Retirement Planning - have I made a royal mistake?

[coffecakecrocodile]

Hi all - I posted months ago about a new academic job I took as a tenure track professor at large state university. We had 30 days from when we were officially hired to select a retirement plan. I ended up with the default option/plan which is a 403b with an employer match (that increases based on my age). However, I recently learned that I don't have/get a pension with this option, and that I needed to opt into the pension + 403b option within that 30 days, and now, the website says our retirement plan decisions are irrevocable and cannot ever be changed (I can change the funds in my 403b though). I am meeting with someone from the benefits office in two weeks to further evaluate these options and entertain whatever chance exist to switch, but I feel like my lack of knowledge led me to made a massive mistake that will cost me in the future. My future income will also exceed the amount that's eligible to contribute to IRAs (and I'm getting a 3% raise in a few months). So I'm keeping that in mind now too.

I live in a high cost of living area but there's no state income tax. The pension option is 1% x service credit (years) x average final compensation (highest consecutive compensation over 5 year period during your tenure with the school). My lone/current 403b option is fully vested.

I love this place and see myself being here for the rest of my life. Do you all think I messed up or will I be okay with the 403b option (or even come out ahead)? I came from a very financially unpredictable and traumatic background and am basically seen as the ATM for this family; no one in my family had retirement accounts and caregivers had very sporadic incomes (plus drug and mental health issues). So, I feel much happier being independently financially secure, but struggle with financial unpredictability, which is why this feels like a mistake I made.

Any insights or words of encouragement?

EDIT: I'm 32, single, no kids, currently renting. Current income is approx $125,000/year. The pension + 403b option works as such: they fund the pension portion, I would fund the 403b via paycheck deductions but with no matching.

[Jack FFR1846]

I'm sure there's more to it. Like if you choose 457 plus pension, you get a match in the 457 and you fully pay into the pension with no added money from the employer. If I were given that choice, I'd choose exactly what you did as I have near zero faith in pensions remaining solvent long enough for me to retire. I had an employer pension plan, fully paid by the employer and when I qualified to take a lump sum and put it in my tIRA, I did it as fast as possible.

[Diluted Waters]

It's not possible to say whether objectively you made a mistake or not without comprehensive specific details on the pension and 403b plans and specific salary numbers, how old you are, how old you intend to be when you retire, and so on.

However, it's unlikely given you're reasonably young that a pension option would necessarily end up much further ahead or behind of a 403b-type plan with an employer match. You must invest the 403b funds in the best quality lowest-cost funds offered taking a reasonable risk, such as a S&P 500 index, so you can gain reasonable return over your working years.

Ultimately, though, what your post is about is what you closed with. Some people find considerable help with counseling and live a better life for it.

[FiveK]

My future income will also exceed the amount that's eligible to contribute to IRAs...

No comment on the pension issue, because I don't know what you gained by losing the pension.

To the quoted phrase, you can always contribute to a traditional IRA. The pertinent question is whether a deduction is allowed for that contribution.

It's also possible you will be over the Roth IRA Contribution Limit. In that case, the backdoor Roth process may interest you.

[suemarkp]

Depends on how the pension worked -- was it free money they would have contributed, or do they take money from you and give it back as a pension? If the first, you missed out. If the latter, it depends on how good their terms are (but its moot now since you can't sign up...). Most people today have no pension, so it just means you need to save more on your own. The plus with no pension is you will have no handcuffs in the future if you wish to change employers to one that isn't in that same pension group. Use the back door Roth if you have to which means avoid any Traditional IRA or convert it now if your income is low enough. Stocks with low dividends in taxable is also nearly as good as a Roth if you can end up in the 0% long term capital gains bracket.

I don't know what it is about state education plans with having irrevocable choices you need to make on day one (at least you got 30 days to mull it over). That is an awful thing to do. Your ability to make contributions changes over time as you have kids and they then disappear or other life events happen. My wife's was the same way except pension was included you just had to pick your 403b percentage and could never change it again. I think the fund choices were a pick it now and never again choice too. She made good choices through dumb luck.

[coffecakecrocodile]

It's not possible to say whether objectively you made a mistake or not without comprehensive specific details on the pension and 403b plans and specific salary numbers, how old you are, how old you intend to be when you retire, and so on.

However, it's unlikely given you're reasonably young that a pension option would necessarily end up much further ahead or behind of a 403b-type plan with an employer match. You must invest the 403b funds in the best quality lowest-cost funds offered taking a reasonable risk, such as a S&P 500 index, so you can gain reasonable return over your working years.

Ultimately, though, what your post is about is what you closed with. Some people find considerable help with counseling and live a better life for it.

lol yes, thank you. I have been and still am in counseling. Yes, this is more about predictable income vs the tenuousness of other, non-"guaranteed" retirement income (although as someone else said, pensions may not be guaranteed either by the time retirement rolls around).

[Gardener]

I wouldn’t think they would put the default choice as a terrible option, right?

[coffecakecrocodile]

Depends on how the pension worked -- was it free money they would have contributed, or do they take money from you and give it back as a pension? If the first, you missed out. If the latter, it depends on how good their terms are (but its moot now since you can't sign up...). Most people today have no pension, so it just means you need to save more on your own. The plus with no pension is you will have no handcuffs in the future if you wish to change employers to one that isn't in that same pension group. Use the back door Roth if you have to which means avoid any Traditional IRA or convert it now if your income is low enough. Stocks with low dividends in taxable is also nearly as good as a Roth if you can end up in the 0% long term capital gains bracket.

