pension vs. 403(b) selection

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Topic Author
Shem002
Posts: 23
Joined: Wed Nov 07, 2018 11:49 am

pension vs. 403(b) selection

Post by Shem002 » Thu May 16, 2019 8:11 pm

Bogleheads,

I need your thoughts on the following situation that has surfaced.
Background: I am 29 and my employer participates in state retirement program and I have been contributing to a pension that I will call pension A for 6.5 years and am currently vested.

Current situation: I have been promoted and now have access to a different pension that I will name pension B which is much better than pension A or I can opt for a 403(b). I will have to leave my pension A balance alone, they won't let me roll it over to an IRA or to pension B since I am still employed by same employer and cannot receive any monthly benefit until age 65 and it will be a very small amount with no medical insurance coverage.

About pension B: my pretax contribution would be 8.185% and my employer would match 15.865% but their match is not my money, it goes into the pool of money just like social security employer match. Since I already have 6.5 years with pension A I can count those years and be vested in pension B. Investment options are determined by the pension not me, it has medical insurance coverage in retirement (after being in it for 15 years) and has death benefits and monthly survivor benefits, and permanent disability coverage available immediately. Pay out is as follows: age 60 with 5 years of service, age 55 with 10 years of service and any age with 27 years of service (I would be roughly 50 years old for this option). A formula is used to determine monthly benefit.

About 403(b): my pretax contribution would be 6.16% and my employer would match 8.74% totaling 14.9% with a list of online vendors to select from which include low cost index funds that I oversee. With this option there is immediate vesting and I have the ability to rollover the entire account value on separation of employment.

My thoughts: This is not my only source for retirement, I contribute to accounts at Vanguard. The thought of having a fully funded pension at age 50 sounds great but with this pension its basically all or nothing in terms of benefits, I either retire with full benefits after 20.5 years or I get partial (minimal) payout at either age 55 or 60. In terms of pension stability my state is one of the worst in the country. I took the balance I have contributed in pension A and backward tested it in a 60/40 portfolio just for fun and have discovered that I would have to live to 121 for me to come out ahead with monthly pension payments from pension A.

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fortfun
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Re: pension vs. 403(b) selection

Post by fortfun » Thu May 16, 2019 9:56 pm

Shem002 wrote:
Thu May 16, 2019 8:11 pm
Bogleheads,

I need your thoughts on the following situation that has surfaced.
Background: I am 29 and my employer participates in state retirement program and I have been contributing to a pension that I will call pension A for 6.5 years and am currently vested.

Current situation: I have been promoted and now have access to a different pension that I will name pension B which is much better than pension A or I can opt for a 403(b). I will have to leave my pension A balance alone, they won't let me roll it over to an IRA or to pension B since I am still employed by same employer and cannot receive any monthly benefit until age 65 and it will be a very small amount with no medical insurance coverage.

About pension B: my pretax contribution would be 8.185% and my employer would match 15.865% but their match is not my money, it goes into the pool of money just like social security employer match. Since I already have 6.5 years with pension A I can count those years and be vested in pension B. Investment options are determined by the pension not me, it has medical insurance coverage in retirement (after being in it for 15 years) and has death benefits and monthly survivor benefits, and permanent disability coverage available immediately. Pay out is as follows: age 60 with 5 years of service, age 55 with 10 years of service and any age with 27 years of service (I would be roughly 50 years old for this option). A formula is used to determine monthly benefit.

About 403(b): my pretax contribution would be 6.16% and my employer would match 8.74% totaling 14.9% with a list of online vendors to select from which include low cost index funds that I oversee. With this option there is immediate vesting and I have the ability to rollover the entire account value on separation of employment.

