Retirement Planning with Pension

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Topic Author
Maxpower
Posts: 2
Joined: Sun Apr 07, 2019 8:42 pm

Retirement Planning with Pension

Post by Maxpower » Sun Apr 14, 2019 7:50 pm

Hello, I'm relatively new to investing and am seeking advice on our current assets as well as how to continue building our portfolio given that my spouse and I are public employees and have pension plans.

General:
Emergency funds: We have an emergency fund to cover 6+ months of expenses
Debt: Our mortgage is our only debt
Tax Filing Status: Married filing jointly
Tax Rate: 22% Federal
Age: 30
Desired Asset allocation: 80% stocks / 20% bonds
Total portfolio is in mid five-figures

Current assets:
Taxable Account - currently used for excess cash
- 28% of total portfolio; 80% of taxable account in Total Stock Market Index (VSTAX - .04% expense ratio)
- 7% of total portfolio; 20% of taxable account in Total Bond Market Index (VBTLX (.05% expense ratio)

My Roth IRA at Vanguard
- 39% of total portfolio; 100% of Roth IRA in Vanguard 2050 Target Retirement Fund (VFIFX - .15% expense ratio)

Spouse's Roth IRA at Vanguard
- 26% of total portfolio; 100% of Roth IRA in Vanguard 2035 Target Retirement Fund (VTTHX - .14% expense ratio)


Other Information:
We are public employees, so we each have pension plans. We have been maxing out our IRAs since being financially able to, and our plan is to continue contributing the maximum amount. We have life insurance and disability insurance. We have no debt other than our mortgage (30 year fixed rate at 3.5%), and we pay additional principal each month so that our house will be payed off at (approximately) year 15 of the mortgage.
We both currently have options for a 403(b), and I am able to contribute to a 457 as well. We have no employer match. Examples of funds and associated expenses available in each plan would be target retirement date funds (expenses of approximately 0.35%), total US stock market index funds (expenses of 0.24%), total international market index fund (expenses of 0.31%), total US bond market funds (expenses of 0.24%). Vanguard funds are available, and essentially, the expenses are the Vanguard expense ratios plus an administrative fee of .20%.

After all of our monthly expenses, about 10% of our after-tax income is available for directing somewhere else (currently putting some of our monthly excess it into a taxable account and some into a high-yield savings account).

Questions:
1. With our pensions and the projected growth of our IRAs, we believe we could work to 62-65 years of age and be financially comfortable. Given how far off retirement is, I am concerned about the future of our state's pension program. I am seeking information about where to direct any additional funds (continue paying additional principal to our mortgage, contributing to 403b/457, etc.).
2. Since the funds available in the 403b and 457 are the same, would there be a reason why I would contribute to one over the other?

BradJ
Posts: 252
Joined: Sun Jan 21, 2018 6:06 pm

Re: Retirement Planning with Pension

Post by BradJ » Sun Apr 14, 2019 8:21 pm

I have a pension as well, and honestly I try and not think about it too much.....it’s not like I “own” it. I do view the pension as my bond portfolio, so therefore I’m a little heavier in stocks in my 401k.

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Wiggums
Posts: 630
Joined: Thu Jan 31, 2019 8:02 am

Re: Retirement Planning with Pension

Post by Wiggums » Sun Apr 14, 2019 8:38 pm

These plans are funded with pre-tax money and once you make withdrawals in retirement, it’s taxed as regular income. Both the 457(b) and the 403(b) are similar in this regard, but the 457(b) doesn’t charge you an early withdrawal penalty if you decide to withdraw money from it when you leave your job. This lack of an early withdrawal penalty is one of the main differences between 403(b) vs. 457 (b) plans.

Tdubs
Posts: 414
Joined: Tue Apr 24, 2018 7:50 pm

Re: Retirement Planning with Pension

Post by Tdubs » Sun Apr 14, 2019 8:46 pm

Is this a PA pension?