I don't know what it is about state education plans with having irrevocable choices you need to make on day one (at least you got 30 days to mull it over). That is an awful thing to do. Your ability to make contributions changes over time as you have kids and they then disappear or other life events happen. My wife's was the same way except pension was included you just had to pick your 403b percentage and could never change it again. I think the fund choices were a pick it now and never again choice too. She made good choices through dumb luck.

Appears that they fund the pension, I fund the 403b via paycheck deductions. The other major difference (it seems) between the solo 403b and the joint plan is that in the solo you can adjust the percentage deducted from your check (and thus the match), but you cannot change it for the joint plan.

I totally agree about the lack of flexibility! As you mentioned, life and other financial events may warrant changes to your retirement plan(s). I'm glad your appears made solid choices, even if they were by luck!

[helloeveryone]

you likely have a very nice match. read the details of you either opt into the pension or you take a match of “x” percent

[coffecakecrocodile]

you likely have a very nice match. read the details of you either opt into the pension or you take a match of “x” percent

I don't know if I'll be able to opt into the pension option now; we'll see but it seems final. The solo 403b plan (my current plan) is:
- now-age 35: I contribute 5%, they match 5%
- 35-50: I contribute 7.5%. they match 7.5%
- 50+: I contribute 10%, they contribute 10%

If I would/could enroll in the joint plan, those individual contributions in the 403B remain the same but you have the option to increase your contributions during later years up to the 20%. But apparently you cannot change these percentages after enrollment.

[sailaway]

Many tenure track professors end up switching jobs at some point in their career. If that happens, you will almost certainly be glad you went this route, as it is more portable. Unions pushed for the option you chose because plenty of people like having control over their funds, rather than being with a pension plan that is subject to cuts.

You are locked into your choice because they need to be able to plan for the pension, which is hard enough with the economy and what not, but would be even more haphazard with folks trying to switch in and out throughout their career.

[FiveK]

I'm 32, single, no kids...Current income is approx $125,000/year.

From a quick search of Help newbie build portfolio for 2021, it seems you have no traditional accounts.

If you expect raises significantly above inflation during your career, staying all Roth plus taxable for some years is not unreasonable. But if you, like most, expect raises more or less in line with inflation, consider traditional 403b contributions at least until they take you down from the 24% to the 22% federal bracket, and perhaps even in the 22% bracket, until your traditional balance is "a decent six figures". Plenty of time for more on that.

[coffecakecrocodile]

I'm 32, single, no kids...Current income is approx $125,000/year.

From a quick search of Help newbie build portfolio for 2021, it seems you have no traditional accounts.

If you expect raises significantly above inflation during your career, staying all Roth plus taxable for some years is not unreasonable. But if you, like most, expect raises more or less in line with inflation, consider traditional 403b contributions at least until they take you down from the 24% to the 22% federal bracket, and perhaps even in the 22% bracket, until your traditional balance is "a decent six figures". Plenty of time for more on that.

Hi. I do but I had to liquidate it to help fund my move and necessities before I started. I only recently started re-investing in my taxable.

[coffecakecrocodile]

Many tenure track professors end up switching jobs at some point in their career. If that happens, you will almost certainly be glad you went this route, as it is more portable. Unions pushed for the option you chose because plenty of people like having control over their funds, rather than being with a pension plan that is subject to cuts.

You are locked into your choice because they need to be able to plan for the pension, which is hard enough with the economy and what not, but would be even more haphazard with folks trying to switch in and out throughout their career.

I know life happens and no one has a crystal ball but I can 1000% say that I am where I want to be (professionally and personally), and do not anticipate leaving. We also have incredibly high tenure success rates and low turnover or departures. There's a lot of longevity here and I'm more than ready to put down roots. It's funny that I've tried to get here for much of my life and my dreams actually came true. Nonetheless, life happens and things do change.

You make great points about the portability and rigidity on the employers' part. That makes sense. I just wish there was more flexibility offered, given life's unpredictability, particularly if some are making these permanent prospective choices with very little time to fully and deeply evaluate or compare options (sounds like some people have even less time than I did). And some employers/servicers are more or less forthcoming with information and support to help you make a personalized-informed decision.

[little_star]

you likely have a very nice match. read the details of you either opt into the pension or you take a match of “x” percent

I don't know if I'll be able to opt into the pension option now; we'll see but it seems final. The solo 403b plan (my current plan) is:
- now-age 35: I contribute 5%, they match 5%
- 35-50: I contribute 7.5%. they match 7.5%
- 50+: I contribute 10%, they contribute 10%

If I would/could enroll in the joint plan, those individual contributions in the 403B remain the same but you have the option to increase your contributions during later years up to the 20%. But apparently you cannot change these percentages after enrollment.

Even if they only match the first 5% now, you should be able to contribute 18% ($22,500) to the 403(b) as the employee contribution. If you contribute this as pre-tax (traditional), that should provide sufficient tax savings for you to fully fund your Roth IRA as well.

On that note, if you have any funds in a traditional IRA at this time, I recommend converting to Roth while you are at a lower marginal tax rate (or investigating whether it is possible to roll these funds into the 403b plan). You should expect to exceed the income limits for direct Roth IRA contributions due to promotions from Assistant to Associate to Full Professor given your starting salary. It is best to resolve the traditional IRA issue now, rather than later, so that you will be prepared to complete the backdoor Roth process when the time comes.

