Help with PA retirement choice: PSERS or Vanguard?

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Help with PA retirement choice: PSERS or Vanguard?

Postby ProfessorX » Thu Aug 29, 2013 7:07 pm

Hello! I am looking for advice about helping my wife choose a retirement plan. She just got a new job in a Charter School in Philadelphia. She had previously been in a different Charter School in Philadelphia for the last four years. And she had been contributing 7.5% a year to the state PSERS retirement program. She is a class T-D member of PSERS (if you know what that means).

The new Charter School offers her an option. Either keep the same PSERS or take a 403(b) at Vanguard. The Charter School contributes 5% for her to Vanguard that is fully vested after 2 years, 50% vested after 1 year. She can contribute up to the max into a Vanguard 403(b). The Vanguard fund choices are good, and livable, but not stellar. Or she would pay 7.5% into PSERS every year, and her school pays whatever they pay into PSERS.

At the time of a normal retirement the Vanguard 403(b) would be a normal 403(b). For a normal PSERS retirement, she would get a yearly payment of (2.5%) X (average of her three highest years salaries ) X (years of service). The Vanguard option has market risk. And the PSERS has the risk that goes with underfunded pension plans etc.

Another point to make is that I currently contribute as much as possible into my Vanguard 403(b) plan (my contributions are maxed out). We also have been doing full backdoor Roth contributions for the last few years. So there would be some diversification with the PSERS option in that regard.

Anyone have any insight about which is a better choice? Apparently this is a one time choice that she can never change while she works at this school. Thanks! :moneybag :moneybag :moneybag
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Re: Help with PA retirement choice: PSERS or Vanguard?

Postby patrick » Thu Aug 29, 2013 7:22 pm

No real answer, but some questions that might make a difference:

How long does it take to be vested in PSERS? Does work at the previous school add together with work at the new school? (I would presume it does, but just to be sure...)

Is the PSERS benefit inflation adjusted?
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Re: Help with PA retirement choice: PSERS or Vanguard?

Postby ProfessorX » Thu Aug 29, 2013 7:46 pm

patrick wrote:No real answer, but some questions that might make a difference:

How long does it take to be vested in PSERS? Does work at the previous school add together with work at the new school? (I would presume it does, but just to be sure...)

Is the PSERS benefit inflation adjusted?


Thanks! It takes 5 years to be vested in PSERS. So she would be vested after 1 more year of service. Yes work at the previous school counts toward the vesting in PSERS. PSERS is independent of the particular school where you work. It is a state run retirement system.

The PSERS benefit does not appear to be inflation adjusted, unfortunately. The money that you and your employer(s) contribute earns a legally mandated 4% rate of interest compounded annually. It earns that amount even after you retire. And if you outlive your money they keep paying you. But if your money outlives you, then what is left goes to your designated beneficiary.

EDIT: another benefit is that the PSERS retirement payments are not subject to City or State income tax in PA.
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Re: Help with PA retirement choice: PSERS or Vanguard?

Postby alec » Thu Aug 29, 2013 9:31 pm

ProfessorX wrote:
EDIT: another benefit is that the PSERS retirement payments are not subject to City or State income tax in PA.


Yabut, doesn't PA take taxes based on your income before retirement plan contributions? If so, then the 403(b) withdrawals wouldn't be subject to State income tax either.
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Re: Help with PA retirement choice: PSERS or Vanguard?

Postby ProfessorX » Thu Aug 29, 2013 9:39 pm

alec wrote:
ProfessorX wrote:
EDIT: another benefit is that the PSERS retirement payments are not subject to City or State income tax in PA.


Yabut, doesn't PA take taxes based on your income before retirement plan contributions? If so, then the 403(b) withdrawals wouldn't be subject to State income tax either.


Is that true? Probably because my state wages on my w2 are higher than my federal wages by almost exactly my 403(b) contributions. Ok.
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Re: Help with PA retirement choice: PSERS or Vanguard?