My thoughts: This is not my only source for retirement, I contribute to accounts at Vanguard. The thought of having a fully funded pension at age 50 sounds great but with this pension its basically all or nothing in terms of benefits, I either retire with full benefits after 20.5 years or I get partial (minimal) payout at either age 55 or 60. In terms of pension stability my state is one of the worst in the country. I took the balance I have contributed in pension A and backward tested it in a 60/40 portfolio just for fun and have discovered that I would have to live to 121 for me to come out ahead with monthly pension payments from pension A.
Do you like the job? Will you stay there till 50? What state? You might be surprised. Some states like IL are horribly funded but protected by the state's constitution (including COLA), so it might not be as bad as you think. The pension you describe sounds very good.

Topic Author
Shem002
Posts: 23
Joined: Wed Nov 07, 2018 11:49 am

Re: pension vs. 403(b) selection

Post by Shem002 » Fri May 17, 2019 8:08 am

I like the job, but I am certain over the next 20 years I assume things will be different since so much has changed in the 6.5 years I have been here. The pension is in Kentucky.

Topic Author
Shem002
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Joined: Wed Nov 07, 2018 11:49 am

Re: pension vs. 403(b) selection

Post by Shem002 » Fri May 17, 2019 6:48 pm

Today I called about the health insurance benefits and was informed that the benefits are subject to change at anytime by legislature.

tibbitts
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Re: pension vs. 403(b) selection

Post by tibbitts » Fri May 17, 2019 7:29 pm

I had a job I loved, kind of my dream job, for six-plus years in a state pension system. I really believed it would be my forever job. Well, I loved it until I didn't, and leaving wasn't my choice. It would have been a disaster if I'd chosen the pension over the defined contribution plan, so I was lucky. Jobs change. People you work with change. Politics happen.

Now I have 6.5 months to my 10-year benefit vesting at a job I've mostly enjoyed. The pension was not optional at this job but hopefully will work out well for me - I've even purchased two extra years of service, which won't help with vesting but the investment will pay higher interest than I can get with an annuity.

Lots of things can change. For example, for years and years there was an annual COLA in this pension system. Then for about the last decade there was nothing - not even a nominal increase. Not in good years, not in bad years. If you had asked before the last ten years happened, people would have said there would always be a COLA. This year, again no COLA.

So, it's not really possible to predict what will turn out best.

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willthrill81
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Re: pension vs. 403(b) selection

Post by willthrill81 » Fri May 17, 2019 8:32 pm

Given the uncertainty surrounding state pensions, there's no way that I'd go for pension B over the 403(b). It's difficult to overestimate the value in having the ability to move on to another employer and not lose your accumulated savings.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

TheDDC
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Re: pension vs. 403(b) selection

Post by TheDDC » Fri May 17, 2019 8:46 pm

Your pension is treated as property. I would go for the pension hands down. Don't listen to the anti-pension people. Deferred benefits are benefits paid later in lieu of paying a competitive salary today.

COLAs are unearned and are subject to change until retirement. Big difference.

-TheDDC
Refreshingly, a double barrel shotgun blast of truth... | Rules to wealth building: 100% VTSAX piled high and deep, 0% given away to banks, minimize amount given to health care industrial complex

Topic Author
Shem002
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Re: pension vs. 403(b) selection

Post by Shem002 » Fri May 17, 2019 8:58 pm

To me the whole point of a pension is stability and not dealing with votality but the thought that legislature can make changes at anytime causes concern. Do other states have these issues? One big issue for Kentucky with the pension I am in right now is funding, they are wanting to increase employer matches close to 50% which is insane

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willthrill81
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Re: pension vs. 403(b) selection

Post by willthrill81 » Fri May 17, 2019 10:13 pm

Shem002 wrote:
Fri May 17, 2019 8:58 pm
To me the whole point of a pension is stability and not dealing with votality but the thought that legislature can make changes at anytime causes concern. Do other states have these issues? One big issue for Kentucky with the pension I am in right now is funding, they are wanting to increase employer matches close to 50% which is insane
Any state legislature can change their state's pension at any time unless the state's constitution forbids it. That alone wouldn't scare me as much as the fact that you have no guarantee that you'll remain with this employer for the rest of your career, nor can you be assured that the pension will be sufficiently funded.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

tibbitts
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Re: pension vs. 403(b) selection

Post by tibbitts » Sat May 18, 2019 7:52 am

TheDDC wrote:
Fri May 17, 2019 8:46 pm
Your pension is treated as property. I would go for the pension hands down. Don't listen to the anti-pension people. Deferred benefits are benefits paid later in lieu of paying a competitive salary today.