Finally, there is no benefit to questioning whether you made the *right* decision regarding the option of a pension. That is water under the bridge now. I can tell you from personal experience that it is possible to grow substantial retirement funds just by making regular contributions to a 403b plan, with a judicious choice of low-fee investments. Maximize your contributions each year and be confident that you are preparing for your own future.

[CookieDough]

Getting to the heart of your question: Yes, you can be financially okay even if you didn't make an optimal decision about retirement plans. I'm not saying you didn't -- I don't know -- but *if* you didn't.

The future is full of unknowns: whether you'll still want to work where you work in a decade (you love it now, but places can change), whether the pensions will still exist when you're ready to retire, etc.

I would say don't worry about it. Certainly investigate any options open to you if you want to, but remember that a lot of folks never have access to pensions, and still retire financially secure. Saving money, learning about finance, and investing wisely and early are still things you can pursue. You have plenty of time to take control of your finances and create a secure future for yourself.

[sailaway]

Many tenure track professors end up switching jobs at some point in their career. If that happens, you will almost certainly be glad you went this route, as it is more portable. Unions pushed for the option you chose because plenty of people like having control over their funds, rather than being with a pension plan that is subject to cuts.

You are locked into your choice because they need to be able to plan for the pension, which is hard enough with the economy and what not, but would be even more haphazard with folks trying to switch in and out throughout their career.

I know life happens and no one has a crystal ball but I can 1000% say that I am where I want to be (professionally and personally), and do not anticipate leaving. We also have incredibly high tenure success rates and low turnover or departures. There's a lot of longevity here and I'm more than ready to put down roots. It's funny that I've tried to get here for much of my life and my dreams actually came true. Nonetheless, life happens and things do change.

You make great points about the portability and rigidity on the employers' part. That makes sense. I just wish there was more flexibility offered, given life's unpredictability, particularly if some are making these permanent prospective choices with very little time to fully and deeply evaluate or compare options (sounds like some people have even less time than I did). And some employers/servicers are more or less forthcoming with information and support to help you make a personalized-informed decision.

The two options are usually designed to be actuarially neutral (ie, the match makes up for the pension). Without a crystal ball, you certainly did not shoot yourself in the foot. You may have even placed yourself in a position to have more control over your future taxes. Take a deep breath and focus on what is open to your choices going forward.

[WhyNotUs]

I don't know if I'll be able to opt into the pension option now; we'll see but it seems final. The solo 403b plan (my current plan) is:
- now-age 35: I contribute 5%, they match 5%
- 35-50: I contribute 7.5%. they match 7.5%
- 50+: I contribute 10%, they contribute 10%

Looks like a good plan for contributions, hard to know whether they have fees under control, I would be asking about management fees, MF fees, and any other fees. Some 403b suffer from fee ignorance. If you can get low cost indexes and low management fees, these matches will serve you well. You can put some additional funds in a Roth every year.

If you are making $125k now, that would mean $12.5 in 403b and $6.5 in a Roth. Read up on how to calculate your "Modified Adjusted Gross Income" to make sure you are Roth qualified.

Let's say that you are still there when you hit 50 and are making $200k, you are putting away $40k per year at that point.

[livesoft]

Lots of folks never had a pension and retired with lots of money. You will be fine. But: You're tenure-track professor making 6-figures. You got this easy.

[coffecakecrocodile]

you likely have a very nice match. read the details of you either opt into the pension or you take a match of “x” percent

I don't know if I'll be able to opt into the pension option now; we'll see but it seems final. The solo 403b plan (my current plan) is:
- now-age 35: I contribute 5%, they match 5%
- 35-50: I contribute 7.5%. they match 7.5%
- 50+: I contribute 10%, they contribute 10%

If I would/could enroll in the joint plan, those individual contributions in the 403B remain the same but you have the option to increase your contributions during later years up to the 20%. But apparently you cannot change these percentages after enrollment.

Even if they only match the first 5% now, you should be able to contribute 18% ($22,500) to the 403(b) as the employee contribution. If you contribute this as pre-tax (traditional), that should provide sufficient tax savings for you to fully fund your Roth IRA as well.

On that note, if you have any funds in a traditional IRA at this time, I recommend converting to Roth while you are at a lower marginal tax rate (or investigating whether it is possible to roll these funds into the 403b plan). You should expect to exceed the income limits for direct Roth IRA contributions due to promotions from Assistant to Associate to Full Professor given your starting salary. It is best to resolve the traditional IRA issue now, rather than later, so that you will be prepared to complete the backdoor Roth process when the time comes.

Finally, there is no benefit to questioning whether you made the *right* decision regarding the option of a pension. That is water under the bridge now. I can tell you from personal experience that it is possible to grow substantial retirement funds just by making regular contributions to a 403b plan, with a judicious choice of low-fee investments. Maximize your contributions each year and be confident that you are preparing for your own future.

I haven't been contributing beyond the 5% since I'm also saving for a house and student loan payments (and rebuilding my emergency fund since I liquidated my assets to move cross-country last year. But that's pretty much done).

I don't have a traditional IRA opened right now, just a roth I started a little over two years ago (and couldn't really fund since I was in graduate school). So you would suggest opening one now?

[coffecakecrocodile]

Many tenure track professors end up switching jobs at some point in their career. If that happens, you will almost certainly be glad you went this route, as it is more portable. Unions pushed for the option you chose because plenty of people like having control over their funds, rather than being with a pension plan that is subject to cuts.

