Velvet handcuffs [Retirement plans and long-term employment]

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Velvet handcuffs [Retirement plans and long-term employment]

Postby DJB » Tue Jul 16, 2013 10:06 am

Hi all,

Just this week, I reached my 5-year anniversary working in my first job out of grad school, which means I am now vested in the defined-benefit pension plan. I've been really happy at work and haven't considering leaving (it's a large health-care organization with lots of potential to move internally), and I'm starting to feel like soon it won't make any sense to leave.

I ran some pension numbers. The formula is 1.5% times years of service times high salary, no COLA. I make low six figures right now, and using some assumptions (3% annual salary growth, 3% inflation), the value of this pension benefit is non-negligible today and snowballs tremendously toward as I approach 30 years with the company. On top of this, I get a generous 401K match and very generous annual vacation due to my tenure, and figure I could retire in my early 50's barring any major setbacks.

I would love your thoughts on what this all means and how I should consider it. I don't mean to plan too far ahead, but hey, I'm a boglehead. I know the pension plan can change, but it's been very well funded, and usually those changes start with new hires, so I think it's likely it will be mostly intact when I approach retirement. I'll list a few specific questions below, but please share any thoughts related to this topic!

-Have you had this velvet handcuff feeling? How did you consider it and what did you do about it? Any regrets about staying or leaving?
-Since most of the value of the pension would accrue in the future, how should I consider its value today? Again, I know the pattern of DB plans fading away, but all indications from my company show that this plan is likely to continue for some time.
-Am I foolish to think so long-term? Lots of variables still in my life (I'm 28 and single), but I really like my company and the area I'm living. I could see myself here for a while...[/list]
-Any other thoughts/feedback/input?

Thank you!
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Re: Velvet handcuffs

Postby Christine_NM » Tue Jul 16, 2013 10:40 am

At this point, it's more important that you like your position, employer, and location than that you have a promise of a defined benefit plan.

I retired from a company with a similar pension plan. It's fully funded but is now closed to new hires. Those hired with that benefit are still eligible -- nobody has had anything taken away. But I would not count on the pension as a sure thing. Social Security and Medicare in some form are surer things than a company pension.

The velvet handcuff effect is quite real. Few left my company willingly before retirement. Most spent their last few years relatively unproductively, just building up their pension benefit. Any innovation was done at the beginning or mid-career.

To generalize a bit, closing a pension is a benefit to the company. There is a healthier turnover of employees.

I don't think you can foresee your retirement benefits with any company at age 28. Best to assume whatever you get will not be enough, and save and invest on your own.
Savor the moment.
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Re: Velvet handcuffs

Postby Iorek » Tue Jul 16, 2013 12:07 pm

I think if you are 10-15 years from retirement it can be a pretty real phenomenon but I also think if you are at the beginning of your career you have no idea where life will take you, and there could be a lot of benefits (cash or psychic) from alternatives. I know I had one job with a generous DB and a lot of people ended up feeling locked in there. I stayed a couple years and did not find the job challenging/interesting enough so I left and found another job which I like a lot more. As it happens, the new job also has a DB and I am starting to think that I would not like to give it up, but I am definitely glad I gave up the prior one.

I also know someone who left a DB job at 55 and took a new job and never regretted it, because the new job was a big step up in location/responsibilities/compensation.

Shorter answer would be, I would basically ignore it for the foreseeable future. :)
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Re: Velvet handcuffs

Postby Ged » Tue Jul 16, 2013 12:23 pm

For 22 years I worked for a company that had a defined benefit plan. People I worked with that made it to retirement got a benefit worth about 60% of their final salary.

Very nice.

But about 18 years into my employment with the company they froze it. Since as you noted these plans are very back loaded it meant that my benefit was only about 15% of my salary. Still it is a useful kicker on top of my SS and other savings.

So if I were you I would not count on any future non-vested benefit when planning your retirement savings. The back loaded non-portable nature of these plans makes that very risky. In addition having conventional savings lessens the tightness of those handcuffs.
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Re: Velvet handcuffs

Postby frugaltype » Tue Jul 16, 2013 12:23 pm

Christine_NM wrote:The velvet handcuff effect is quite real. Few left my company willingly before retirement. Most spent their last few years relatively unproductively, just building up their pension benefit. Any innovation was done at the beginning or mid-career.

To generalize a bit, closing a pension is a benefit to the company. There is a healthier turnover of employees.


I object to the idea that older employees are slackers or less qualified. Often they are experienced, hard workers.