COLAs are unearned and are subject to change until retirement. Big difference.

-TheDDC
COLAs can be changed after retirement too, as can some other provisions of the pension.

In general, your contributions from your pay to the pension are your property; employer contributions are not.

tibbitts
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Re: pension vs. 403(b) selection

Post by tibbitts » Sat May 18, 2019 7:55 am

Shem002 wrote:
Fri May 17, 2019 8:58 pm
To me the whole point of a pension is stability and not dealing with votality but the thought that legislature can make changes at anytime causes concern. Do other states have these issues? One big issue for Kentucky with the pension I am in right now is funding, they are wanting to increase employer matches close to 50% which is insane
Why is 50% employer matching insane? I believe it's usually more. I thought employers funded most state pensions - the employer being the state agency or other government entity you work for, vs. a general legislative appropriation.

Employee contributions usually run somewhat under 50% I believe.

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Wiggums
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Re: pension vs. 403(b) selection

Post by Wiggums » Sat May 18, 2019 8:06 am

tibbitts wrote:
Sat May 18, 2019 7:55 am
Shem002 wrote:
Fri May 17, 2019 8:58 pm
To me the whole point of a pension is stability and not dealing with votality but the thought that legislature can make changes at anytime causes concern. Do other states have these issues? One big issue for Kentucky with the pension I am in right now is funding, they are wanting to increase employer matches close to 50% which is insane
Why is 50% employer matching insane? I believe it's usually more. I thought employers funded most state pensions - the employer being the state agency or other government entity you work for, vs. a general legislative appropriation.

Employee contributions usually run somewhat under 50% I believe.
I guess I’m lucky that my pension was 100% employer funded.

Topic Author
Shem002
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Joined: Wed Nov 07, 2018 11:49 am

Re: pension vs. 403(b) selection

Post by Shem002 » Sat May 18, 2019 9:04 am

tibbitts wrote:
Sat May 18, 2019 7:55 am
Shem002 wrote:
Fri May 17, 2019 8:58 pm
To me the whole point of a pension is stability and not dealing with votality but the thought that legislature can make changes at anytime causes concern. Do other states have these issues? One big issue for Kentucky with the pension I am in right now is funding, they are wanting to increase employer matches close to 50% which is insane
Why is 50% employer matching insane? I believe it's usually more. I thought employers funded most state pensions - the employer being the state agency or other government entity you work for, vs. a general legislative appropriation.

Employee contributions usually run somewhat under 50% I believe.
Have you ever heard of an employer matching 50% of salary to a 401(k)/403(b)? That is why I stated 50% is insane.

tibbitts
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Re: pension vs. 403(b) selection

Post by tibbitts » Sat May 18, 2019 1:47 pm

Shem002 wrote:
Sat May 18, 2019 9:04 am
tibbitts wrote:
Sat May 18, 2019 7:55 am
Shem002 wrote:
Fri May 17, 2019 8:58 pm
To me the whole point of a pension is stability and not dealing with votality but the thought that legislature can make changes at anytime causes concern. Do other states have these issues? One big issue for Kentucky with the pension I am in right now is funding, they are wanting to increase employer matches close to 50% which is insane
Why is 50% employer matching insane? I believe it's usually more. I thought employers funded most state pensions - the employer being the state agency or other government entity you work for, vs. a general legislative appropriation.

Employee contributions usually run somewhat under 50% I believe.
Have you ever heard of an employer matching 50% of salary to a 401(k)/403(b)? That is why I stated 50% is insane.
Typically somewhere around 50% of pension contributions are employee and 50% are employer was what I meant, somewhere in the range 15-20% of salary combined.

A 50% employer match on employee contributions for a 403b or 457 might be in place of a pension - 50% of contributions, not of salary.

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