You are locked into your choice because they need to be able to plan for the pension, which is hard enough with the economy and what not, but would be even more haphazard with folks trying to switch in and out throughout their career.

I know life happens and no one has a crystal ball but I can 1000% say that I am where I want to be (professionally and personally), and do not anticipate leaving. We also have incredibly high tenure success rates and low turnover or departures. There's a lot of longevity here and I'm more than ready to put down roots. It's funny that I've tried to get here for much of my life and my dreams actually came true. Nonetheless, life happens and things do change.

You make great points about the portability and rigidity on the employers' part. That makes sense. I just wish there was more flexibility offered, given life's unpredictability, particularly if some are making these permanent prospective choices with very little time to fully and deeply evaluate or compare options (sounds like some people have even less time than I did). And some employers/servicers are more or less forthcoming with information and support to help you make a personalized-informed decision.

The two options are usually designed to be actuarially neutral (ie, the match makes up for the pension). Without a crystal ball, you certainly did not shoot yourself in the foot. You may have even placed yourself in a position to have more control over your future taxes. Take a deep breath and focus on what is open to your choices going forward.

Thank you for this!!!

[coffecakecrocodile]

Lots of folks never had a pension and retired with lots of money. You will be fine. But: You're tenure-track professor making 6-figures. You got this easy.

Thank you, livesoft!!

[coffecakecrocodile]

Getting to the heart of your question: Yes, you can be financially okay even if you didn't make an optimal decision about retirement plans. I'm not saying you didn't -- I don't know -- but *if* you didn't.

The future is full of unknowns: whether you'll still want to work where you work in a decade (you love it now, but places can change), whether the pensions will still exist when you're ready to retire, etc.

I would say don't worry about it. Certainly investigate any options open to you if you want to, but remember that a lot of folks never have access to pensions, and still retire financially secure. Saving money, learning about finance, and investing wisely and early are still things you can pursue. You have plenty of time to take control of your finances and create a secure future for yourself.

You are right, CookieDough. Thank you!

[FiveK]

I don't have a traditional IRA opened right now, just a roth I started a little over two years ago (and couldn't really fund since I was in graduate school). So you would suggest opening one now?

No need to rush on that, because you will be above the traditional IRA Deduction Limit and below the Roth IRA Contribution Limit.

When/if your MAGI for Roth IRA purposes does go above that contribution limit, you would open a traditional IRA solely for the purpose of using it as part of the backdoor Roth process.

[DIYtrixie]

you likely have a very nice match. read the details of you either opt into the pension or you take a match of “x” percent

I don't know if I'll be able to opt into the pension option now; we'll see but it seems final. The solo 403b plan (my current plan) is:
- now-age 35: I contribute 5%, they match 5%
- 35-50: I contribute 7.5%. they match 7.5%
- 50+: I contribute 10%, they contribute 10%

If I would/could enroll in the joint plan, those individual contributions in the 403B remain the same but you have the option to increase your contributions during later years up to the 20%. But apparently you cannot change these percentages after enrollment.

Even if they only match the first 5% now, you should be able to contribute 18% ($22,500) to the 403(b) as the employee contribution. If you contribute this as pre-tax (traditional), that should provide sufficient tax savings for you to fully fund your Roth IRA as well.

On that note, if you have any funds in a traditional IRA at this time, I recommend converting to Roth while you are at a lower marginal tax rate (or investigating whether it is possible to roll these funds into the 403b plan). You should expect to exceed the income limits for direct Roth IRA contributions due to promotions from Assistant to Associate to Full Professor given your starting salary. It is best to resolve the traditional IRA issue now, rather than later, so that you will be prepared to complete the backdoor Roth process when the time comes.

Finally, there is no benefit to questioning whether you made the *right* decision regarding the option of a pension. That is water under the bridge now. I can tell you from personal experience that it is possible to grow substantial retirement funds just by making regular contributions to a 403b plan, with a judicious choice of low-fee investments. Maximize your contributions each year and be confident that you are preparing for your own future.

I haven't been contributing beyond the 5% since I'm also saving for a house and student loan payments (and rebuilding my emergency fund since I liquidated my assets to move cross-country last year. But that's pretty much done).

I don't have a traditional IRA opened right now, just a roth I started a little over two years ago (and couldn't really fund since I was in graduate school). So you would suggest opening one now?

Avoid funding a pre-tax traditional IRA, because once your salary rises above the limit for a direct Roth IRA contribution, having a pre-tax traditional IRA will make it a royal pain for you to contribute to a Roth IRA via the back door.

I think littlestar was suggesting you make additional, voluntary contributions to your 403(b). This would be in addition to the 5% required contribution. Such contributions are quite typically allowed in 403(b) accounts, up to the annual limit ($22,500 for 2023). This would be my recommendation, as well. Between the 5% mandatory + $22,500, plus a Roth IRA contribution, you will be sitting quite pretty come retirement time.

[snowday2022]

I had this option at a different university and chose the 403b because of its portability, lack of placing trust in a state government 30-70 years in the future, AND because when I ran the numbers I realized that monetarily I would likely come out way ahead by investing in all equities in the 403b vs the pension which is invested more conservatively.

There is probably a 457 supplemental plan available to you and possibly even another. At my employer, the mandatory program does not count towards IRS limits, so I get to max that, plus a supplemental 403b and a 457. It adds up to about 90K per year including match in pretax retirement contributions. When coupled with the job security, it is almost impossible to screw this up.

