State Pension Plan vs. Investment Plan (Need Advice)

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Topic Author
whereskyle
Posts: 41
Joined: Wed Jan 29, 2020 10:29 am

State Pension Plan vs. Investment Plan (Need Advice)

Post by whereskyle » Thu Feb 13, 2020 11:07 am

Hello all,

I need to make a big decision within the next year about my employer retirement plan. As a state employee, I can choose a constitutionally protected pension plan or I can choose a defined contribution investment plan. The pension plan has a number of odd conditions that turn me off to it. The defined contribution investment plan also lags those offered by most private employer 401Ks. Crucially, both plans require and allow no more than a 3% annual contribution. Let me tell you some of the differences.

Pension Plan: 8 years to vest (anything less than that and my 3% contributions are returned without interest).
To receive the full benefit, I'll have to work until I am 64 years old. At that point, my guaranteed benefit would be $46,200 per year before taxes for the rest of my life. There is no COLA. The conditions as to what happens to the money if I die after vesting are extremely complicated. Suffice it to say that if I choose to tie the amount to my wife's life as opposed to my own, the benefit is reduced substantially and it is reduced every year she outlives me. I view the state as having amended the pension plan to such an extent that they are actively trying to discourage new employees from choosing it. Still, I am very intrigued by the unique diversification benefit of the pension plan. No matter where the market is, the state constitution protects my benefit. Where else can I get a guarantee on my investment like that?

One caveat to my dismal view of the spousal benefit is that I can always pay for life insurance to counter the perceived unwanted effects of the pension being tied to my life. Anyone have a guess as to how much I would need to be paying in life insurance in my 50s, 60s, and 70s, if I'm a healthy white american male? What if I'm not so healthy?

All told, if I follow the rules and live until I'm 85, the pension benefit before taxes will equal at the very least a guaranteed $1,000,000, and the total of course increases if I live longer.

Contrast with

Investment plan: 1 year to vest. I contribute 3%, the employer contributes 4.67%. There is no option for me to increase my contributions so as to receive additional employer contributions, so no more $ than 7.67% of my salary will go into the account. After a year, all contributions belong to me. The investment plan thankfully offers a Russell 3000 total market index fund with an expense ratio of .02. Assuming I receive minimal raises over the years, which is very likely given that this is a state-government job, the fund will receive about $6000 per year. If I assume a mere 5% annual return, I'll have $500,000 by the time I retire. If the stock market performs in line with history, I'll be able to retire earlier with more.

I plan to supplement either plan by maxing out at least one IRA per year. Doing this would basically just be a double-down on the investment plan. I would follow the market. Maybe I would consider focusing on a specialized index such as VIG or I'd add real estate, but I like things to be simple. Total market is my assumption. So, if the Investment plan makes $1,000,000, so would my IRA. If the investment plan makes $500k, so would my IRA.

My current view

I think the investment plan makes more sense in the short and medium term. For instance, I may decide I need to earn more despite the wonderful lifestyle and public-service benefits that drew me to this job. I'd like to guarantee the employer's contributions, which I can do in just one year under the investment plan, rather than waiting for 8. Do I see myself at this job in 8 years? Absolutely. I've been wanting this exact job for about 5 years, and I'm wildly happy I got it despite the relatively low pay. There are factors such as location and transportation costs that do make it somewhat less likely that I'll stay forever though.

My main hangup on just running with the investment plan is Bogle's, and I think any wise investor's, appreciation for the security of diversification. "Constitutionally guaranteed money? Yes, please. Where else can I get a deal like that?"

Would anyone choose the pension in light of the complicated conditions and lack of protection for my spouse? Could a reasonably affordable life-insurance policy offset the downside of the pension plan being tied to my life? Is it wrong to double down on the stock market when I could easily reach $500k in both an IRA and the Investment plan in the worst 30 years of the stock market ever? Or is the fact that doubling down on the market would still yield $1,000,000 make the market the obvious choice?

Thanks for your thoughts, all!

retired@50
Posts: 1317
Joined: Tue Oct 01, 2019 2:36 pm

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by retired@50 » Thu Feb 13, 2020 11:20 am

whereskyle wrote:
Thu Feb 13, 2020 11:07 am
Still, I am very intrigued by the unique diversification benefit of the pension plan. No matter where the market is, the state constitution protects my benefit. Where else can I get a guarantee on my investment like that?

Thanks for your thoughts, all!
First, a very well written summary of the options.

Second, Think of Detroit, Puerto Rico, Orange County, CA. All went bankrupt at one point, and pensioners didn't get what they were promised. State constitutions can change if the politicians in charge re-write the constitutional promises and vote on it. The power of this promise only exists if the taxpayers in the state think it is fair. When times are tough, taxpayers get mad.

I'd go with the defined contribution plan and use the Russell 3000 fund with the tiny expense ratio.

Regards,
Boggle - a game from Parker Brothers. Bogle - investor, founder of Vanguard.

Topic Author
whereskyle
Posts: 41
Joined: Wed Jan 29, 2020 10:29 am

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by whereskyle » Thu Feb 13, 2020 11:33 am

retired@50 wrote:
Thu Feb 13, 2020 11:20 am
whereskyle wrote:
Thu Feb 13, 2020 11:07 am
Still, I am very intrigued by the unique diversification benefit of the pension plan. No matter where the market is, the state constitution protects my benefit. Where else can I get a guarantee on my investment like that?

Thanks for your thoughts, all!
First, a very well written summary of the options.

Second, Think of Detroit, Puerto Rico, Orange County, CA. All went bankrupt at one point, and pensioners didn't get what they were promised. State constitutions can change if the politicians in charge re-write the constitutional promises and vote on it. The power of this promise only exists if the taxpayers in the state think it is fair. When times are tough, taxpayers get mad.

I'd go with the defined contribution plan and use the Russell 3000 fund with the tiny expense ratio.

