Florida Retirement System Pension vs. Investment Option

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply

Would you choose Option 1 or Option 2?

Option 1 - Pension Plan
3
50%
Option 2 - Investment Plan
3
50%
 
Total votes: 6

User avatar
Topic Author
Titanium3er
Posts: 45
Joined: Sat Aug 16, 2014 9:52 am

Florida Retirement System Pension vs. Investment Option

Post by Titanium3er »

Hi All,

I've been reading the forum for a while and recently joined in order to learn and contribute. My wife was offered a position which provides entry into the Florida Retirement System (FRS). I've been doing research and haven't found anything substantial comparing the two options aside from the literature provided by the state; although there is this thread which was put together prior to changes making both options less generous in 2011:

http://www.bogleheads.org/forum/viewtopic.php?t=21984

She has two options:

Option 1: FRS Pension Plan - Defined Benefit Plan, 3% employee contribution for service accrued after 2011. 8 year vesting period. Annual benefit calculated based on a formula which considers age, years of service, average compensation (final 8 years), and a percentage multiplier found here https://www.myfrs.com/portal/server.pt/ ... ation/1820.

Option 2: FRS Investment Plan - Defined Contribution Plan, 3% employee contribution, 3.3% employer contribution. 1 year vesting period. Fund options can be found here https://www.myfrs.com/InvestmentFundTabs.htm.

There are obviously many variables which come into play. Some relevant information to consider is that I have a moderately sized 401(k) and a small Roth IRA. She also has a small 401(k) from a previous employer. We are 30 and would like to retire around 60. It is hard to predict how long she will remain with the state, although odds are it will be long-term.

I put together an excel spreadsheet as a basic model to test different scenarios. I'm certainly not an expert, but I think it is a good starting point. Here is a screenshot of the summary which I hope is readable. The important info is the static comparison (investment plans advantage over pension) which is the table on the bottom:

Image

My model suggests that if she is there for 30 years or the investment plan performs extremely well then she should forgo the pension. Otherwise, the pension is likely the better option. My thinking at the moment is to suggest she go with the pension due to its guaranteed cash flow and the ability to contribute to other vehicles; both mine and hers. There is also the option to change from one to other once during her lifetime.

I appreciate any time taken to offer advice and also hope that this thread will help others who are facing the same choice.
Last edited by Titanium3er on Sat Aug 16, 2014 1:24 pm, edited 5 times in total.
User avatar
hoppy08520
Posts: 2193
Joined: Sat Feb 18, 2012 10:36 am

Re: Florida Retirement System Pension vs. Investment Option

Post by hoppy08520 »

I may be alarmist or irresponsible but I just wouldn't put too much faith in a government pension 30 - 50 years from now.

Granted, Florida seems to have one of the better-run pension systems (at least according to this: http://www.governing.com/gov-data/state ... -data.html and http://www.thinkadvisor.com/2013/09/09/ ... page_all=1). I'd rather invest and control the money on my own. Given that your projections show that both options are fairly close, that would make me lean more toward the investment account rather than the pension account.

One question on your analysis: are the return estimates (4%, 6%, etc.) real or nominal? If they're real, I think those numbers are a little rosy. Most experts are forecasting longer-term returns of closer to 3% - 5% real for stocks, and 1% to 2% or so for bonds, for a portfolio blend of around 4% for a balanced portfolio depending on your AA. That might actually give the pension a bit of an edge. Should we indeed have lower returns, then the pension does better.
sailfish2
Posts: 82
Joined: Sat Aug 16, 2014 9:32 am

Re: Florida Retirement System Pension vs. Investment Option

Post by sailfish2 »

I can't chime in with a recommendation (yet).

Coincidentally, I am also trying to decide between the options, as a new FRS-qualified employee. And you're right Titanium, there is very little in the way of neutral guidance for the new employee (and what FRS provides is pretty limited). Great job with the spread sheet.