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CyclingDuo
Posts: 2189
Joined: Fri Jan 06, 2017 9:07 am

Re: Retirement Planning with Pension

Post by CyclingDuo » Mon Apr 15, 2019 12:56 am

Maxpower wrote:
Sun Apr 14, 2019 7:50 pm
Hello, I'm relatively new to investing and am seeking advice on our current assets as well as how to continue building our portfolio given that my spouse and I are public employees and have pension plans.

General:
Emergency funds: We have an emergency fund to cover 6+ months of expenses
Debt: Our mortgage is our only debt
Tax Filing Status: Married filing jointly
Tax Rate: 22% Federal
Age: 30
Desired Asset allocation: 80% stocks / 20% bonds
Total portfolio is in mid five-figures

Current assets:
Taxable Account - currently used for excess cash
- 28% of total portfolio; 80% of taxable account in Total Stock Market Index (VSTAX - .04% expense ratio)
- 7% of total portfolio; 20% of taxable account in Total Bond Market Index (VBTLX (.05% expense ratio)

My Roth IRA at Vanguard
- 39% of total portfolio; 100% of Roth IRA in Vanguard 2050 Target Retirement Fund (VFIFX - .15% expense ratio)

Spouse's Roth IRA at Vanguard
- 26% of total portfolio; 100% of Roth IRA in Vanguard 2035 Target Retirement Fund (VTTHX - .14% expense ratio)


Other Information:
We are public employees, so we each have pension plans. We have been maxing out our IRAs since being financially able to, and our plan is to continue contributing the maximum amount. We have life insurance and disability insurance. We have no debt other than our mortgage (30 year fixed rate at 3.5%), and we pay additional principal each month so that our house will be payed off at (approximately) year 15 of the mortgage.
We both currently have options for a 403(b), and I am able to contribute to a 457 as well. We have no employer match. Examples of funds and associated expenses available in each plan would be target retirement date funds (expenses of approximately 0.35%), total US stock market index funds (expenses of 0.24%), total international market index fund (expenses of 0.31%), total US bond market funds (expenses of 0.24%). Vanguard funds are available, and essentially, the expenses are the Vanguard expense ratios plus an administrative fee of .20%.

After all of our monthly expenses, about 10% of our after-tax income is available for directing somewhere else (currently putting some of our monthly excess it into a taxable account and some into a high-yield savings account).

Questions:
1. With our pensions and the projected growth of our IRAs, we believe we could work to 62-65 years of age and be financially comfortable. Given how far off retirement is, I am concerned about the future of our state's pension program. I am seeking information about where to direct any additional funds (continue paying additional principal to our mortgage, contributing to 403b/457, etc.).
2. Since the funds available in the 403b and 457 are the same, would there be a reason why I would contribute to one over the other?
I would use the remaining salary leftover (you said around 10% after monthly expenses) to start filling some of the 403b and 457b spaces. I highlighted the funds in red we would suggest in the 403b/457b to be the classic Three Fund Portfolio...

Vanguard Total Stock Market
Vanguard Total International
Vanguard Total Bond
"Everywhere is within walking distance if you have the time." ~ Steven Wright

carolinaman
Posts: 3555
Joined: Wed Dec 28, 2011 9:56 am
Location: North Carolina

Re: Retirement Planning with Pension

Post by carolinaman » Mon Apr 15, 2019 7:09 am

Here is an article describing 403 and 457. One notable advantage of 457 is you can take distributions early without the 10% penalty.

https://www.investopedia.com/articles/p ... arison.asp

Public pensions vary a lot in their financial soundness and ability to pay all of their future liabilities. Some public pension systems are in really bad shape but many have the ability to pay most, if not all of their obligations. This articles lists all of the states and their projected funding level to pay their future liabilities. 80% is considered a safe funding level, but many question that.

