help understanding pension

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Topic Author
mad9q
Posts: 17
Joined: Sat Jan 21, 2017 7:35 am

help understanding pension

Post by mad9q » Tue Aug 13, 2019 8:58 am

Hi there.

My husband recently started a job with a local government that requires he participates in their pension program. We do not expect him to retire from this place of employment. Our plan right now is to take a lump-sum when he leaves and I am trying to figure out what that figure may be. I am hoping persons familiar with pensions might help me understand things.

The descriptions say he will vest in the program after five years. Does that mean he can take both his contributions and his employers? I know if he leaves before five years, he gets his contributions plus 4% interest, but I am not clear if he gets his employer contributions.

Thanks for any help.

oldfatguy
Posts: 199
Joined: Tue Feb 27, 2018 1:38 pm

Re: help understanding pension

Post by oldfatguy » Tue Aug 13, 2019 9:02 am

mad9q wrote:
Tue Aug 13, 2019 8:58 am
Hi there.

My husband recently started a job with a local government that requires he participates in their pension program. We do not expect him to retire from this place of employment. Our plan right now is to take a lump-sum when he leaves and I am trying to figure out what that figure may be. I am hoping persons familiar with pensions might help me understand things.

The descriptions say he will vest in the program after five years. Does that mean he can take both his contributions and his employers? I know if he leaves before five years, he gets his contributions plus 4% interest, but I am not clear if he gets his employer contributions.

Thanks for any help.
The only way to get answers to these questions is from your husband's plan. Every plan has different rules.

ETA: "Vested" does not necessarily mean that he would be able to withdraw employer contributions if he leaves, it simply means he has earned to right to the benefit when he is eligible for retirement.
Last edited by oldfatguy on Tue Aug 13, 2019 9:08 am, edited 1 time in total.

Broken Man 1999
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Joined: Wed Apr 08, 2015 11:31 am

Re: help understanding pension

Post by Broken Man 1999 » Tue Aug 13, 2019 9:04 am

Pensions vary. Not to mention, changes in the same pension.

You need to get a copy of his pension SPD (Summary Plan Description). The info you seek should be in the document.

From Investopedia:
https://www.investopedia.com/terms/s/su ... iption.asp

Good luck!

Broken man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

Topic Author
mad9q
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Joined: Sat Jan 21, 2017 7:35 am

Re: help understanding pension

Post by mad9q » Tue Aug 13, 2019 9:37 am

Thanks for the replies. I will ask for that document.

sawdust60
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Re: help understanding pension

Post by sawdust60 » Tue Aug 13, 2019 10:28 am

Does he also pay into social security? Or, will he have 30 years of substantial SS earnings?

The pension or lump sum could result in a reduction in SS benefits.

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N1CKV
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Re: help understanding pension

Post by N1CKV » Tue Aug 13, 2019 11:01 am

Each plan is different.
For my pension: If I leave I can take my contributions, but I never qualify for employer contributions or any interest.

Topic Author
mad9q
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Re: help understanding pension

Post by mad9q » Tue Aug 13, 2019 11:03 am

Yes, he pays into social security and will have 30 years of credits. Will it say in the plan document how the pension affects social security?

Thanks again.

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Kenkat
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Location: Cincinnati, OH

Re: help understanding pension

Post by Kenkat » Tue Aug 13, 2019 11:18 am

As a general rule, if he is paying social security taxes in addition to the pension, then the pension won’t affect social security benefits. Some governmental agencies have plans where employees pay into a separate retirement system and do not pay social security taxes, but that doesn’t sound like the case here.

sawdust60
Posts: 232
Joined: Tue Jul 17, 2018 12:06 pm

Re: help understanding pension

Post by sawdust60 » Tue Aug 13, 2019 11:22 am

mad9q wrote:
Tue Aug 13, 2019 11:03 am
Yes, he pays into social security and will have 30 years of credits. Will it say in the plan document how the pension affects social security?

Thanks again.
Not an issue for your case. You are good as both qualifications are satisfied.

But I wondered about the concern; why you seem intent on wanting the lump sum. You will evaluate the pension vs. lump sum and choose one.
Last edited by sawdust60 on Tue Aug 13, 2019 11:26 am, edited 1 time in total.