Regards,
Thank you for the input. I do not trust my state legislators. That is for sure. (They're currently trying to merge my wonderful, small public honors college into one of the big state universities, effectively ending the independence that made it such a unique place where the seeds of rigorous logic and common sense that eventually led me to become a Boglehead could grow.)

If you were in my shoes and chose the Russell 3000 at work, what might you hold in your IRA? Would you double down on the market or diversify?

retired@50
Posts: 1317
Joined: Tue Oct 01, 2019 2:36 pm

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by retired@50 » Thu Feb 13, 2020 11:41 am

whereskyle wrote:
Thu Feb 13, 2020 11:33 am
retired@50 wrote:
Thu Feb 13, 2020 11:20 am
whereskyle wrote:
Thu Feb 13, 2020 11:07 am
Still, I am very intrigued by the unique diversification benefit of the pension plan. No matter where the market is, the state constitution protects my benefit. Where else can I get a guarantee on my investment like that?

Thanks for your thoughts, all!
First, a very well written summary of the options.

Second, Think of Detroit, Puerto Rico, Orange County, CA. All went bankrupt at one point, and pensioners didn't get what they were promised. State constitutions can change if the politicians in charge re-write the constitutional promises and vote on it. The power of this promise only exists if the taxpayers in the state think it is fair. When times are tough, taxpayers get mad.

I'd go with the defined contribution plan and use the Russell 3000 fund with the tiny expense ratio.

Regards,
Thank you for the input. I do not trust my state legislators. That is for sure. (They're currently trying to merge my wonderful, small public honors college into one of the big state universities, effectively ending the independence that made it such a unique place where the seeds of rigorous logic and common sense that eventually led me to become a Boglehead could grow.)

If you were in my shoes and chose the Russell 3000 at work, what might you hold in your IRA? Would you double down on the market or diversify?
I only mentioned the Russell 3000 fund because you did. What about a bond fund at work? Is there one? Is it a total bond market fund with a low expense ratio? If not a total bond market fund, what about an intermediate term bond fund? Something along those lines would be a good thing. If your "non-work" account is a Roth IRA, then you could toss in an international stock index fund and possibly a REIT index fund.

Regards,
Boggle - a game from Parker Brothers. Bogle - investor, founder of Vanguard.

oldfatguy
Posts: 533
Joined: Tue Feb 27, 2018 1:38 pm

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by oldfatguy » Thu Feb 13, 2020 11:44 am

I am in a public pension plan, and would opt for the investment plan you describe if I could.

dknightd
Posts: 1989
Joined: Wed Mar 07, 2018 11:57 am

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by dknightd » Thu Feb 13, 2020 11:48 am

I faced that decision 30 years ago. In the end I decided to opt for the 401/403 investment plan. In retrospect I would probably have been better off with a combination of pension and private savings. I did not know then that I would work in the same place for 30 years. I do not regret my decision. Toss a coin . . .

cresive
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Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by cresive » Thu Feb 13, 2020 11:49 am

whereskyle wrote:
Thu Feb 13, 2020 11:07 am
Hello all,

I need to make a big decision within the next year about my employer retirement plan. As a state employee, I can choose a constitutionally protected pension plan or I can choose a defined contribution investment plan. The pension plan has a number of odd conditions that turn me off to it. The defined contribution investment plan also lags those offered by most private employer 401Ks. Crucially, both plans require and allow no more than a 3% annual contribution. Let me tell you some of the differences.

Pension Plan: 8 years to vest (anything less than that and my 3% contributions are returned without interest).
To receive the full benefit, I'll have to work until I am 64 years old. At that point, my guaranteed benefit would be $46,200 per year before taxes for the rest of my life. There is no COLA. The conditions as to what happens to the money if I die after vesting are extremely complicated. Suffice it to say that if I choose to tie the amount to my wife's life as opposed to my own, the benefit is reduced substantially and it is reduced every year she outlives me. I view the state as having amended the pension plan to such an extent that they are actively trying to discourage new employees from choosing it. Still, I am very intrigued by the unique diversification benefit of the pension plan. No matter where the market is, the state constitution protects my benefit. Where else can I get a guarantee on my investment like that?

One caveat to my dismal view of the spousal benefit is that I can always pay for life insurance to counter the perceived unwanted effects of the pension being tied to my life. Anyone have a guess as to how much I would need to be paying in life insurance in my 50s, 60s, and 70s, if I'm a healthy white american male? What if I'm not so healthy?

All told, if I follow the rules and live until I'm 85, the pension benefit before taxes will equal at the very least a guaranteed $1,000,000, and the total of course increases if I live longer.

Contrast with

Investment plan: 1 year to vest. I contribute 3%, the employer contributes 4.67%. There is no option for me to increase my contributions so as to receive additional employer contributions, so no more $ than 7.67% of my salary will go into the account. After a year, all contributions belong to me. The investment plan thankfully offers a Russell 3000 total market index fund with an expense ratio of .02. Assuming I receive minimal raises over the years, which is very likely given that this is a state-government job, the fund will receive about $6000 per year. If I assume a mere 5% annual return, I'll have $500,000 by the time I retire. If the stock market performs in line with history, I'll be able to retire earlier with more.

I plan to supplement either plan by maxing out at least one IRA per year. Doing this would basically just be a double-down on the investment plan. I would follow the market. Maybe I would consider focusing on a specialized index such as VIG or I'd add real estate, but I like things to be simple. Total market is my assumption. So, if the Investment plan makes $1,000,000, so would my IRA. If the investment plan makes $500k, so would my IRA.

My current view

I think the investment plan makes more sense in the short and medium term. For instance, I may decide I need to earn more despite the wonderful lifestyle and public-service benefits that drew me to this job. I'd like to guarantee the employer's contributions, which I can do in just one year under the investment plan, rather than waiting for 8. Do I see myself at this job in 8 years? Absolutely. I've been wanting this exact job for about 5 years, and I'm wildly happy I got it despite the relatively low pay. There are factors such as location and transportation costs that do make it somewhat less likely that I'll stay forever though.