https://www.marketwatch.com/story/the-s ... 2018-12-18

If you are in one of the poorer funded pension systems, you run the risk of getting your benefit cut. Thus, you are wise to have supplementary savings, especially since you have 30+ years before you plan to retire.

tibbitts
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Joined: Tue Feb 27, 2007 6:50 pm

Re: Retirement Planning with Pension

Post by tibbitts » Mon Apr 15, 2019 7:51 am

BradJ wrote:
Sun Apr 14, 2019 8:21 pm
I have a pension as well, and honestly I try and not think about it too much.....it’s not like I “own” it. I do view the pension as my bond portfolio, so therefore I’m a little heavier in stocks in my 401k.
You may not own it but you sort of own the contributions you made to it vs. the contributions your employer made. At least in my case these are segregated into a separate account that is burned through first at retirement (all pension payments are return of employee contributions, without interest, until they are depleted.) These contributions earn no interest (that benefit you vs. the plan) even after many decades but they belong to you in the sense that if you leave you can take them - or you can take them in lieu of the pension as a lump sum. The downside to many pensions is no COLA and that applies to mine, so combined with few or only very minor sub-inflation pay increases in the modern era while working, your pension can end up being based on pay from decades ago if you live long enough.

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midareff
Posts: 6137
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: Retirement Planning with Pension

Post by midareff » Mon Apr 15, 2019 7:58 am

I had a 457 (b) at my municipal employer (into Tier 5) until retirement. I was at max contribution for about 22 years. I also had a D.R.O.P. plan there as well and used it for 29 months after age 62, until retirement. I was also saving into my Roth and as much as I could into taxable. I retired and immediately rolled the 457 (b) and D.R.O.P. monies into an IRA @ Vanguard. The 457 (b) was with Nationwide and they make you jump through hoops tyo get your money out since they want to keep it for the management and fund fees. The D.R.O.P. was with the state and it transferred easily in about 10 days. Due to a large payout of hours owed I had to wait to start doing Roth conversions to the top of a reasonable tax bracket. Pension + taxable + Roth + SS + RMD = :mrgreen:

BradJ
Posts: 252
Joined: Sun Jan 21, 2018 6:06 pm

Re: Retirement Planning with Pension

Post by BradJ » Mon Apr 15, 2019 8:26 am

tibbitts wrote:
Mon Apr 15, 2019 7:51 am
BradJ wrote:
Sun Apr 14, 2019 8:21 pm
I have a pension as well, and honestly I try and not think about it too much.....it’s not like I “own” it. I do view the pension as my bond portfolio, so therefore I’m a little heavier in stocks in my 401k.
You may not own it but you sort of own the contributions you made to it vs. the contributions your employer made. At least in my case these are segregated into a separate account that is burned through first at retirement (all pension payments are return of employee contributions, without interest, until they are depleted.) These contributions earn no interest (that benefit you vs. the plan) even after many decades but they belong to you in the sense that if you leave you can take them - or you can take them in lieu of the pension as a lump sum. The downside to many pensions is no COLA and that applies to mine, so combined with few or only very minor sub-inflation pay increases in the modern era while working, your pension can end up being based on pay from decades ago if you live long enough.
I make zero contributions to my pension, it is full funded by the company.

Ybsybs
Posts: 471
Joined: Thu Aug 28, 2014 4:28 pm

Re: Retirement Planning with Pension

Post by Ybsybs » Mon Apr 15, 2019 8:27 am

Some people think of pension as a bond equivalent and adjust their asset allocation accordingly.

The difficulty I have with calculating how to include a pension in retirement planning is that before the pension starts being paid out, it can be tough to estimate the pension's value. In some cases, the pension can vanish if you are let go before a specific vesting age.

It's important to know the details of your pension. You need to know if the pension is guaranteed by some entity and guaranteed at what level. Sometimes there are state laws protecting a government pension. You need to know what level pension you'd get (if anything) if you aren't able to work at the pension-providing job for as long as you wish. Other useful things to figure out for assessing your pension with regards to retirement planning: Is it inflation adjusted? Is there a spousal benefit?