You’ll be fine.

[Hockeyfan55]

I don't have a traditional IRA opened right now, just a roth I started a little over two years ago (and couldn't really fund since I was in graduate school). So you would suggest opening one now?

No need to rush on that, because you will be above the traditional IRA Deduction Limit and below the Roth IRA Contribution Limit.

When/if your MAGI for Roth IRA purposes does go above that contribution limit, you would open a traditional IRA solely for the purpose of using it as part of the backdoor Roth process.

I'd footstomp this post to say that you do not want to open a traditional IRA right now. When/if you do the backdoor Roth in the future, it is cleanest, both tax-wise and paperwork wise, if you don't have any existing traditional IRA which would be subject to the pro rata rule.

[FiveK]

I'd footstomp this post....

I take it that's a good thing.

[coffecakecrocodile]

Lots of folks never had a pension and retired with lots of money. You will be fine. But: You're tenure-track professor making 6-figures. You got this easy.

Thank you. Perhaps, given the position I'm in with this irrevocable decision, I'll be fine. But given a pension + 403b option (like the comparison between the two plans), it just feels like I left an additional, reliable income stream on the table and now my options are more solely tied to markets, and my own financial behaviors. As you said, most people don't have a pension option and are stuck with 403b (numbered) plans, but wonder how many would like a setup where you get "the best of both worlds" - income every month plus your 403b. Like I would make a different decision if I could go back.

[coffecakecrocodile]

I don't have a traditional IRA opened right now, just a roth I started a little over two years ago (and couldn't really fund since I was in graduate school). So you would suggest opening one now?

No need to rush on that, because you will be above the traditional IRA Deduction Limit and below the Roth IRA Contribution Limit.

When/if your MAGI for Roth IRA purposes does go above that contribution limit, you would open a traditional IRA solely for the purpose of using it as part of the backdoor Roth process.

I'd footstomp this post to say that you do not want to open a traditional IRA right now. When/if you do the backdoor Roth in the future, it is cleanest, both tax-wise and paperwork wise, if you don't have any existing traditional IRA which would be subject to the pro rata rule.

Thank you for explaining this.

[livesoft]

Lots of folks never had a pension and retired with lots of money. You will be fine. But: You're tenure-track professor making 6-figures. You got this easy.

Thank you. Perhaps, given the position I'm in with this irrevocable decision, I'll be fine. But given a pension + 403b option ....

You can create your own pension with the extra money that you get as a match on your 403(b). Pensions are not a Holy Grail and there is risk involved. You cannot predict the future. Don't worry. Be happy.

[Jack FFR1846]

To me, 5% is a wicked good match. In my last job, we got a zero match and a high fee 401k only. In my present job, the most we can get, which is voted by the board every quarter is 2%.

[Grt2bOutdoors]

If the OP can discover what the contribution rate for pension expense as a percentage of payroll is, that is one way to calculate what he’s losing. A 10% contribution rate is too low for a traditional pension. Calpers for instance has a 24-32 percent of payroll contribution rate. Each states plan is different. The New York State Common Retirement Plan has a contribution rate exceeding 20%, though it pays a higher rate per year of service.

[TacoLover]

Hi.

I live in CA. I have relatives in IL.

Most (all?) of the no-income-tax states seem to be financially stable. Having a pension means trusting the pension will be there in 20 or 30 years. Having a 401K or similar means the money is there, in your account. As mentioned - 1) I'd talk with the HR people to see if the decision is truly irrevocable, and if not, schedule a session to see what the difference really are between the two options. There can't be THAT much difference. If one was clearly superior to the other there would not be an option 2. 2) This may not be relevant to your state but if I lived in CA or IL or any of the many other states with terribly insufficiently funded public pensions, I would be very worried as to if I had a pension at all. An unfunded pension is trusting the government that in 20 or 30 years they will have enough money to pay it out. Having a 401K or 403b or similar means your governing body's competence, thrift, and ability to pay is not your problem. You actually own your own retirement.

Personally I'd be MUCH more comfortable with a funded 401k than with a promise from an organization that it may or may not be able to keep!

[CyclingDuo]

Lots of folks never had a pension and retired with lots of money. You will be fine. But: You're tenure-track professor making 6-figures. You got this easy.

Thank you. Perhaps, given the position I'm in with this irrevocable decision, I'll be fine. But given a pension + 403b option (like the comparison between the two plans), it just feels like I left an additional, reliable income stream on the table and now my options are more solely tied to markets, and my own financial behaviors. As you said, most people don't have a pension option and are stuck with 403b (numbered) plans, but wonder how many would like a setup where you get "the best of both worlds" - income every month plus your 403b. Like I would make a different decision if I could go back.

Let's just think of a pension as an annuity.

Although the choice you made all those months ago seems to be irrevocable at this point, your concerns about having left an additional, reliable income stream on the table are understandable. However, moving forward provides you with several alternatives to counter that choice. You will have your SS, along with your personal savings/investment accounts to provide income streams for retirement.

You have the option of building your own pension via saving for an eventual purchase of an annuity that you could begin at or around the same time frame you would have begun the pension if you had chosen the pension + voluntary 403b route. Most here approve of SPIA (single premium insurance annuities) once you arrive at a certain age in retirement. If non-COLA, then having the additional DIY COLA via your taxable/Roth IRA/tIRA/403b accounts would provide the cost of living adjustment portion. In other words, you could build your nest egg large enough that you could convert a portion of it into an annuity that would act very much just like the pension you forwent.