My main hangup on just running with the investment plan is Bogle's, and I think any wise investor's, appreciation for the security of diversification. "Constitutionally guaranteed money? Yes, please. Where else can I get a deal like that?"

Would anyone choose the pension in light of the complicated conditions and lack of protection for my spouse? Could a reasonably affordable life-insurance policy offset the downside of the pension plan being tied to my life? Is it wrong to double down on the stock market when I could easily reach $500k in both an IRA and the Investment plan in the worst 30 years of the stock market ever? Or is the fact that doubling down on the market would still yield $1,000,000 make the market the obvious choice?

Thanks for your thoughts, all!

I have a few questions for you. I Think you may have mistaken your match scenario.
" year to vest. I contribute 3%, the employer contributes 4.67%. There is no option for me to increase my contributions so as to receive additional employer contributions, so no more $ than 7.67% of my salary will go into the account."

I read this as a good thing. You need a minimum of 3% salary to receive a match of 4.7%. I have to input 6% to receive a maximum of 5%, so you have a nice return on your input. However, I didn't see where you are restricted to contributing only 3%. You can probably contribute up to $19,000. You will still only receive 4.7% match, but you will have a large percentage of you salary saved for retirement. If you vest in a year, AND have good investment options, I would definitely go with the defined contribution.

I had a job where I had a similar choice, go with the state's retirement system, or an Optional Retirement Plan (ORP). When I first started, I didn't plan to stay for a long duration, so I liked the portability of the ORP. I did wind up staying long enough to have benefited from either option. However, I will have significantly more income from my savings than from the conventional defined benefit plan. You didn't supply your age, but if you are in your early thirties, or younger, I think the optional plan, trying to max your contributions is definitely the way to go. Also, if I had a ROTH option, I would have jumped on it. I contribute some to my Roth, but I am nearing the end of my career, so the traditional contributions make more sense for me today--The Roth wasn't a thing when I first started out.

The downside of living off your savings is market volatility, etc. Having a defined income in retirement is nice. However, you should have SSA benefits for defined benefit in retirement. SSA benefits have a small adjustment for increase, which you state your pension would not. That would be the deciding factor for me.


Good luck.

Ben

Valuethinker
Posts: 39394
Joined: Fri May 11, 2007 11:07 am

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by Valuethinker » Thu Feb 13, 2020 11:55 am

whereskyle wrote:
Thu Feb 13, 2020 11:07 am
Hello all,

I need to make a big decision within the next year about my employer retirement plan. As a state employee, I can choose a constitutionally protected pension plan or I can choose a defined contribution investment plan. The pension plan has a number of odd conditions that turn me off to it. The defined contribution investment plan also lags those offered by most private employer 401Ks. Crucially, both plans require and allow no more than a 3% annual contribution. Let me tell you some of the differences.

Pension Plan: 8 years to vest (anything less than that and my 3% contributions are returned without interest).
To receive the full benefit, I'll have to work until I am 64 years old. At that point, my guaranteed benefit would be $46,200 per year before taxes for the rest of my life. There is no COLA. The conditions as to what happens to the money if I die after vesting are extremely complicated. Suffice it to say that if I choose to tie the amount to my wife's life as opposed to my own, the benefit is reduced substantially and it is reduced every year she outlives me. I view the state as having amended the pension plan to such an extent that they are actively trying to discourage new employees from choosing it. Still, I am very intrigued by the unique diversification benefit of the pension plan. No matter where the market is, the state constitution protects my benefit. Where else can I get a guarantee on my investment like that?

One caveat to my dismal view of the spousal benefit is that I can always pay for life insurance to counter the perceived unwanted effects of the pension being tied to my life. Anyone have a guess as to how much I would need to be paying in life insurance in my 50s, 60s, and 70s, if I'm a healthy white american male? What if I'm not so healthy?

All told, if I follow the rules and live until I'm 85, the pension benefit before taxes will equal at the very least a guaranteed $1,000,000, and the total of course increases if I live longer.

Contrast with

Investment plan: 1 year to vest. I contribute 3%, the employer contributes 4.67%. There is no option for me to increase my contributions so as to receive additional employer contributions, so no more $ than 7.67% of my salary will go into the account. After a year, all contributions belong to me. The investment plan thankfully offers a Russell 3000 total market index fund with an expense ratio of .02. Assuming I receive minimal raises over the years, which is very likely given that this is a state-government job, the fund will receive about $6000 per year. If I assume a mere 5% annual return, I'll have $500,000 by the time I retire. If the stock market performs in line with history, I'll be able to retire earlier with more.

I plan to supplement either plan by maxing out at least one IRA per year. Doing this would basically just be a double-down on the investment plan. I would follow the market. Maybe I would consider focusing on a specialized index such as VIG or I'd add real estate, but I like things to be simple. Total market is my assumption. So, if the Investment plan makes $1,000,000, so would my IRA. If the investment plan makes $500k, so would my IRA.

My current view

I think the investment plan makes more sense in the short and medium term. For instance, I may decide I need to earn more despite the wonderful lifestyle and public-service benefits that drew me to this job. I'd like to guarantee the employer's contributions, which I can do in just one year under the investment plan, rather than waiting for 8. Do I see myself at this job in 8 years? Absolutely. I've been wanting this exact job for about 5 years, and I'm wildly happy I got it despite the relatively low pay. There are factors such as location and transportation costs that do make it somewhat less likely that I'll stay forever though.

My main hangup on just running with the investment plan is Bogle's, and I think any wise investor's, appreciation for the security of diversification. "Constitutionally guaranteed money? Yes, please. Where else can I get a deal like that?"

Would anyone choose the pension in light of the complicated conditions and lack of protection for my spouse? Could a reasonably affordable life-insurance policy offset the downside of the pension plan being tied to my life? Is it wrong to double down on the stock market when I could easily reach $500k in both an IRA and the Investment plan in the worst 30 years of the stock market ever? Or is the fact that doubling down on the market would still yield $1,000,000 make the market the obvious choice?