RollTide31457
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Re: help understanding pension

Post by RollTide31457 » Tue Aug 13, 2019 11:25 am

Always cash out of pensions when given the chance. Why wouldn’t you?

Carefreeap
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Location: SF Bay Area

Re: help understanding pension

Post by Carefreeap » Tue Aug 13, 2019 11:40 am

RollTide31457 wrote:
Tue Aug 13, 2019 11:25 am
Always cash out of pensions when given the chance. Why wouldn’t you?
I chose to leave mine on account as the stream of payments will exceed the lump sum in about 7 years. Since I'm 58 with an expected lifespan of 87 I think the math will work in my favor.

No guarantees. I doubt I would be a better money manager than the pension professionals especially as I age. I look at it as a type of annuity; perhaps not optimum but good enough for what I need which is a cushion for our own self directed investments.

Needtoknow
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Re: help understanding pension

Post by Needtoknow » Tue Aug 13, 2019 11:50 am

RollTide31457 wrote:
Tue Aug 13, 2019 11:25 am
Always cash out of pensions when given the chance. Why wouldn’t you?
There are too many variables to make this blanket statement. I would be crazy to cash out my pension. It would be about $385,000. However, I am taking my pension and I will receive almost 90% of my pay and my wife will also receive the same amount upon my death. She is 14 years younger than me. So that $385,000 pales in comparison. Yes, inflation will set in but that is guaranteed money that the State Supreme Court says is a binding contract that has to be honored. I am not going to take the lump sum when I am going to get well over $100,000 per year.

In her particular case, if her husband is leaving after 5 years, his pension will not be a large amount because he won’t have been in the system very long. so that makes sense to take the money out. In most systems, length of service plays a big part in the calculation for pension benefits.

Reamus294
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Re: help understanding pension

Post by Reamus294 » Tue Aug 13, 2019 11:59 am

Like others said, each pension plan is widely different and the best way to learn is by calling them or reading up. Pension descriptions aren't always the easiest thing to read, so reading, then verifying with a call would be best. Some can be very lucrative for employees and beneficiaries (as shown above), while others not-so-much.

This is my general understanding of most pensions. You cannot take out employer contributions when you leave (even if vested), and the way you receive the employer contributions is through a monthly payment. Once vested, he may be able to leave the money in there and be eligible for a retirement benefit at a certain age, even with only 5 years of service. Some may offer health benefits too in retirement, which could be very valuable. Once he is ready to leave, he should be able to receive estimates of how much he could receive to see if it is worth leaving in or pulling out, while keeping in mind the health of the pension fund (funded %).

anonenigma
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Re: help understanding pension

Post by anonenigma » Tue Aug 13, 2019 12:04 pm

RollTide31457 wrote:
Tue Aug 13, 2019 11:25 am
Always cash out of pensions when given the chance. Why wouldn’t you?
This means walking away from the employer contributions credited to your account. As a general rule, this seems suicidal.

sawdust60
Posts: 232
Joined: Tue Jul 17, 2018 12:06 pm

Re: help understanding pension

Post by sawdust60 » Tue Aug 13, 2019 12:06 pm

RollTide31457 wrote:
Tue Aug 13, 2019 11:25 am
Always cash out of pensions when given the chance. Why wouldn’t you?
Evaluate the projected future cash flow vs. the lump sum. Sometimes the lump sum is an actuarial calculation of the pension. Sometimes the pension is based on factors different from the contributions, such as years of service, high-3 salary average, and a multiplier/factor. The pension might have a COLA adjustment. And there are many other factors.

Always evaluate. Then choose.

You might be interested in the Pension Payout Probability Analysis spreadsheet from this Kitces page: Rigorous Analysis of Pension Options Done Right!

RollTide31457
Posts: 251
Joined: Tue Nov 28, 2017 8:06 pm

Re: help understanding pension

Post by RollTide31457 » Tue Aug 13, 2019 12:25 pm

anonenigma wrote:
Tue Aug 13, 2019 12:04 pm
RollTide31457 wrote:
Tue Aug 13, 2019 11:25 am
Always cash out of pensions when given the chance. Why wouldn’t you?
This means walking away from the employer contributions credited to your account. As a general rule, this seems suicidal.