Turbo29
Posts: 412
Joined: Tue May 01, 2018 7:12 am

Re: Retirement Planning with Pension

Post by Turbo29 » Mon Apr 15, 2019 8:30 am

midareff wrote:
Mon Apr 15, 2019 7:58 am
I had a 457 (b) at my municipal employer (into Tier 5) until retirement. I was at max contribution for about 22 years. I also had a D.R.O.P. plan there as well and used it for 29 months after age 62, until retirement. I was also saving into my Roth and as much as I could into taxable. I retired and immediately rolled the 457 (b) and D.R.O.P. monies into an IRA @ Vanguard. The 457 (b) was with Nationwide and they make you jump through hoops tyo get your money out since they want to keep it for the management and fund fees. The D.R.O.P. was with the state and it transferred easily in about 10 days. Due to a large payout of hours owed I had to wait to start doing Roth conversions to the top of a reasonable tax bracket. Pension + taxable + Roth + SS + RMD = :mrgreen:
Can you elaborate on this? I am contributing to a governmental 457b managed by Nationwide and am planning to roll it to an IRA when I retire soon. How difficult was it?
Last edited by Turbo29 on Mon Apr 15, 2019 9:00 am, edited 1 time in total.

dbr
Posts: 28517
Joined: Sun Mar 04, 2007 9:50 am

Re: Retirement Planning with Pension

Post by dbr » Mon Apr 15, 2019 8:33 am

Ybsybs wrote:
Mon Apr 15, 2019 8:27 am
Some people think of pension as a bond equivalent and adjust their asset allocation accordingly.

The difficulty I have with calculating how to include a pension in retirement planning is that before the pension starts being paid out, it can be tough to estimate the pension's value. In some cases, the pension can vanish if you are let go before a specific vesting age.

It's important to know the details of your pension. You need to know if the pension is guaranteed by some entity and guaranteed at what level. Sometimes there are state laws protecting a government pension. You need to know what level pension you'd get (if anything) if you aren't able to work at the pension-providing job for as long as you wish. Other useful things to figure out for assessing your pension with regards to retirement planning: Is it inflation adjusted? Is there a spousal benefit?
Exactly so.

Retirement planning is successive approximation to an end result, which is death (or maybe beyond). Along the way one has to consider that there are contingencies and scenarios of various probability of occurrence.

From a technical point of view it would seem far and away the straightforward way most people here would use to put a potential pension in a financial plan is that it is a future income stream which may affect need, ability, and willingness to take risk otherwise. Some pensions can be actual savings plans called pensions, and those really are fixed income, but income streams work best as income streams rather than pseudo assets in personal financial planning. Most retirement planning models allow income streams to be input and modeled as such.

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Wiggums
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Re: Retirement Planning with Pension

Post by Wiggums » Mon Apr 15, 2019 8:34 am

Ybsybs wrote:
Mon Apr 15, 2019 8:27 am
Some people think of pension as a bond equivalent and adjust their asset allocation accordingly.

The difficulty I have with calculating how to include a pension in retirement planning is that before the pension starts being paid out, it can be tough to estimate the pension's value. In some cases, the pension can vanish if you are let go before a specific vesting age.

It's important to know the details of your pension. You need to know if the pension is guaranteed by some entity and guaranteed at what level. Sometimes there are state laws protecting a government pension. You need to know what level pension you'd get (if anything) if you aren't able to work at the pension-providing job for as long as you wish. Other useful things to figure out for assessing your pension with regards to retirement planning: Is it inflation adjusted? Is there a spousal benefit?
My company fully funded the pension without any employer contribution. I received annual statements that were audited by a third party to show that the trust is fully funded. The company also provided a pension estimator that showed all the options and the monthly payout for each option.