Thanks for your thoughts, all!
It is impossible to call this without other information:

- your age
- financial position - other investment balances
- spousal age & their financial position (ie pensions they may accrue)

Generally it's easier to use real returns. Assume 2% inflation. So your likely equity returns (real) are 3-6% pa. 5% nominal (3% real) is at the conservative end, but if you are 10 years or less to retirement I would assume that.

That will give you a better feel for what that $500k would actually *buy* in today's money.

On life insurance, that's usually to compensate for lost earnings - the loss to your family of your working years. You are absolutely right that buying new life insurance in your 50s, or life insurance that lasts past your likely retirement age, can be very expensive. By that time, you are expected to have substantial savings to compensate your loved one for their loss.

Most of us square this circle by buying term life in our late 20s or early 30s with a term of 20 to 30 years, guaranteed level premium. That falls in real value, remorselessly, every year, but hopefully our other savings grow. By the time our policies expire (in our late 50s or early 60s) our working years are nearly done, and there's not such a big "hole" to fill in the event of our demise. To some extent we supplement this with employer provided insurance (typically 1-2x salary) but since that is totally contingent upon our continued employment, we'd be fools to rely on it. It was a long standing tradition with employers to have it in place to prevent having the families of late employees impoverished which is bad for morale and could even lead to legal claims. Also there (were) tax advantages to providing it that way as a benefit (depending on your jurisdiction). I've never worked in the USA but conversely I have never had a job that did not have at least 1x salary as life insurance.

Somehow my father managed to die, well after retirement, with some policy in place (I think it was a standard retirement benefit when he was employed that carried over into retirement) - it was helpful with funeral expenses and the tax bills we faced upon his demise.

If you wait until your 40s or 50s to try to buy life insurance, then you are right medical issues can make it prohibitive (or even impossible).

(Always remember with life insurance that if the policy expires, worthless, you won ;-)).

From the tone you adopt, I think you are mentally thinking this won't be forever - you don't trust this state's legislators. So that should play a role in your calculation. I caution you that you'd be amazed how fast 10 years in a career goes, "life is what happens whilst you are making other plans".

illumination
Posts: 367
Joined: Tue Apr 02, 2019 6:13 pm

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by illumination » Thu Feb 13, 2020 12:08 pm

Just one thing regarding "constitutionally protected" benefits. My state went through something similar, the state supreme court even upheld that it was constitutionally protected when the department didn't get the funds, but the money still never came. At the end of the day, a court starts getting into blurry separation of powers of what to actually do about it. It was just a long term stalemate.

A court can't really "make" a state raise taxes for something or take spending from one place and give it to another. Or issue bonds to make up for the shortfall. You then have judges becoming unelected legislators and it becomes a very slippery slope. A court (and a state as well) also can't print money out of thin air.

I don't know how all of this will shake out, but my guess is if the math doesn't work, I wouldn't rely on something being in the state constitution being able to overcome that. If you have a dangerously underfunded pension plan, I would look for other options as I believe some sort of haircut will occur.

Topic Author
whereskyle
Posts: 41
Joined: Wed Jan 29, 2020 10:29 am

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by whereskyle » Thu Feb 13, 2020 12:42 pm

Thanks, all! I appreciate your thoughts on this decision. I continue to lean towards the investment plan. For those that are curious, I'm 30 years old with no significant net worth. Well-educated and just starting my career (late to the party). Wife is an artist and a minimal earner. Any $ she makes for us is cake, and I have not been able to interest her in investing. She trusts me to make our financial decisions.

I may need to start another thread so that this question appears at the top, but I wonder: What would you do with your IRA if you had the Russell 3000 at work? Would you double down on the market? (VTSAX has been my plan so far) Would you include international? (I think I would go World-Market Cap, giving my entire portfolio an AA of 75% U.S./25% Int'l) Or would you invest in non-equities like REITs, gold, or bonds? I'm here because I'm a Boglehead. What Jack Bogle teaches make sense, and I intend to follow it. He evidently thinks that the U.S. Stock Market provides sufficient diversification. I'm 30 now, and I really don't see myself investing in bonds in the foreseeable future. I am more open to real estate. Thoughts on what you would do with the separate IRA in my position?

Thanks again!

FoolMeOnce
Posts: 787
Joined: Mon Apr 24, 2017 11:16 am

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by FoolMeOnce » Thu Feb 13, 2020 12:59 pm

Can you contribute more than 3% to the 401k without additional matching? I didn't think an employer could limit individual contributions like that, but maybe I'm wrong. Can you continue anything while participation in the pension system?

Maybe you only focused on 3% to compare apples to apples. The first $6k in your 401k is similar to getting the pension (both require your 3% plus employer contributions). $6k/year for 34 years requires 8% nominal annual returns to reach $1 million nominal future dollars, which is roughly the equivalent of a $42k pension going by the 4% rule. Sounds like a good deal if you think the plan is stable enough (especially if you can still contribute to a 401k).

I get that the expected pension has no COLA once you start drawing it, but is that forecasted amount in future dollars or current dollars?

il0kin
Posts: 283
Joined: Mon Feb 26, 2018 8:19 pm

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by il0kin » Thu Feb 13, 2020 1:01 pm

Will you contribute to and receive Social Security benefits? That’s an important part to consider. Your wife will be eligible for your SS if you die before she does.

I trust state government to be responsible stewards of state pension plans about as much as I trust a shark to exercise restraint. I would personally much rather have total control over 50-75% of the asset value than hope that my state government honors their promises 30 years from now.

You didn’t post your income but you should also be looking at Savers Credits if you can get your AGI under $65,000. https://www.irs.gov/retirement-plans/pl ... ers-credit

Topic Author
whereskyle
Posts: 41
Joined: Wed Jan 29, 2020 10:29 am

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by whereskyle » Thu Feb 13, 2020 7:20 pm

FoolMeOnce wrote:
Thu Feb 13, 2020 12:59 pm
Can you contribute more than 3% to the 401k without additional matching? I didn't think an employer could limit individual contributions like that, but maybe I'm wrong. Can you continue anything while participation in the pension system?