You have the money in your hands rather than a former employer. Who wants to deal with the administrative hassles of a pension from a long ago job?
Last edited by RollTide31457 on Tue Aug 13, 2019 12:52 pm, edited 1 time in total.

FI4LIFE
Posts: 169
Joined: Sun Apr 28, 2019 9:27 am

Re: help understanding pension

Post by FI4LIFE » Tue Aug 13, 2019 12:42 pm

RollTide31457 wrote:
Tue Aug 13, 2019 12:25 pm
anonenigma wrote:
Tue Aug 13, 2019 12:04 pm
RollTide31457 wrote:
Tue Aug 13, 2019 11:25 am
Always cash out of pensions when given the chance. Why wouldn’t you?
This means walking away from the employer contributions credited to your account. As a general rule, this seems suicidal.

You have the money in your hands rather than a former employer. Who wants to do with the administrative hassles of a pension from a long ago job?
Obviously, you need to do a calculation and decide. Watching a check from a municipality enter my bank account electronically once a month doesn't seem like it's enough of a hassle to give up several hundred thousand dollars of guaranteed payments, in my case.

Admiral
Posts: 2298
Joined: Mon Oct 27, 2014 12:35 pm

Re: help understanding pension

Post by Admiral » Tue Aug 13, 2019 3:35 pm

mad9q wrote:
Tue Aug 13, 2019 8:58 am
Hi there.

My husband recently started a job with a local government that requires he participates in their pension program. We do not expect him to retire from this place of employment. Our plan right now is to take a lump-sum when he leaves and I am trying to figure out what that figure may be. I am hoping persons familiar with pensions might help me understand things.

The descriptions say he will vest in the program after five years. Does that mean he can take both his contributions and his employers? I know if he leaves before five years, he gets his contributions plus 4% interest, but I am not clear if he gets his employer contributions.

Thanks for any help.
The answer is, in general, no. To determine what the payout is the calculation looks like this (typically): average of three highest earning years x some percent x # of years worked. There's simply to way to know what the pension would be without knowing the other factors. You can ask for the second one, and make a guess about the first and third, and then do the calculation.

Here's an example:

My spouse gets 2.2% for first 10 years, + 2% for each additional year, x average of three highest earning years, which do not need to be consecutive.

So, for example, if someone worked 20 years and had average compensation was 100k, they would get 42% of $100,000, or $42,000 per year.

There is no need to "retire" from a job to get a pension. Once vested, you receive it at the appropriate age (assuming separated from employer) regardless of whether you work there or not. That's how pensions work. In our case, the pension will ALSO go to the surviving spouse, with the caveat that the lifetime benefit is reduced by about 15% per year.

Pensions are a (now) rare and fantastic deal. Don't be so quick to assume that other positions with defined contribution plans are better, financially, even if the salary is higher. In general, they are not. The poster who said one should always take the lump sum is not familiar with how pensions work.


Here's some addl reading for you.

https://www.financialsamurai.com/how-do ... y-pension/

FactualFran
Posts: 882
Joined: Sat Feb 21, 2015 2:29 pm

Re: help understanding pension

Post by FactualFran » Tue Aug 13, 2019 3:57 pm

RollTide31457 wrote:
Tue Aug 13, 2019 12:25 pm
You have the money in your hands rather than a former employer. Who wants to deal with the administrative hassles of a pension from a long ago job?
I have not had any administrative hassles with the retirement plan of a job that I left decades ago. I did not use the option to take the money because I would have received only half of the value of the account. I would have lost the employer contributions and the gains on them. I'll start taking the retirement benefit in a few years and receive annuity payments based on the value of the account, including the employer contributions and the gains on them.

Topic Author
mad9q
Posts: 17
Joined: Sat Jan 21, 2017 7:35 am

Re: help understanding pension

Post by mad9q » Tue Aug 13, 2019 6:32 pm

Thank you all. This discussion has been very informative and helpful.

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