One advantage of the Investment Plan is that there is the one-time conversion option, so if I do make it to the point where I would be vested in the Plan (and if at that time all indicators are rosy both for my future employment with the govt AND with the viability of the Pension Plan), I can convert my Investment Plan to the Pension Plan. I was warned at my orientation that this conversion could be very costly, ie $50,000 or more by that time...so that means I should horde plenty of cash in case I decide to convert :moneybag :moneybag I am just not sure about being locked into the Pension Plan - what if my position is not working out and I am not yet vested in the Pension Plan, and have difficulty finding a comparable new position with a FRS employer?

I'm also somewhat hesitant to commit to the Pension Plan because of the possibility that,on a personal note, I am currently single, what if I end up married to someone with a job or situation that requires us to depart Florida before I have vested?
Otherwise, at 38, I am pretty sure I can handle living in Florida and continuing to remain employed in an agency that offers FRS, even if my position with my current agency does not work out and I end up with another agency.

Also, I have a decent nest egg in IRAs already going for me, from my previous private employment. [See my other thread about "Vanguard IRA advice and FRS advice"]... Not sure if that should play into the decision at all.
Last edited by sailfish2 on Sat Aug 16, 2014 1:17 pm, edited 1 time in total.
User avatar
Topic Author
Titanium3er
Posts: 45
Joined: Sat Aug 16, 2014 9:52 am

Re: Florida Retirement System Pension vs. Investment Option

Post by Titanium3er »

hoppy08520 wrote:I may be alarmist or irresponsible but I just wouldn't put too much faith in a government pension 30 - 50 years from now.

Granted, Florida seems to have one of the better-run pension systems (at least according to this: http://www.governing.com/gov-data/state ... -data.html and http://www.thinkadvisor.com/2013/09/09/ ... page_all=1). I'd rather invest and control the money on my own. Given that your projections show that both options are fairly close, that would make me lean more toward the investment account rather than the pension account.

One question on your analysis: are the return estimates (4%, 6%, etc.) real or nominal? If they're real, I think those numbers are a little rosy. Most experts are forecasting longer-term returns of closer to 3% - 5% real for stocks, and 1% to 2% or so for bonds, for a portfolio blend of around 4% for a balanced portfolio depending on your AA. That might actually give the pension a bit of an edge. Should we indeed have lower returns, then the pension does better.
Thanks for the taking the time to reply, hoppy.

The projections are in today's dollars with no adjustment for inflation. I think in nominal dollars 4 - 12 % is realistic, right?

I agree that with news lately about pension defaults and the generally unhealthy financial state of government run programs that pension benefits might be questionable, but from what I've seen (and your links corroborate it), Florida's has been consistently ranked as one of the better funded systems.

That actually brings up a good point which I didn't detail in the original post, though. A number of politicians in Florida have been trying to do away with the pension plan altogether. If it is assumed they'll succeed it may be better to join the pension plan with the option to switch to the investment plan down the road since under those circumstances the option to do the opposite likely won't exist any longer.
User avatar
sometimesinvestor
Posts: 1271
Joined: Wed May 13, 2009 6:54 am

Re: Florida Retirement System Pension vs. Investment Option

Post by sometimesinvestor »

To the extent you can save outside the 3% contribution the pension plan seems better because the existence of the cash flow associated with the pension means that you are less stressed regarding investment performance , can perhaps have a slightly more aggressive portfolio outside of the pension or evena more conservative one because you can achievea lower return and still be comfortable. etc. In my case I retired at the almost worst possible time (Sept 2008) but because I had almost enough from my pension to live in I did not panic at all about the stock market performance and did not sell at the bottom.

If you are an optimist you may feel you can outperform the pension and that is certainly possible but what if you are wrong. Instead suplement the 3% being withheld with a Roth IRA investment and perhaps if you can afford ita taxable account that is relatively tax efficient such as Total stock Market. In the end I believe you will be well placed.As you noticed Florida gives a less good deal to newer employees. That is likely to continue (I think it will be true for most states).That has advanteges to you in that it increases the chances the pension system will be able to make the needed future payments
tibbitts
Posts: 23716
Joined: Tue Feb 27, 2007 5:50 pm

Re: Florida Retirement System Pension vs. Investment Option

Post by tibbitts »

I haven't read the documents, but a few thoughts from my own experience with two state pension systems:

1. It's amazing how much terms and implementations of the same plan can vary between individual agencies.

2. It's pretty common for 95% of people in a pension plan to not understand important terms that apply to them, because the rules are so intricate and complicated. Even if you think you understand the terms, you might not.

