underfunded.

I'm sure most here would tell you to go with the DCP, as you don't need to worry about the government underfunding the fund and the possibility that they will default on the obligation. BUT I'm of the opinion that your retirement assets should contain various streams of income, and having a pension does not preclude you from having a 401k style plan. I say go with the pension plan, and also make contributions to the 401k. Stick it out for 8 years, then evaluate if you want to stay for the long haul. If you leave, at least when you retire, you should have a partial pension independent of the decisions you made with the rest of your retirement porfolio. If the stock & bond market blows up and retracts by 50%, the state is still obligated to make your pension payment.


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For what it's worth, I'm looking at the following in retirement assuming nothing blows up (which is a real possibility):

~65% pension
Social security
100% medical insurance
457 plan (pretax)
Roth IRA (posttax)
Standard investment account
Business assets
Rental property

[~bs]

All too many government plans are underfunded. How much risk do you carry if your state declares itself bankrupt? T

The rules may change in the future, as the economic and political climate changes, but as of right now, states cannot file bankruptcy. Pensions are a contractual legal obligation, and the states must service the obligation, even at the expense of reducing other services, and even if they must raise taxes to cover the payments. Counties on the other hand, can declare.

[Thrif-t]

I say go with the Pension plan too, it's a nice benefit. But also know it will quite possibly change before you collect it. Make sure you are contributing to the 401k also so if things change you still have your backup.

I've been sprouting this off on recent threads but my DH has a gov't pension and a Deferred Comp account (I'm not sure is that the same as the 457??), we've always contributed as much as we could to the Deferred Comp just in case. Well it's a good thing because things change. We will still be ok, in fact, we will be better for having the pension in addition to the Deferred Comp fund.

edit: I should say DH doesn't get Social Security but the monthly benefit he will get from his deferred comp is more than he would've gotten from SS anyway.

[~bs]

edit: I should say DH doesn't get Social Security but the monthly benefit he will get from his deferred comp is more than he would've gotten from SS anyway.

The social security thing is a double edged sword. It is really nice that you don't have to pay for it, and can invest it on your own, but it won't be there for you when you retire. Social security can be seen as a nationalized defined benefit plan of sorts, one with an unlimited printing press.

If you do have social security, it really sucks when you're working because you're likely contributing 4-6% into the defined benefit plan PLUS paying 6.2% social security PLUS contributing to the deferred comp plan. But in the end, when you retire (and if it's there), it is a nice benefit. Social security + pension can equal to your working salary (depending on personal details of course).

[Thrif-t]

The thing with social security is that at some point it's probably going to be means tested. We won't have to worry about that with the deferred comp. We will get all we put in. I'd rather it be that way anyway but realize we need the safety net that ss provides for people who aren't financial savy.

[~bs]

The thing with social security is that at some point it's probably going to be means tested. We won't have to worry about that with the deferred comp. We will get all we put in. I'd rather it be that way anyway but realize we need the safety net that ss provides for people who aren't financial savy.

Yeah, I'd probably have opted out of SS if I actually had the choice.

[txex86]

The thing with social security is that at some point it's probably going to be means tested. We won't have to worry about that with the deferred comp. We will get all we put in. I'd rather it be that way anyway but realize we need the safety net that ss provides for people who aren't financial savy.

What makes you think that deferred compensation won't be "means tested" by states as they realize that defined contributions (pensions) are too costly. The state of Illinois comes to mind; the far too generous pensions have bankrupted the state.

[bennkar]

The thing with social security is that at some point it's probably going to be means tested. We won't have to worry about that with the deferred comp. We will get all we put in. I'd rather it be that way anyway but realize we need the safety net that ss provides for people who aren't financial savy.

I'm surprised that someone hasn't chimed in on this, but there is already means testing on SSI. If your income is above a certain point you have to pay taxes on SSI in retirement. So if you get a pension (like I will) you get the privilege of having your SSI reduced.

[tripods68]

I'd stick to Defined Benefit Pension too. With your additional retirement accounts, you further enhanced your retirement benefits by contributing towards 401K & 457 which will help Optimize your Savings while reducing your taxable income (lower taxes!) should you choose to maximize contributions in the future.

You'll end-up with various sources of income from several buckets:

• Pension
• 401K
• 457
• Social Security

[bennkar]

What makes you think that deferred compensation won't be "means tested" by states as they realize that defined contributions (pensions) are too costly. The state of Illinois comes to mind; the far too generous pensions have bankrupted the state.

I'm curious how you think a state would means test deferred compensation. Only practical way I can think of would be based on your income (i.e. income taxes). If they did that many people would just move out of state, then good luck on getting that money. Once you're retired moving is not that hard to do. If they tried to change your benefits based on actual assets, it would be a change of contract, and that would be in courts for years. Heck doing an estate when someone dies takes forever. Imagine doing that yearly - just not going to happen.

[Thrif-t]

What makes you think that deferred compensation won't be "means tested" by states as they realize that defined contributions (pensions) are too costly. The state of Illinois comes to mind; the far too generous pensions have bankrupted the state.

What? His deferred comp is HIS MONEY that he is deducting out of his pay and putting in a plan, kinda like a 401k plan but no match. How can HIS MONEY be means tested? That would cause all kinds of an uproar with people. He doesn't have to deposit money in his deferred comp account, he could just take that money in his pay check, lots do. Are you thinking of something else?

[GrimJack]

I'm surprised that someone hasn't chimed in on this, but there is already means testing on SSI. If your income is above a certain point you have to pay taxes on SSI in retirement. So if you get a pension (like I will) you get the privilege of having your SSI reduced.

I do not understand your logic here? Your SS is reduced?

[Thrif-t]

I do not understand your logic here? Your SS is reduced?

I'm thinking because he has a pension he will have to pay taxes on his SS income thereby reducing it??

There is a certain income thresh hold that once you go over you have to pay taxes on your SS income, off the top of my head I don't know that amount.