Although your income will be rising above normal contribution rates for a Roth IRA, you can do the backdoor version. Other options beyond your 403b (is there also a 457b plan available?), Roth IRA, and taxable accounts would be to consider something like the plan available at Fidelity called the Fidelity Personal Retirement Annuity. It allows you to invest after tax money, but tax defer that money once invested until age 59 1/2 or beyond with no RMDs and you could convert the amount to an income stream through one of their annuities, or just withdraw chunks as you need it while paying taxes on the ordinary income for the portion that has gained since your initial contribution(s). Expense ratio includes an administrative wrapper of 0.25% on top of the underlying index funds ER fees for balances below $1M. Example, we use the S&P 500 index fund within that product which has an ER fee of 0.10%, so balances below $1M would pay a combined fee of 0.26% to defer the taxes. Balances over $1M would pay a total of 0.2% (for the S&P 500). They also have all of the low expense ratio funds required to build the three fund portfolio available (total US, total international, and total bond market).

What about your health insurance selection at your university? Do you have a high deductible plan that includes an HSA as a way to boost savings via the HSA?

I'm sure there are plenty of other options, but just pointing out that you do have options to counter the decision made many months ago.

CyclingDuo

[Tamarind]

you likely have a very nice match. read the details of you either opt into the pension or you take a match of “x” percent

I don't know if I'll be able to opt into the pension option now; we'll see but it seems final. The solo 403b plan (my current plan) is:
- now-age 35: I contribute 5%, they match 5%
- 35-50: I contribute 7.5%. they match 7.5%
- 50+: I contribute 10%, they contribute 10%

If I would/could enroll in the joint plan, those individual contributions in the 403B remain the same but you have the option to increase your contributions during later years up to the 20%. But apparently you cannot change these percentages after enrollment.

I don't expect you will be able to change now, so you might want to prepare emotionally for acceptance of that regardless of what you learn. But that is an incredibly rich match, and if the joint plan would have had you getting less match than that after age 35 (assuming you max your contributions) then you also made the right decision IMO.

To put this in context for you, many private 401k plans that are considered pretty good limit match to 4% no matter how much you contribute or how long you work there. Match over 6% is rare and mostly limited to professional practices with custom plans (legal, medical, etc). To get it at an employer with low turnover and high possibility of staying until retirement age is a big win no matter what.

[MrJedi]

I assume the pension option meant a reduced or lack of 403b match. That is how I've seen this situation before between options.

I would rather take the match and have control over the money. But I can see somebody who does not like or know how to DIY investments to prefer the pension option.

Either way, I see it is high unlikely there there was any royal mistake anywhere, more just preferential choice.

[HeelaMonster]

One prof's experience, FWIW:

30 years ago I was faced with this same choice when I accepted faculty position at flagship state university across the country. I had same uncertainty, needing to make an irrevocable decision with limited info in a short time frame. I opted to not take the pension option, based on (a) ability to control things yourself, (b) potential instability of state system over long haul, (c) feedback that most faculty tended to take the Optional Retirement Plan (ORP), and (d) portability. (It's great that you are enjoying your new position, but academic careers have a way of evolving over a period of decades... I worked at 4 institutions over 40 years, as I grew and new opportunities presented.)

Importantly, as already mentioned above, the options are typically designed to "even out" from a financial standpoint. In my case, the matching contributions were much higher than the state-based pension option, because... well, the state wouldn't be on the hook for anything else down the road! This is not a case of one choice obviously better than the other and you blew it... but more of an even-odds coin toss with much depending on how things play out in the future (which no one can predict at this point).

Fast forward 30 years, and I am VERY happy with the choice I made. I retired with nearly $2 million in tax-deferred employer accounts, and am now aggressively converting to Roth IRA to avoid overly-large required minimum distributions (but that's one of those nice problems to have). In our case, my spouse was a public school teacher and had no choice but but to stay in the state pension system, and it's working out very well to have one of each... with my plans under our own control.

YMMV.... but I wouldn't live in fear that you made a horrible choice. Focus on teaching and research and publishing. And keep reading here and learn all you can about positioning those self-directed funds for the future. Good luck!

[celia]

The pension option is 1% x service credit (years) x average final compensation (highest consecutive compensation over 5 year period during your tenure with the school).

This doesn’t sound like a very good pension to me. So after 30 years, you only get 30% of your final pay. You should be able to do better than that just by maxing out the 403b and investing in Taxable.

Open a separate Taxable account at a brokerage and mentally label it your ”Secondary Retirement Account” and contribute, say, 10% of your pay to it each year. (You could even have this at a different custodian than your other investments to help keep in mind that you aren’t going to touch it until retirement. And you won’t accidentally touch it when you meant to transact on another account.) Just let it grow and don’t withdraw from it until retired. Your retirement withdrawals will be taxed a lot less at that time since you will be paying taxes on only Long Term Capital Gains. While working, you will pay taxes only on Dividends. So aim for mutual funds or ETFs that have only “Qualified Dividends” since those are taxed at a lower rate than unqualified dividends.

Of course you need to max out your Roth IRA every year and don’t touch it until you are over 59.5. That can give you a stream of tax-free withdrawals then, if you need to supplement your 403b withdrawals (where every dollar withdrawn will be taxed as ordinary income) and withdrawals from the “Secondary Retirement Account” in Taxable.