3. You can make all the spreadsheets you want, but unpredictable factors, such as leaving your job - voluntarily or otherwise - at an inopportune time, are going to end up determining which alternative will work out best for you.

In the end, luck matters at least as much as planning.
User avatar
Topic Author
Titanium3er
Posts: 45
Joined: Sat Aug 16, 2014 9:52 am

Re: Florida Retirement System Pension vs. Investment Option

Post by Titanium3er »

sailfish2 wrote:I can't chime in with a recommendation (yet).

Coincidentally, I am also trying to decide between the options, as a new FRS-qualified employee. And you're right Titanium, there is very little in the way of neutral guidance for the new employee (and what FRS provides is pretty limited). Great job with the spread sheet.

... I was warned at my orientation that this conversion could be very costly, ie $50,000 or more by that time...so that means I should horde plenty of cash in case I decide to convert :moneybag :moneybag I am just not sure about being locked into the Pension Plan - what if my position is not working out and I am not yet vested in the Pension Plan, and have difficulty finding a comparable new position with a FRS employer? ...
I knew others would feel the same way about the lack of information comparing the two options. I saw that there is a one-time option to switch from one to the other, but I'm surprised at how costly moving from the investment plan to the pension plan could be. We'll have to keep that in mind. Thanks for the info!
sometimesinvestor wrote:To the extent you can save outside the 3% contribution the pension plan seems better because the existence of the cash flow associated with the pension means that you are less stressed regarding investment performance , can perhaps have a slightly more aggressive portfolio outside of the pension or evena more conservative one because you can achievea lower return and still be comfortable. etc. In my case I retired at the almost worst possible time (Sept 2008) but because I had almost enough from my pension to live in I did not panic at all about the stock market performance and did not sell at the bottom...
I'm glad things worked out for you. You're right that having guaranteed income would make staying the course much easier in turbulent times. As you mention, we have other options as far as retirement savings goes. I'm inclined to recommend that she choose the pension just for the piece of mind that it affords. We can always pump money into my 401(k) or our Roth IRA's for self-directed investments. She could also open her own pre-tax account and roll her old 401(k) into it.
tibbitts wrote:...
2. It's pretty common for 95% of people in a pension plan to not understand important terms that apply to them, because the rules are so intricate and complicated. Even if you think you understand the terms, you might not.

3. You can make all the spreadsheets you want, but unpredictable factors, such as leaving your job - voluntarily or otherwise - at an inopportune time, are going to end up determining which alternative will work out best for you.

In the end, luck matters at least as much as planning.
I think that "95% of people" don't take the time to understand many complex situations. I'm creating spreadsheets and asking the forum for input in an effort to - hopefully - fall within the 5%. I do agree with you that luck is critical, although I might call it 'circumstances outside of our control'. In the end there are many things that could change or turn out differently than we planned, but that doesn't mean it isn't worthwhile to make an educated choice based on the information available at present.
Greenleaves
Posts: 30
Joined: Mon Jan 27, 2014 9:08 am

Re: Florida Retirement System Pension vs. Investment Option

Post by Greenleaves »

I would stay in the defined benefit plan for now. Don't worry if you have to leave before 8 years because after the first year you can use your one time switch option and go to the investment plan and then do a direct rollover out. However if you do stay in the pension plan when it is time to leave or retire you might want to switch back to the investment plan if you want to leave something to children etc. you can not do that in the pension plan. I think you have four choices of payment options then dead and done.

Good luck
Greenleaves
Posts: 30
Joined: Mon Jan 27, 2014 9:08 am

Re: Florida Retirement System Pension vs. Investment Option

Post by Greenleaves »

TO Titanium3er
I forgot to add, I think you have this part wrong, you said " and the ability to contribute to other vehicles; both mine and hers. "

I believe up to the income limits for a person with a pension you can still contribute to an IRA or Roth IRA for both of you whether you are in either of the retirement plans.
Post Reply