Maybe you only focused on 3% to compare apples to apples. The first $6k in your 401k is similar to getting the pension (both require your 3% plus employer contributions). $6k/year for 34 years requires 8% nominal annual returns to reach $1 million nominal future dollars, which is roughly the equivalent of a $42k pension going by the 4% rule. Sounds like a good deal if you think the plan is stable enough (especially if you can still contribute to a 401k).

I get that the expected pension has no COLA once you start drawing it, but is that forecasted amount in future dollars or current dollars?
Thanks for the input! All forecasted amounts are in present dollars. The pension does not affect my social security benefits, and I would likely never earn enough at this job to be disqualified from ira contributions. At starting pay, I should be able to max out at least one account in addition to my work retirement plan. The real hold-up for me is that, while the pension benefit is equivalent (or greater) in value over a longer retirement, if I die with the pension, my wife gets nothing, whereas if I die while living off of the $1m in investments, I leave her with a $1m (excluding whatever tax penalties I have not yet learned about). That to me is a pretty stark distinction. I think when it comes down to brass tax, if the stock market is no longer a good long-term investment, I do not see how the economy would function and thus I do not see how the pension would still be valuable. Maybe this is a straw-man I'm constructing to obscure my fear of leaving DW with nothing. I ask myself if 401ks have been iffy in the past because people have simply chosen the wrong investments. I don't see how I go wrong with the Russell 3000 with .02, unless of course Boglehead philosophy no longer applies in 30 years because something happened to the stock market that's never happened to it before. I have met people nearing retirement who long for pensions and who continue working even though they probably don't have to out of fear of what the market will do once they stop. Perhaps I'm underestimating that kind of peace of mind. I also don't want to be driving to the capitol to picket because the state is cutting pension benefits. I try to follow Bogle in all things, so that I can stay the course, and I know that I should appreciate the unique diversification that a pension offers.

Topic Author
whereskyle
Posts: 41
Joined: Wed Jan 29, 2020 10:29 am

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by whereskyle » Thu Feb 13, 2020 7:32 pm

il0kin wrote:
Thu Feb 13, 2020 1:01 pm
Will you contribute to and receive Social Security benefits? That’s an important part to consider. Your wife will be eligible for your SS if you die before she does.

I trust state government to be responsible stewards of state pension plans about as much as I trust a shark to exercise restraint. I would personally much rather have total control over 50-75% of the asset value than hope that my state government honors their promises 30 years from now.

You didn’t post your income but you should also be looking at Savers Credits if you can get your AGI under $65,000. https://www.irs.gov/retirement-plans/pl ... ers-credit
Thanks for the heads up! I was unaware of the spousal social security benefit. I will contribute to and receive social security benefits, so that gives me some peace of mind. My starting pay at this new job is a huge step down. From $100k to $65k. My law school will pay my $100k in student loans for taking this public-service job, a huge benefit, but I believe that assistance might be taxed as income each year, pushing my AGI up. I think that if I max out an IRA, I might skate right under $65k. However, my wife, an artist, also works sporadically, so I'm cautiously anticipating her bringing in $10-$20k after taxes. I think it's likely that even with IRA contributions we'll be over $65k. I've never heard of savers credits, but it seems like it would be a great benefit for a relatively low earner like myself. Trying to plan this transition to work in my low-paying dream job has been extremely exhausting. I am confident that the extra time with my daughter and the feeling of doing something I believe in every day will make it worth it, but I'm here on Bogleheads trying to make sure I get our finances right for the long term.

petulant
Posts: 951
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Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by petulant » Thu Feb 13, 2020 8:01 pm

whereskyle wrote:
Thu Feb 13, 2020 7:32 pm
il0kin wrote:
Thu Feb 13, 2020 1:01 pm
Will you contribute to and receive Social Security benefits? That’s an important part to consider. Your wife will be eligible for your SS if you die before she does.

I trust state government to be responsible stewards of state pension plans about as much as I trust a shark to exercise restraint. I would personally much rather have total control over 50-75% of the asset value than hope that my state government honors their promises 30 years from now.

You didn’t post your income but you should also be looking at Savers Credits if you can get your AGI under $65,000. https://www.irs.gov/retirement-plans/pl ... ers-credit
Thanks for the heads up! I was unaware of the spousal social security benefit. I will contribute to and receive social security benefits, so that gives me some peace of mind. My starting pay at this new job is a huge step down. From $100k to $65k. My law school will pay my $100k in student loans for taking this public-service job, a huge benefit, but I believe that assistance might be taxed as income each year, pushing my AGI up. I think that if I max out an IRA, I might skate right under $65k. However, my wife, an artist, also works sporadically, so I'm cautiously anticipating her bringing in $10-$20k after taxes. I think it's likely that even with IRA contributions we'll be over $65k. I've never heard of savers credits, but it seems like it would be a great benefit for a relatively low earner like myself. Trying to plan this transition to work in my low-paying dream job has been extremely exhausting. I am confident that the extra time with my daughter and the feeling of doing something I believe in every day will make it worth it, but I'm here on Bogleheads trying to make sure I get our finances right for the long term.
Also a lawyer with a government. At your age the investment plan is a better bet. You haven't shared the exact formula, but if it's a standard age * salary * years of service, the way the math works compared to contributions is that your contributions have a very low implied rate of return in early years and a much higher rate in later years. That means at a very young age like 30 the time your early contributions compound is invaluable. There is a possibility with some of these programs that a pension "catches up" on the average rate of return, as you seem to imply, but then you've got the possibilities that you want to leave halfway through or that the stock market outperforms a reasonably conservative estimate. I am stuck in a pension and would move to an investment plan in a heartbeat.

Your law school's program should be structured as a loan that they forgive once you make student loan payments for 9-12 months each year. That will make it qualify as a non-taxable forgiven loan under a statutory exemption. Discuss with your law school.

