Help Deciding on ORP or State Pension Option

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Topic Author
whatisgood
Posts: 9
Joined: Wed May 11, 2022 8:26 pm

Help Deciding on ORP or State Pension Option

Post by whatisgood »

Hi all,

Love this forum and really appreciate the advice I have gotten here. About to start a new job with the state of Arizona and am having a hard time deciding on whether to opt into the ORP plan or the state pension. Here are the particulars for me:

- Don't plan on being at this job more than 5 years and will likely not continue to work for the state of Arizona (work remote in another state)
-Age late 30's and well on track to FI already (70% or so traditional retirment accounts 30% Roth), Salary in low 6 figures
- In addition to whatever I choose below, I plan to max out the 403B and 457b options available there with low cost index funds and my significant other does the same with their 403B


Here are the details on the 2 options which I need to make a binding decision on within 30 days of starting employment:

ORP
Mandatory 7% Employee Contribution
Employer 7% Matching Contribution
Low cost index funds available
Need to confirm my situation but appears I would vest immediately for both employee and employer contributions

AZ State Pension - link to AZ plan here https://www.azasrs.gov/content/estimate-your-benefits
Mandatory 12.71% Employee Contribution
Employer Matches 12% Contribution but those contributions do not vest if I leave for any reason other than position being eliminated which does not seem likely
Full Retirement benefit at age 62 + 10 years of service or age 65
No control over investment selection
Working less than 5 years leads to 10% salary replacement at retirement
Small retirement supplement (about $200 per month for insurance premium offset)

Any questions I should ask HR when I discuss my retirement election? I'm leaning towards the simplicity of the ORP with the higher likelihood to capture employer matching but have never had an option for a pension before. Please let me know your thoughts and thanks as always
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galawdawg
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Location: Georgia

Re: Help Deciding on ORP or State Pension Option

Post by galawdawg »

ORP for sure under the circumstances you describe.
sailaway
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Joined: Fri May 12, 2017 1:11 pm

Re: Help Deciding on ORP or State Pension Option

Post by sailaway »

ORP, considering the short time you expect to contribute to the plan.

Do you also have access to a 457 for additional tax sheltering?
Topic Author
whatisgood
Posts: 9
Joined: Wed May 11, 2022 8:26 pm

Re: Help Deciding on ORP or State Pension Option

Post by whatisgood »

sailaway wrote: Tue Jan 24, 2023 9:58 am ORP, considering the short time you expect to contribute to the plan.

Do you also have access to a 457 for additional tax sheltering?
Yes, I do have access to the 457B as well. Plan is to max the 457B and the 403B in addition to the primary retirement options described here.

Thanks for the reply
oldfatguy
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Joined: Tue Feb 27, 2018 12:38 pm

Re: Help Deciding on ORP or State Pension Option

Post by oldfatguy »

galawdawg wrote: Tue Jan 24, 2023 9:49 am ORP for sure under the circumstances you describe.
Definitely this
Topic Author
whatisgood
Posts: 9
Joined: Wed May 11, 2022 8:26 pm

Re: Help Deciding on ORP or State Pension Option

Post by whatisgood »

Thanks all for the feedback confirming what I was thinking. Quick followup question about contribution limits. I've used 401A accounts in the past but that has come exclusively from my employer contributing but with this ORP I will be contributing 7% and university will be contributing 7%.

Does my 7% 401A employee contribution affect what I can contribute to my 457B or 403B?

My plan would be if it does not to:

1. do ORP and contribute employee 7% of salary to 401A (approximately 5-10K), capture employer match (approximately 5-10K)
2. Contribute 22,500 to 403B
3. Contribute 22,500 to 457B

I think that would be allowed but just wanted to check with all of you who would likely know better than HR. I'll confirm with HR but I've found bogleheads often knows the answers to these questions much better.
treecat
Posts: 28
Joined: Sun Jan 09, 2022 5:44 pm

Re: Help Deciding on ORP or State Pension Option

Post by treecat »

whatisgood wrote: Tue Jan 24, 2023 9:39 am Here are the details on the 2 options which I need to make a binding decision on within 30 days of starting employment:

ORP
Mandatory 7% Employee Contribution
Employer 7% Matching Contribution
Low cost index funds available
Need to confirm my situation but appears I would vest immediately for both employee and employer contributions

AZ State Pension - link to AZ plan here https://www.azasrs.gov/content/estimate-your-benefits
Mandatory 12.71% Employee Contribution
Employer Matches 12% Contribution but those contributions do not vest if I leave for any reason other than position being eliminated which does not seem likely
Full Retirement benefit at age 62 + 10 years of service or age 65
No control over investment selection
Working less than 5 years leads to 10% salary replacement at retirement
Small retirement supplement (about $200 per month for insurance premium offset)

Any questions I should ask HR when I discuss my retirement election? I'm leaning towards the simplicity of the ORP with the higher likelihood to capture employer matching but have never had an option for a pension before. Please let me know your thoughts and thanks as always
When analyzing a similar question for another state, I found it useful to assume one worked for N years, then compare the state pension annual amount starting at age X, versus the amount from, say, a 4% withdrawal rate from what the N years of ORP contributions would grow to by age X. And to make the comparison fair in this case, for the ORP option, you'd need to include the counterfactual extra pension contribution as hypothetically extra investment in a non-ORP vehicle, say in a taxable account (something like (12.71-7)*(1-taxrate)% of extra contribution per year?). At least in the case I looked at, which option was "optimal" was very sensitive to N and market return assumptions.