You look like you are in a good place financially. Also build up an Emergency Fund in taxable to contain at least a year’s worth of living expenses. Then if you need to make another big move or are out of work or need a need car, etc, you won’t be draining a retirement account. When that is funded, continue investing in another taxable account for your long term goals (house, car, travel, education….).

[MrBobcat]

I wouldn’t think they would put the default choice as a terrible option, right?

Probably not terrible, but probably better for the University/State by not having a pension obligation.

[student]

I don't think you made a royal mistake. Your 403b is "portable." I would rather have 403b in my name than a pension that is maybe subject to "change."

[Cocoa Beach Bum]

Let's just think of a pension as an annuity.

This is a good idea. Just take the amount your employer is contributing to your 403B and start buying a Deferred Income Annuity, like one offered through The Fidelity Insurance Network. You get your own pension that stays with you regardless of where you work.

[suemarkp]

I don't think you said whether you pay into the Social Security system or not. If you are in a state where teachers or other state employees don't pay into SS, then you don't want a state or federal pension. You may never get SS on your own since you don't pay in, but if you get married and your spouse gets SS, so can you. But a government pension reduces what you get from SS, even if getting it as spousal or survivor benefits. These are the GPO/WEP rules in SS. My mom (school nurse) got nothing from SS from by Dad's employment, either as spousal or survivor, because her school pension offsets it all.

If you pay into SS, then the GPO/WEP reductions from government pensions don't apply. Income from an annuity (i.e. a buy your own pension) doesn't affect GPO/WEP either.

[TSR]

My future income will also exceed the amount that's eligible to contribute to IRAs (and I'm getting a 3% raise in a few months). So I'm keeping that in mind now too.

[...]

EDIT: I'm 32, single, no kids, currently renting. Current income is approx $125,000/year. The pension + 403b option works as such: they fund the pension portion, I would fund the 403b via paycheck deductions but with no matching.

I'm wondering if you have a basic, albeit very common, misunderstanding about the eligibility to contribute to a Roth IRA here. Just in case you do, I'll explain (and please forgive me if you already understand this -- maybe it'll help someone else).

You are nowhere near the income limit to contribute, and you likely never will be. The key point here is that the income limit triggers off your MAGI, which is a number that does not include pretax contributions such as those made toward a 403b. What you want to do is max out your 403b contributions to reduce your MAGI, and THAT is the number you compare to the Roth income limit. So if you make $125,000 now and you contribute $22,500/year to your 403b, your MAGI is only $102,500 --- nowhere close to the current $129,000 Roth income limit. More importantly, that Roth limit is indexed for inflation, so it will increase over time; also, the 403b contribution limit is indexed for inflation, so the amount you can reduce your income by will also increase. In other words, currently, if you max out your 403b contributions, you would need to make $151,000 before you even had to START worrying about this. And even then you don't immediately "income out": your allowed contributions are just reduced.

Yes, your salary will increase, but these days in academia there is not usually as significant a bump for the associate-to-full promotion (I can's speak for your specific institution, of course). Where this can get a little weird is if you take in an unusual level of grant or honorarium income or income from some other sources (book publishing, patents, etc.), so it might make sense to contribute at the end of the year if you think that's a risk. Of course a very high-earning spouse could also affect this.

Good luck -- sounds like you're well on your way and making good choices regardless of your current concern. Keep at it and get rich slowly!

Edit: I realize now I used the 2022 income limits. In 2023 the Roth income limit is $138,000, which means someone maxing out their 403b would need to make at least $160,500 before they ran up against that limit.

[snowday2022]

To me, 5% is a wicked good match. In my last job, we got a zero match and a high fee 401k only. In my present job, the most we can get, which is voted by the board every quarter is 2%.

Universities typically have very nice benefits. 10% Match is not uncommon. Mine matches 10% up to the IRS annual limit (330K in 2023). I know others who get 12.

[texasdiver]

It is completely impossible to know whether the traditional pension or 403(b) plan will leave you better off in 30 years. However, as someone closing in on 60 who has participated in three traditional pension programs (Federal and teaching in two separate states) as well as several flavors of 401(k) and 403(b) programs I can make some general comments.

1. For chunks of work you did early in your career you are much better off with personal investment savings like 403(b) than pensions. I was in a Federal pension from ages 25 to 35 and in a Texas teachers pension from ages 37 to 47. So I have 10 years of work history in two different pension programs from decades ago. Because of the way that pensions are determined (based on number of years worked and highest 3 years average salary) those pension payments have been fixed in stone since I left those jobs and every year that goes by, inflation eats away at the value of those pensions that I have not yet reached the age to claim. For example, I left Federal employment in 2003 at age 39 with a pension entitlement of about $5k/yr. claimable at age 62. Twenty years later despite all the intervening decades of inflation my pension will be that same exact amount based on my highest 3 years of earnings from 2000-2003. Your highest 3 years don't inflate over time and if they were 20 years ago, that's the breaks. By contrast, my Federal TSP which is a 403(b) type program had a balance of about $90K when I left Federal service 20 years ago and is now closing in on $700,000. I rolled some IRAs into it over the years, but the bulk of that balance is actually investment earnings not contributions and largely the contributions I made from 1994-2003. And it will (hopefully) continue to appreciate in the future while the pension will not. My more recent retirement savings are in a different 403(b) plan with Vanguard that is also growing nicely.