Saver's Credit is nice, but don't sweat it if you don't qualify.

Your student loans should be on an income-based plan. That means the payments will come down to 10% of AGI. Note the consequence is that you basically will have an additional 10% income tax on top of 12% federal and any state tax.

psy1
Posts: 132
Joined: Thu Jan 31, 2019 1:40 am

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by psy1 » Thu Feb 13, 2020 8:20 pm

I would opt for a private plan (in anything). The Constitution does not ban insolvency and many states have mortgaged their futures on handouts. i would not want my future dependent on that. Even if your state is responsibly managed now, what are the odds that it will remain so? And you have zero control over that.

Also, you would be indentured to your job until 64. Who wants that? As you age, the state would be incentivized to get rid of you. Not a recipe for job satisfaction and a happy retirement.

FoolMeOnce
Posts: 787
Joined: Mon Apr 24, 2017 11:16 am

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by FoolMeOnce » Thu Feb 13, 2020 8:34 pm

whereskyle wrote:
Thu Feb 13, 2020 7:20 pm
FoolMeOnce wrote:
Thu Feb 13, 2020 12:59 pm
Can you contribute more than 3% to the 401k without additional matching? I didn't think an employer could limit individual contributions like that, but maybe I'm wrong. Can you continue anything while participation in the pension system?

Maybe you only focused on 3% to compare apples to apples. The first $6k in your 401k is similar to getting the pension (both require your 3% plus employer contributions). $6k/year for 34 years requires 8% nominal annual returns to reach $1 million nominal future dollars, which is roughly the equivalent of a $42k pension going by the 4% rule. Sounds like a good deal if you think the plan is stable enough (especially if you can still contribute to a 401k).

I get that the expected pension has no COLA once you start drawing it, but is that forecasted amount in future dollars or current dollars?
Thanks for the input! All forecasted amounts are in present dollars. The pension does not affect my social security benefits, and I would likely never earn enough at this job to be disqualified from ira contributions. At starting pay, I should be able to max out at least one account in addition to my work retirement plan. The real hold-up for me is that, while the pension benefit is equivalent (or greater) in value over a longer retirement, if I die with the pension, my wife gets nothing, whereas if I die while living off of the $1m in investments, I leave her with a $1m (excluding whatever tax penalties I have not yet learned about). That to me is a pretty stark distinction. I think when it comes down to brass tax, if the stock market is no longer a good long-term investment, I do not see how the economy would function and thus I do not see how the pension would still be valuable. Maybe this is a straw-man I'm constructing to obscure my fear of leaving DW with nothing. I ask myself if 401ks have been iffy in the past because people have simply chosen the wrong investments. I don't see how I go wrong with the Russell 3000 with .02, unless of course Boglehead philosophy no longer applies in 30 years because something happened to the stock market that's never happened to it before. I have met people nearing retirement who long for pensions and who continue working even though they probably don't have to out of fear of what the market will do once they stop. Perhaps I'm underestimating that kind of peace of mind. I also don't want to be driving to the capitol to picket because the state is cutting pension benefits. I try to follow Bogle in all things, so that I can stay the course, and I know that I should appreciate the unique diversification that a pension offers.
A lack of a survivor benefit is a good reason to forgo the pension.

As for your AGI, are you sure you can't contribute up to $19k to your 401k (if that leaves enough for spending)? That's still confusing me.

Also, at your expected new tax rate, you should consider using Roths for you and your spouse.

Topic Author
whereskyle
Posts: 41
Joined: Wed Jan 29, 2020 10:29 am

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by whereskyle » Thu Feb 13, 2020 9:15 pm

FoolMeOnce wrote:
Thu Feb 13, 2020 8:34 pm
whereskyle wrote:
Thu Feb 13, 2020 7:20 pm
FoolMeOnce wrote:
Thu Feb 13, 2020 12:59 pm
Can you contribute more than 3% to the 401k without additional matching? I didn't think an employer could limit individual contributions like that, but maybe I'm wrong. Can you continue anything while participation in the pension system?

Maybe you only focused on 3% to compare apples to apples. The first $6k in your 401k is similar to getting the pension (both require your 3% plus employer contributions). $6k/year for 34 years requires 8% nominal annual returns to reach $1 million nominal future dollars, which is roughly the equivalent of a $42k pension going by the 4% rule. Sounds like a good deal if you think the plan is stable enough (especially if you can still contribute to a 401k).

I get that the expected pension has no COLA once you start drawing it, but is that forecasted amount in future dollars or current dollars?
Thanks for the input! All forecasted amounts are in present dollars. The pension does not affect my social security benefits, and I would likely never earn enough at this job to be disqualified from ira contributions. At starting pay, I should be able to max out at least one account in addition to my work retirement plan. The real hold-up for me is that, while the pension benefit is equivalent (or greater) in value over a longer retirement, if I die with the pension, my wife gets nothing, whereas if I die while living off of the $1m in investments, I leave her with a $1m (excluding whatever tax penalties I have not yet learned about). That to me is a pretty stark distinction. I think when it comes down to brass tax, if the stock market is no longer a good long-term investment, I do not see how the economy would function and thus I do not see how the pension would still be valuable. Maybe this is a straw-man I'm constructing to obscure my fear of leaving DW with nothing. I ask myself if 401ks have been iffy in the past because people have simply chosen the wrong investments. I don't see how I go wrong with the Russell 3000 with .02, unless of course Boglehead philosophy no longer applies in 30 years because something happened to the stock market that's never happened to it before. I have met people nearing retirement who long for pensions and who continue working even though they probably don't have to out of fear of what the market will do once they stop. Perhaps I'm underestimating that kind of peace of mind. I also don't want to be driving to the capitol to picket because the state is cutting pension benefits. I try to follow Bogle in all things, so that I can stay the course, and I know that I should appreciate the unique diversification that a pension offers.
A lack of a survivor benefit is a good reason to forgo the pension.

As for your AGI, are you sure you can't contribute up to $19k to your 401k (if that leaves enough for spending)? That's still confusing me.