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midareff
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Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: Retirement Planning with Pension

Post by midareff » Mon Apr 15, 2019 8:50 am

Turbo29 wrote:
Mon Apr 15, 2019 8:30 am
midareff wrote:
Mon Apr 15, 2019 7:58 am
I had a 457 (b) at my municipal employer (into Tier 5) until retirement. I was at max contribution for about 22 years. I also had a D.R.O.P. plan there as well and used it for 29 months after age 62, until retirement. I was also saving into my Roth and as much as I could into taxable. I retired and immediately rolled the 457 (b) and D.R.O.P. monies into an IRA @ Vanguard. The 457 (b) was with Nationwide and they make you jump through hoops tyo get your money out since they want to keep it for the management and fund fees. The D.R.O.P. was with the state and it transferred easily in about 10 days. Due to a large payout of hours owed I had to wait to start doing Roth conversions to the top of a reasonable tax bracket. Pension + taxable + Roth + SS + RMD = :mrgreen:
Can you elaborate on this. I am contributing to a governmental 457b managed by Nationwide and am planning to roll it to an IRA when I retire soon. How difficult was it?
They wanted an extremely non-standard worded letter from the company that was to receive the funds (Vanguard) and were not happy providing the exact language they required. I can get pretty abrasive in a situation like that and did. They released the language they "required" and Vanguard's rollover specialist I was working with used it (with his supervisor's approval) and it still took nearly a month from that point. They don't transfer or move in kind so even if you are in Vanguard Funds you have to cash out first, and then it sits while they try to play games. I was in Tier 5 or 6, whatever they call it so my money was actually at Schwab under an absurd fee schedule (still better than the Nationwide Funds we had available), $75 to buy a mutual fund, $7.95 for an ETF, all of which had to be liquidated to move back to Nationwide to wait to be moved to Vanguard. ... it's doable, just a PIA and frustrating to have to spend a month in cash in a bull market.

Topic Author
Maxpower
Posts: 2
Joined: Sun Apr 07, 2019 8:42 pm

Re: Retirement Planning with Pension

Post by Maxpower » Mon Apr 15, 2019 7:21 pm

Thank you all for the feedback and the additional resources. My pension is a defined benefit plan in (relatively) good health (i.e., over 80% funded). Contributions to the pension plan are a mix of employer and employee. As part of the state's funding plan the percentage of our income that is contributed to the pension may be adjusted over time, the vesting period may be adjusted, and the benefits may be adjusted.

Given what has been shared, it sounds like I need to have some conversations with the 403 and 457 providers. Since the plans have the same providers, but 457 has some perceived advantages (e.g. accessing the money prior to age 59.5, higher catch-up policy), I may start with funding the 457. Would there be any reason at this time to fund both the 403 and 457 given that I am not able to max out either one at this time?

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CyclingDuo
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Re: Retirement Planning with Pension

Post by CyclingDuo » Tue Apr 16, 2019 8:56 am

Maxpower wrote:
Mon Apr 15, 2019 7:21 pm
Thank you all for the feedback and the additional resources. My pension is a defined benefit plan in (relatively) good health (i.e., over 80% funded). Contributions to the pension plan are a mix of employer and employee. As part of the state's funding plan the percentage of our income that is contributed to the pension may be adjusted over time, the vesting period may be adjusted, and the benefits may be adjusted.

Given what has been shared, it sounds like I need to have some conversations with the 403 and 457 providers. Since the plans have the same providers, but 457 has some perceived advantages (e.g. accessing the money prior to age 59.5, higher catch-up policy), I may start with funding the 457. Would there be any reason at this time to fund both the 403 and 457 given that I am not able to max out either one at this time?
All things being equal (same mutual funds available within the 403b and 457b), the 457b gives you a bit more flexibility in terms of avoiding penalties on withdrawals if you leave your job early (before age 59 1/2). At your age, there is nothing wrong with starting with the 457b. If your household income increases enough over the years that you could max that out, then you can consider moving on to also fund some in the 403b.