Sounds like there are many complications on top of that too here.
Topic Author
whatisgood
Posts: 9
Joined: Wed May 11, 2022 8:26 pm

Re: Help Deciding on ORP or State Pension Option

Post by whatisgood »

treecat wrote: Thu Jan 26, 2023 10:01 am
whatisgood wrote: Tue Jan 24, 2023 9:39 am Here are the details on the 2 options which I need to make a binding decision on within 30 days of starting employment:

ORP
Mandatory 7% Employee Contribution
Employer 7% Matching Contribution
Low cost index funds available
Need to confirm my situation but appears I would vest immediately for both employee and employer contributions

AZ State Pension - link to AZ plan here https://www.azasrs.gov/content/estimate-your-benefits
Mandatory 12.71% Employee Contribution
Employer Matches 12% Contribution but those contributions do not vest if I leave for any reason other than position being eliminated which does not seem likely
Full Retirement benefit at age 62 + 10 years of service or age 65
No control over investment selection
Working less than 5 years leads to 10% salary replacement at retirement
Small retirement supplement (about $200 per month for insurance premium offset)

Any questions I should ask HR when I discuss my retirement election? I'm leaning towards the simplicity of the ORP with the higher likelihood to capture employer matching but have never had an option for a pension before. Please let me know your thoughts and thanks as always
When analyzing a similar question for another state, I found it useful to assume one worked for N years, then compare the state pension annual amount starting at age X, versus the amount from, say, a 4% withdrawal rate from what the N years of ORP contributions would grow to by age X. And to make the comparison fair in this case, for the ORP option, you'd need to include the counterfactual extra pension contribution as hypothetically extra investment in a non-ORP vehicle, say in a taxable account (something like (12.71-7)*(1-taxrate)% of extra contribution per year?). At least in the case I looked at, which option was "optimal" was very sensitive to N and market return assumptions.

Sounds like there are many complications on top of that too here.
Thanks for the feedback - I'll look into making that calculation and I appreciate your point about needing to account for the 12-7=5% difference between the contributions under both plans. Are you aware of any online tools to make that comparison?
Topic Author
whatisgood
Posts: 9
Joined: Wed May 11, 2022 8:26 pm

Re: Help Deciding on ORP or State Pension Option

Post by whatisgood »

whatisgood wrote: Thu Jan 26, 2023 8:55 am Thanks all for the feedback confirming what I was thinking. Quick followup question about contribution limits. I've used 401A accounts in the past but that has come exclusively from my employer contributing but with this ORP I will be contributing 7% and university will be contributing 7%.

Does my 7% 401A employee contribution affect what I can contribute to my 457B or 403B?

My plan would be if it does not to:

1. do ORP and contribute employee 7% of salary to 401A (approximately 5-10K), capture employer match (approximately 5-10K)
2. Contribute 22,500 to 403B
3. Contribute 22,500 to 457B

I think that would be allowed but just wanted to check with all of you who would likely know better than HR. I'll confirm with HR but I've found bogleheads often knows the answers to these questions much better.
Did some more reading last night and still didn't find an answer to this but what I found points to the mandatory 401A contributions not affecting the contribution limits of either the 403B or 457B. Can anyone else confirm that?
Topic Author
whatisgood
Posts: 9
Joined: Wed May 11, 2022 8:26 pm

Re: Help Deciding on ORP or State Pension Option

Post by whatisgood »

Bump for my last 2 questions. Any advice appreciated
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CyclingDuo
Posts: 5259
Joined: Fri Jan 06, 2017 8:07 am

Re: Help Deciding on ORP or State Pension Option

Post by CyclingDuo »

whatisgood wrote: Sat Jan 28, 2023 5:38 am Bump for my last 2 questions. Any advice appreciated
The White Coat Investor answers your question in this video...

https://www.youtube.com/watch?v=RmzC1tOEzYE

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel
Topic Author
whatisgood
Posts: 9
Joined: Wed May 11, 2022 8:26 pm

Re: Help Deciding on ORP or State Pension Option

Post by whatisgood »

CyclingDuo wrote: Sat Jan 28, 2023 6:17 am
whatisgood wrote: Sat Jan 28, 2023 5:38 am Bump for my last 2 questions. Any advice appreciated
The White Coat Investor answers your question in this video...

https://www.youtube.com/watch?v=RmzC1tOEzYE

CyclingDuo
Thanks - exactly what I was looking for
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