Also, at your expected new tax rate, you should consider using Roths for you and your spouse.
Thanks. I am thinking that I will convert our $7k in a TIRA into a Roth once our tax bracket drops. Or I might just continue building on the even more minuscule holdings I already have in my Roth. I agree that it is very odd that I cannot contribute additional funds, but that is what the fine print says. No explanation for it, and I wonder what the reason could be. But even if I could, I think 15% of my salary is about as much as I will be able to contribute and maintain a reasonable standard of living. I always assume that my wife will make $0, and when she does take on a project that nets income I generally encourage us to use most of it for recreation and the things we don't buy when we're adhering to my spartan budget. If she starts earning more, we will contribute to a Roth in her name, and with that we should be in a very strong position for our income and lifestyle.

Topic Author
whereskyle
Posts: 41
Joined: Wed Jan 29, 2020 10:29 am

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by whereskyle » Thu Feb 13, 2020 9:17 pm

FoolMeOnce wrote:
Thu Feb 13, 2020 8:34 pm
whereskyle wrote:
Thu Feb 13, 2020 7:20 pm
FoolMeOnce wrote:
Thu Feb 13, 2020 12:59 pm
Can you contribute more than 3% to the 401k without additional matching? I didn't think an employer could limit individual contributions like that, but maybe I'm wrong. Can you continue anything while participation in the pension system?

Maybe you only focused on 3% to compare apples to apples. The first $6k in your 401k is similar to getting the pension (both require your 3% plus employer contributions). $6k/year for 34 years requires 8% nominal annual returns to reach $1 million nominal future dollars, which is roughly the equivalent of a $42k pension going by the 4% rule. Sounds like a good deal if you think the plan is stable enough (especially if you can still contribute to a 401k).

I get that the expected pension has no COLA once you start drawing it, but is that forecasted amount in future dollars or current dollars?
Thanks for the input! All forecasted amounts are in present dollars. The pension does not affect my social security benefits, and I would likely never earn enough at this job to be disqualified from ira contributions. At starting pay, I should be able to max out at least one account in addition to my work retirement plan. The real hold-up for me is that, while the pension benefit is equivalent (or greater) in value over a longer retirement, if I die with the pension, my wife gets nothing, whereas if I die while living off of the $1m in investments, I leave her with a $1m (excluding whatever tax penalties I have not yet learned about). That to me is a pretty stark distinction. I think when it comes down to brass tax, if the stock market is no longer a good long-term investment, I do not see how the economy would function and thus I do not see how the pension would still be valuable. Maybe this is a straw-man I'm constructing to obscure my fear of leaving DW with nothing. I ask myself if 401ks have been iffy in the past because people have simply chosen the wrong investments. I don't see how I go wrong with the Russell 3000 with .02, unless of course Boglehead philosophy no longer applies in 30 years because something happened to the stock market that's never happened to it before. I have met people nearing retirement who long for pensions and who continue working even though they probably don't have to out of fear of what the market will do once they stop. Perhaps I'm underestimating that kind of peace of mind. I also don't want to be driving to the capitol to picket because the state is cutting pension benefits. I try to follow Bogle in all things, so that I can stay the course, and I know that I should appreciate the unique diversification that a pension offers.
A lack of a survivor benefit is a good reason to forgo the pension.

As for your AGI, are you sure you can't contribute up to $19k to your 401k (if that leaves enough for spending)? That's still confusing me.

Also, at your expected new tax rate, you should consider using Roths for you and your spouse.
Thanks. I am thinking that I will convert our $7k in a TIRA into a Roth once our tax bracket drops. Or I might just continue building on the even more minuscule holdings I already have in my Roth. I agree that it is very odd that I cannot contribute additional funds, but that is what the fine print says. No explanation for it, and I wonder what the reason could be. But even if I could, I think 15% of my salary is about as much as I will be able to contribute to the employment plan and to my IRA while maintaining a reasonable standard of living. I always assume that my wife will make $0, and when she does take on a project that nets income I generally encourage us to use most of it for recreation. If she starts earning more, we will contribute to a Roth in her name, and with that we should be in a very strong position for our income and lifestyle.

petulant
Posts: 951
Joined: Thu Sep 22, 2016 1:09 pm

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by petulant » Thu Feb 13, 2020 9:18 pm

whereskyle wrote:
Thu Feb 13, 2020 9:15 pm
FoolMeOnce wrote:
Thu Feb 13, 2020 8:34 pm
whereskyle wrote:
Thu Feb 13, 2020 7:20 pm
FoolMeOnce wrote:
Thu Feb 13, 2020 12:59 pm
Can you contribute more than 3% to the 401k without additional matching? I didn't think an employer could limit individual contributions like that, but maybe I'm wrong. Can you continue anything while participation in the pension system?

Maybe you only focused on 3% to compare apples to apples. The first $6k in your 401k is similar to getting the pension (both require your 3% plus employer contributions). $6k/year for 34 years requires 8% nominal annual returns to reach $1 million nominal future dollars, which is roughly the equivalent of a $42k pension going by the 4% rule. Sounds like a good deal if you think the plan is stable enough (especially if you can still contribute to a 401k).

I get that the expected pension has no COLA once you start drawing it, but is that forecasted amount in future dollars or current dollars?
Thanks for the input! All forecasted amounts are in present dollars. The pension does not affect my social security benefits, and I would likely never earn enough at this job to be disqualified from ira contributions. At starting pay, I should be able to max out at least one account in addition to my work retirement plan. The real hold-up for me is that, while the pension benefit is equivalent (or greater) in value over a longer retirement, if I die with the pension, my wife gets nothing, whereas if I die while living off of the $1m in investments, I leave her with a $1m (excluding whatever tax penalties I have not yet learned about). That to me is a pretty stark distinction. I think when it comes down to brass tax, if the stock market is no longer a good long-term investment, I do not see how the economy would function and thus I do not see how the pension would still be valuable. Maybe this is a straw-man I'm constructing to obscure my fear of leaving DW with nothing. I ask myself if 401ks have been iffy in the past because people have simply chosen the wrong investments. I don't see how I go wrong with the Russell 3000 with .02, unless of course Boglehead philosophy no longer applies in 30 years because something happened to the stock market that's never happened to it before. I have met people nearing retirement who long for pensions and who continue working even though they probably don't have to out of fear of what the market will do once they stop. Perhaps I'm underestimating that kind of peace of mind. I also don't want to be driving to the capitol to picket because the state is cutting pension benefits. I try to follow Bogle in all things, so that I can stay the course, and I know that I should appreciate the unique diversification that a pension offers.
A lack of a survivor benefit is a good reason to forgo the pension.