If you consider your overall building of incomes streams for retirement, the traditional three legged stool would be the pension, the risk portfolio (Roth IRA, tIRA, 401k/403b, 457b, HSA, taxable, etc...) and Social Security. Will you receive SS?

How to build each over the years? The more time you work in terms of years, the more the pension benefit grows. The more time you work in terms of years, the more you save in your risk portfolio. The more time you work in terms of years, the better the chance of hitting at least the 2nd bend point for SS. Each income stream will be important for you in retirement, so building all three will be key for you over the next two or three decades.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

Admiral
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Joined: Mon Oct 27, 2014 12:35 pm

Re: Retirement Planning with Pension

Post by Admiral » Tue Apr 16, 2019 9:31 am

Maxpower wrote:
Sun Apr 14, 2019 7:50 pm
Hello, I'm relatively new to investing and am seeking advice on our current assets as well as how to continue building our portfolio given that my spouse and I are public employees and have pension plans.

General:
Emergency funds: We have an emergency fund to cover 6+ months of expenses
Debt: Our mortgage is our only debt
Tax Filing Status: Married filing jointly
Tax Rate: 22% Federal
Age: 30
Desired Asset allocation: 80% stocks / 20% bonds
Total portfolio is in mid five-figures

Current assets:
Taxable Account - currently used for excess cash
- 28% of total portfolio; 80% of taxable account in Total Stock Market Index (VSTAX - .04% expense ratio)
- 7% of total portfolio; 20% of taxable account in Total Bond Market Index (VBTLX (.05% expense ratio)

My Roth IRA at Vanguard
- 39% of total portfolio; 100% of Roth IRA in Vanguard 2050 Target Retirement Fund (VFIFX - .15% expense ratio)

Spouse's Roth IRA at Vanguard
- 26% of total portfolio; 100% of Roth IRA in Vanguard 2035 Target Retirement Fund (VTTHX - .14% expense ratio)


Other Information:
We are public employees, so we each have pension plans. We have been maxing out our IRAs since being financially able to, and our plan is to continue contributing the maximum amount. We have life insurance and disability insurance. We have no debt other than our mortgage (30 year fixed rate at 3.5%), and we pay additional principal each month so that our house will be payed off at (approximately) year 15 of the mortgage.
We both currently have options for a 403(b), and I am able to contribute to a 457 as well. We have no employer match. Examples of funds and associated expenses available in each plan would be target retirement date funds (expenses of approximately 0.35%), total US stock market index funds (expenses of 0.24%), total international market index fund (expenses of 0.31%), total US bond market funds (expenses of 0.24%). Vanguard funds are available, and essentially, the expenses are the Vanguard expense ratios plus an administrative fee of .20%.

After all of our monthly expenses, about 10% of our after-tax income is available for directing somewhere else (currently putting some of our monthly excess it into a taxable account and some into a high-yield savings account).

Questions:
1. With our pensions and the projected growth of our IRAs, we believe we could work to 62-65 years of age and be financially comfortable. Given how far off retirement is, I am concerned about the future of our state's pension program. I am seeking information about where to direct any additional funds (continue paying additional principal to our mortgage, contributing to 403b/457, etc.).
2. Since the funds available in the 403b and 457 are the same, would there be a reason why I would contribute to one over the other?
We have access to a) pension b) 457 c) 403b. We use them all.

Both the 457 and the 403b also have Roth options, which is nice. States and Municipalities have taxing authority so their pensions (while in many cases underfunded) are unlikely to go away. We assume it will be there but save like it may not be. 10 years from collecting. As we get closer we re-evaluate each year in terms of whether we can save a bit less, because the vested value increases each year. Ours is only occasionally increased for COLA (non-regular basis). If yours gets a regular COLA, that is very valuable in terms of retirement planning.

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