Postby ProfessorX » Thu Aug 29, 2013 9:49 pm

About COLA with PSERS:

Q: When will I receive a Cost-of-Living Adjustment (COLA)?

A: Cost-of-Living increases are not automatically granted. By law, legislators (the Pennsylvania General Assembly) must enact legislation granting cost-of- living increases. No COLA has been granted since 2002. COLAs are not granted for survivor annuitants, as this would require a change in the Pennsylvania Constitution.

After the bill becomes law, PSERS calculates and adjusts your new monthly benefit amount according to the provisions in the law. PSERS’ role is that of an administrator of the benefit and not of one who grants COLA’s.

Note: You must have reached one of the superannuation/normal retirement qualifications before PSERS can apply any COLA to your monthly check.

Minimum Requirements for Superannuation ((Normal) Retirement for a Class T-C or Class T-D Member

35 years of service at any age
30 years of service and age 60
1 year of service at age 62
If you retired before reaching one of the qualifications, you must wait until you would have reached one of the qualifications as if you had not retired. PSERS would apply the COLA the July after you would have reached normal retirement.

Member retires with 36 years of service

COLA is applied according to the legislation.

Member retires with 27 years of service at age 56 as of April 2005.

Member would reach superannuation at age 60 with 31 years of service in April 2009. The COLA would be applied July 2009.
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Re: Help with PA retirement choice: PSERS or Vanguard?

Postby ProfessorX » Sat Aug 31, 2013 8:12 am

Bump. Any more advice? Thanks!
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Re: Help with PA retirement choice: PSERS or Vanguard?

Postby alec » Sat Aug 31, 2013 8:45 am

ProfessorX wrote:
alec wrote:
ProfessorX wrote:
EDIT: another benefit is that the PSERS retirement payments are not subject to City or State income tax in PA.


Yabut, doesn't PA take taxes based on your income before retirement plan contributions? If so, then the 403(b) withdrawals wouldn't be subject to State income tax either.


Is that true? Probably because my state wages on my w2 are higher than my federal wages by almost exactly my 403(b) contributions. Ok.


Thats what my dad and bro told me. They both live in PA and were and are professors with 403(b)'s.
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Re: Help with PA retirement choice: PSERS or Vanguard?

Postby civi68 » Sun Sep 01, 2013 7:47 am

I am a PA state employee that is in the state employee fund. It is similar to the school pension fund. Hands down, the pension fund offers the best deal over a 403B if your wife plans on making teaching a career. I have been saving significant amounts of money for retirement and would have to save even more to match the pension plan. My guess is that you would need to contribute 25% of your salary towards retirement to come close. The big issue is that the pension plans are underfunded. In a few years, the state needs to contribute about 24% of employees' salaries to the fund for about 20 years to keep it funded. Most school and state employees stay in their job for the pension plan. Except for current employees possibly paying more in the future, most proposals only affect new employees hired after 2015 to only have the 403B option. The above employer contribution rate would be reduced if new employees end up no longer in the pension plan.
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Re: Help with PA retirement choice: PSERS or Vanguard?

Postby donall » Mon Sep 02, 2013 1:54 am

PSERS sounds like a better way to fund retirement. PSERS is funded at 69% currently, so not great, but ok.
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Re: Help with PA retirement choice: PSERS or Vanguard?

Postby ProfessorX » Mon Sep 02, 2013 10:12 am

donall wrote:PSERS sounds like a better way to fund retirement. PSERS is funded at 69% currently, so not great, but ok.


That was in 2011. In 2012 due to lower returns it is estimated to be funded at 59%. They have built in a 7.5% annual return into their "funded" calculation. And the funded ratio is estimated to decline before it starts picking up again:

http://www.commonwealthfoundation.org/r ... sion-costs

I also think that PSERS is invested severely too heavily in "Private Equity". But what can I do about it?
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