I worked for a large company that replaced its pension plan with a lump sum. It was a considerable financial loss for me, but even more so for others in a different age range. By the time that happens, for an older employee there's nothing you can do about it, those years are gone.
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Re: Velvet handcuffs

Postby Calm Man » Tue Jul 16, 2013 1:08 pm

OP, take it from a veteran who has seen it all. The chances are 100% that one of the following occurs in the next 10 years, forget until you retire:
1. You get laid off because of position elimination.
2. You get laid off because of a merger.
3. You get laid off for poor performance, an inappropriate remark or somebody up there doesn't like you.
4. The pension plan is changed -- THIS IS GUARANTEED
5. You become disabled.
6. You voluntarily change jobs.
7. You move because you have a significant other who wants to move or needs to move.

What I am saying is that you should be pleased that you are vested and that cannot be taken away from you. But being vested at 5 years should not translate into making your entire career plans based on remaining at the same place. Good luck.
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Re: Velvet handcuffs

Postby Christine_NM » Tue Jul 16, 2013 1:23 pm

frugaltype wrote:I object to the idea that older employees are slackers or less qualified. Often they are experienced, hard workers.


Frugal -

"Hard worker" to my employer was a given. It is very difficult to keep engineering skills current for a full 40 years of work. I didn't use the word slacker or any derogatory term. The employees hired young who make it to retirement age have contributed their best efforts at some point. They don't wait until their 60's to suddenly become more innovative. Older employees are very good at some things, but creating new technologies isn't one of them.

Please don't take offense. The younger employees are building on the shoulders of the older ones, in my experience.
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Re: Velvet handcuffs

Postby dhodson » Tue Jul 16, 2013 1:29 pm

you need to just consider these factors money. Some people prefer there money in the form of income. Some prefer in the form of health benefits. Some in the form of retirement benefits. Its really just money to you in the end and money to them as well. They structure their payment of money in order to attract and retain good people. You need to evaluate the money compared to other opportunities as well as uncertainties. If you like your job and people then that helps a lot bc it isn't certain you would like a different job or working with different people.
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Re: Velvet handcuffs

Postby rotorhead » Tue Jul 16, 2013 1:46 pm

DJB, you said
Just this week, I reached my 5-year anniversary working in my first job out of grad school, which means I am now vested in the defined-benefit pension plan. I've been really happy at work and haven't considering leaving

It's far too soon to be asking such a question, if you truly enjoy your work and are happy.

I spent 23 years with a Fortune 50 company, with an excellent DB plan; and have been enjoying those benefits 10+ years now. However, that's not why I stayed - I truly loved my job, and my customers; and was in a position where I personally was able to "make a difference" over the years. The benefit plan was icing on the cake.

As another poster said, there are many things that can happen in future that might cause you to leave the company. Enjoy your life and your work; and don't worry about the "velvet handcuffs" right now. Revisit the notion in another 5 years perhaps.
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Re: Velvet handcuffs

Postby BolderBoy » Tue Jul 16, 2013 1:57 pm

Calm Man wrote:OP, take it from a veteran who has seen it all. The chances are 100% that one of the following occurs in the next 10 years, forget until you retire:
1. You get laid off because of position elimination.
2. You get laid off because of a merger.
3. You get laid off for poor performance, an inappropriate remark or somebody up there doesn't like you.
4. The pension plan is changed -- THIS IS GUARANTEED
5. You become disabled.
6. You voluntarily change jobs.
7. You move because you have a significant other who wants to move or needs to move.

What I am saying is that you should be pleased that you are vested and that cannot be taken away from you. But being vested at 5 years should not translate into making your entire career plans based on remaining at the same place. Good luck.

+1
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Re: Velvet handcuffs

Postby BolderBoy » Tue Jul 16, 2013 1:58 pm

BolderBoy wrote:
Calm Man wrote:OP, take it from a veteran who has seen it all. The chances are 100% that one of the following occurs in the next 10 years, forget until you retire:
1. You get laid off because of position elimination.
2. You get laid off because of a merger.
3. You get laid off for poor performance, an inappropriate remark or somebody up there doesn't like you.
4. The pension plan is changed -- THIS IS GUARANTEED
5. You become disabled.
6. You voluntarily change jobs.
7. You move because you have a significant other who wants to move or needs to move.

What I am saying is that you should be pleased that you are vested and that cannot be taken away from you. But being vested at 5 years should not translate into making your entire career plans based on remaining at the same place. Good luck.

+1

I should add that Calm Man and I spent our entire careers in the healthcare industry.
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Re: Velvet handcuffs

Postby TomatoTomahto » Tue Jul 16, 2013 4:08 pm

DJB wrote:[snip...]
I would love your thoughts on what this all means and how I should consider it.