2. For chunks of work that you do late in your career a pension can be better than a 403(b) plan because the earnings that go into the pension formula will be recent and at the peak of your earning power and so have not yet been eroded by inflation or based on being lower and more junior on the pay scale. By contrast, 403(b) contributions that come late in your career will not have had decades to grow and so will basically just be whatever actual contributions you have made along with any match without much in the way of investment returns.

Bottom line? None of us have any idea what we will be doing in 20 or 30 years. In 1995 I was a fisheries biologist working for NOAA in Alaska and Seattle with no notion that I would ever do anything different. Two careers and three states later I'm with my 6th employer and very thankful for all the personal retirement savings I've made because all those small pensions from long ago employers are not going to ever amount to much and haven't appreciated one single dime since I left those jobs.

[coffecakecrocodile]

It is completely impossible to know whether the traditional pension or 403(b) plan will leave you better off in 30 years. However, as someone closing in on 60 who has participated in three traditional pension programs (Federal and teaching in two separate states) as well as several flavors of 401(k) and 403(b) programs I can make some general comments.

1. For chunks of work you did early in your career you are much better off with personal investment savings like 403(b) than pensions. I was in a Federal pension from ages 25 to 35 and in a Texas teachers pension from ages 37 to 47. So I have 10 years of work history in two different pension programs from decades ago. Because of the way that pensions are determined (based on number of years worked and highest 3 years average salary) those pension payments have been fixed in stone since I left those jobs and every year that goes by, inflation eats away at the value of those pensions that I have not yet reached the age to claim. For example, I left Federal employment in 2003 at age 39 with a pension entitlement of about $5k/yr. claimable at age 62. Twenty years later despite all the intervening decades of inflation my pension will be that same exact amount based on my highest 3 years of earnings from 2000-2003. Your highest 3 years don't inflate over time and if they were 20 years ago, that's the breaks. By contrast, my Federal TSP which is a 403(b) type program had a balance of about $90K when I left Federal service 20 years ago and is now closing in on $700,000. I rolled some IRAs into it over the years, but the bulk of that balance is actually investment earnings not contributions and largely the contributions I made from 1994-2003. And it will (hopefully) continue to appreciate in the future while the pension will not. My more recent retirement savings are in a different 403(b) plan with Vanguard that is also growing nicely.

2. For chunks of work that you do late in your career a pension can be better than a 403(b) plan because the earnings that go into the pension formula will be recent and at the peak of your earning power and so have not yet been eroded by inflation or based on being lower and more junior on the pay scale. By contrast, 403(b) contributions that come late in your career will not have had decades to grow and so will basically just be whatever actual contributions you have made along with any match without much in the way of investment returns.

Bottom line? None of us have any idea what we will be doing in 20 or 30 years. In 1995 I was a fisheries biologist working for NOAA in Alaska and Seattle with no notion that I would ever do anything different. Two careers and three states later I'm with my 6th employer and very thankful for all the personal retirement savings I've made because all those small pensions from long ago employers are not going to ever amount to much and haven't appreciated one single dime since I left those jobs.

Thank you, texasdiver for sharing your experiences. You are so right about how inflation can impact pensions.

[FellsGuy]

I would check in with other people in your position age, job etc and see what they chose to do one or two of them will have some interesting insights. The big thing to me seems to be the portability of the plan, when another university makes you an offer you can’t refuse haha. Also you sound like a saver and generally speaking a saver can come out ahead with smart and simple investment choices. I m just amazed they don’t give some guidance or advice before you make an irreversible decision like this. Good Luck with the new job.

[DoTheMath]

Congratulations on the new position!

No, you didn't make a mistake. Either option is reasonable. When I was in the same position, I made the same choice. In my case, it was because it seemed hard to imagine I'd be at the same employer for my entire career. It looks like I might be here for the duration, but skipping the pension was still a good decision. By not being tied to years of service, we'll be able to retire on our own timeline. But taking the pension would have worked fine, too. It just would have been a slightly different path.

You won't know until decades from now which choice would have been better (and maybe you'll never know), but either option is good. As Livesoft and others have said, having a TT job at ~125k/year puts you in a very strong position. With that career stability and salary, and the advice of the good folks here, your career and retirement will turn out better than you could have possibly imagined.

Your priority now is to do excellent work and develop a professional profile so that tenure (or moving, if that's a desire) comes easily. The years before tenure go quite quickly. It's time to get to work.

Related to the above, while it's important to start saving for retirement and other big life expenses, investing in yourself and your career is also important. It is shortsighted to skip attending a conference, dinner with a visitor, professional memberships, etc., for the sake of saving a few bucks. Generally you should be funding these from startup/grants/etc., but for the stuff coming out of pocket, don't skip the things you think will be valuable even if they cost you.

In case it wasn't discussed elsewhere, the value of a 457b plan is the other thing I'll mention. We have both a 403b and 457b and they've allowed us to save aggressively and defer a bunch of taxes. We'll now be able to retire relatively early with the bonus of doing Roth conversions to avoid much of those taxes entirely.




P.S. The fact you're starting at that salary immediately after PhD means you're doing something with strong job prospects. It sounds like your job is a great fit for you, but I would guess that you could have plenty of other opportunities if you decide your current situation isn't what you want to be doing. Keep that in mind if and when you start feeling anxiety, unhappiness, or stress about work. You can always find something else.

[placeholder]

I would check in with other people in your position age, job etc and see what they chose to do one or two of them will have some interesting insights.

If it's truly irrevocable then I don't see the point and the op needs to move on.