-Have you had this velvet handcuff feeling? How did you consider it and what did you do about it? Any regrets about staying or leaving?
-Since most of the value of the pension would accrue in the future, how should I consider its value today? Again, I know the pattern of DB plans fading away, but all indications from my company show that this plan is likely to continue for some time.
-Am I foolish to think so long-term? Lots of variables still in my life (I'm 28 and single), but I really like my company and the area I'm living. I could see myself here for a while...[/list]


We're quite a bit older than you, but I think our approach is still somewhat appropriate for you.

I track our investments, credit cards, etc. in Quicken to the penny. However, our "velvet handcuffs" are not counted in our net worth, and don't even show up in Quicken. I have a spreadsheet that I keep to track deferred compensation (for planning purposes), but otherwise we treat these 7-digit handcuffs pretty much as though they don't exist. Life is better that way.

We do allow ourselves a somewhat more aggressive AA because we have the additional safety net, which acts sort of like a bond. But, at your age, that's not even a consideration.

I would not advise leaving a job a day before you vest, but otherwise I would just put it out of your mind and make your decisions based on what floats your boat.
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Re: Velvet handcuffs

Postby awval999 » Tue Jul 16, 2013 4:09 pm

Based on the title I thought this thread would be about something else 8-)
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Re: Velvet handcuffs

Postby MP173 » Tue Jul 16, 2013 5:09 pm

Age 58 with no pension but a solid footing on retirement based on IRA, Roth, and 401k.

To me one of the most important issues in a person's life is ... "do I enjoy my job/career?" I do and live by the Sunday night rule. Am I ready to go back to work on Sunday nights (meaning am I ready for Monday morning)? I wasn't in my previous career, but certain enjoy this one (23 years and counting).

Take advantage of the pension while it lasts and the generous 401k match. If you do leave your current employer, perhaps use the pension as negotiating tool for higher pay if the other company doesn't have one. Pensions will be obsolete in another 10 years, except for state, local, and federal government.

Ed
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Re: Velvet handcuffs

Postby frugaltype » Tue Jul 16, 2013 6:41 pm

duplicate.
Last edited by frugaltype on Tue Jul 16, 2013 6:43 pm, edited 1 time in total.
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Re: Velvet handcuffs

Postby frugaltype » Tue Jul 16, 2013 6:42 pm

Christine_NM wrote: Older employees are very good at some things, but creating new technologies isn't one of them.


Talk about infuriating stereotyping.

Don't say that where HR can hear you, not if you're a manager, especially a hiring manager. Or better yet, do so.
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Re: Velvet handcuffs

Postby TomatoTomahto » Tue Jul 16, 2013 6:59 pm

frugaltype wrote:
Christine_NM wrote: Older employees are very good at some things, but creating new technologies isn't one of them.


Talk about infuriating stereotyping.

Don't say that where HR can hear you, not if you're a manager, especially a hiring manager. Or better yet, do so.


:sharebeer
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Re: Velvet handcuffs

Postby frugaltype » Tue Jul 16, 2013 7:01 pm

TomatoTomahto wrote:
frugaltype wrote:
Christine_NM wrote: Older employees are very good at some things, but creating new technologies isn't one of them.


Talk about infuriating stereotyping.

Don't say that where HR can hear you, not if you're a manager, especially a hiring manager. Or better yet, do so.


:sharebeer


Richard Feynman, age 68, rational for existence of antiparticles.
J.C.R. Licklider, age 53, seminal Internet paper, The Computer as a Communication Device.
Marie Curie, age 43, isolated radium.

Old losers, all.
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Re: Velvet handcuffs

Postby DJB » Tue Jul 16, 2013 8:19 pm

Calm Man wrote:OP, take it from a veteran who has seen it all. The chances are 100% that one of the following occurs in the next 10 years, forget until you retire:
1. You get laid off because of position elimination.
2. You get laid off because of a merger.
3. You get laid off for poor performance, an inappropriate remark or somebody up there doesn't like you.
4. The pension plan is changed -- THIS IS GUARANTEED
5. You become disabled.
6. You voluntarily change jobs.
7. You move because you have a significant other who wants to move or needs to move.

What I am saying is that you should be pleased that you are vested and that cannot be taken away from you. But being vested at 5 years should not translate into making your entire career plans based on remaining at the same place. Good luck.



Thank you Calm Man and everyone for the valuable perspective. And apologies to those looking for a kinkier thread. I think this is the kind of advice that's often hard for a young whippersnapper to hear, but it's well-taken.

The Sunday night rule is really golden, and I do my best to live that way. Sometimes my mind wanders to the less important financial matters and "strategy." A fair amount of my mental energy goes into maximizing airline miles, too. It has some great perks, but really it's pretty sad. Now that I've got my financial ducks in a row and a pretty stable career, I should focus on the deeper things. That will be my homework from this point forward.

I'm glad I can count on these forums for the financial advice and the "real life" stuff, too. You guys and gals rock.

Thanks again.
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