As for your AGI, are you sure you can't contribute up to $19k to your 401k (if that leaves enough for spending)? That's still confusing me.

Also, at your expected new tax rate, you should consider using Roths for you and your spouse.
Thanks. I am thinking that I will convert our $7k in a TIRA into a Roth once our tax bracket drops. Or I might just continue building on the even more minuscule holdings I already have in my Roth. I agree that it is very odd that I cannot contribute additional funds, but that is what the fine print says. No explanation for it, and I wonder what the reason could be. But even if I could, I think 15% of my salary is about as much as I will be able to contribute and maintain a reasonable standard of living. I always assume that my wife will make $0, and when she does take on a project that nets income I generally encourage us to use most of it for recreation and the things we don't buy when we're adhering to my spartan budget. If she starts earning more, we will contribute to a Roth in her name, and with that we should be in a very strong position for our income and lifestyle.
No no no! Like I said above, the student loan repayment plan is like an extra 10% tax rate. That means your new tax rate will be federal 12% plus 10% SL plus state income for at least 22%. That is higher than probable retirement income and higher than what you'll be after PSLF. So that means you save tIRA for you and spouse now and then convert later to top of the 12% bracket after SL forgiveness.

petulant
Posts: 951
Joined: Thu Sep 22, 2016 1:09 pm

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by petulant » Thu Feb 13, 2020 9:22 pm

Maybe I need to be more clear. The student loan repayment will be 10% of AGI, most likely. AGI will be from the tax return two years ago, except for the first one or two when you mark "Yes, my income dropped since the tax return." Your AGI on the following tax returns is AFTER tax-deductible work retirement and tIRA contributions. So every dollar you put in tIRA will avoid income tax AND SL payment consideration. That is effectively an additional 10% tax rate, and it means you almost always want to do tax-deferred saving until PSLF finishes.

Topic Author
whereskyle
Posts: 41
Joined: Wed Jan 29, 2020 10:29 am

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by whereskyle » Thu Feb 13, 2020 9:29 pm

petulant wrote:
Thu Feb 13, 2020 9:18 pm
whereskyle wrote:
Thu Feb 13, 2020 9:15 pm
FoolMeOnce wrote:
Thu Feb 13, 2020 8:34 pm
whereskyle wrote:
Thu Feb 13, 2020 7:20 pm
FoolMeOnce wrote:
Thu Feb 13, 2020 12:59 pm
Can you contribute more than 3% to the 401k without additional matching? I didn't think an employer could limit individual contributions like that, but maybe I'm wrong. Can you continue anything while participation in the pension system?

Maybe you only focused on 3% to compare apples to apples. The first $6k in your 401k is similar to getting the pension (both require your 3% plus employer contributions). $6k/year for 34 years requires 8% nominal annual returns to reach $1 million nominal future dollars, which is roughly the equivalent of a $42k pension going by the 4% rule. Sounds like a good deal if you think the plan is stable enough (especially if you can still contribute to a 401k).

I get that the expected pension has no COLA once you start drawing it, but is that forecasted amount in future dollars or current dollars?
Thanks for the input! All forecasted amounts are in present dollars. The pension does not affect my social security benefits, and I would likely never earn enough at this job to be disqualified from ira contributions. At starting pay, I should be able to max out at least one account in addition to my work retirement plan. The real hold-up for me is that, while the pension benefit is equivalent (or greater) in value over a longer retirement, if I die with the pension, my wife gets nothing, whereas if I die while living off of the $1m in investments, I leave her with a $1m (excluding whatever tax penalties I have not yet learned about). That to me is a pretty stark distinction. I think when it comes down to brass tax, if the stock market is no longer a good long-term investment, I do not see how the economy would function and thus I do not see how the pension would still be valuable. Maybe this is a straw-man I'm constructing to obscure my fear of leaving DW with nothing. I ask myself if 401ks have been iffy in the past because people have simply chosen the wrong investments. I don't see how I go wrong with the Russell 3000 with .02, unless of course Boglehead philosophy no longer applies in 30 years because something happened to the stock market that's never happened to it before. I have met people nearing retirement who long for pensions and who continue working even though they probably don't have to out of fear of what the market will do once they stop. Perhaps I'm underestimating that kind of peace of mind. I also don't want to be driving to the capitol to picket because the state is cutting pension benefits. I try to follow Bogle in all things, so that I can stay the course, and I know that I should appreciate the unique diversification that a pension offers.
A lack of a survivor benefit is a good reason to forgo the pension.

As for your AGI, are you sure you can't contribute up to $19k to your 401k (if that leaves enough for spending)? That's still confusing me.

Also, at your expected new tax rate, you should consider using Roths for you and your spouse.
Thanks. I am thinking that I will convert our $7k in a TIRA into a Roth once our tax bracket drops. Or I might just continue building on the even more minuscule holdings I already have in my Roth. I agree that it is very odd that I cannot contribute additional funds, but that is what the fine print says. No explanation for it, and I wonder what the reason could be. But even if I could, I think 15% of my salary is about as much as I will be able to contribute and maintain a reasonable standard of living. I always assume that my wife will make $0, and when she does take on a project that nets income I generally encourage us to use most of it for recreation and the things we don't buy when we're adhering to my spartan budget. If she starts earning more, we will contribute to a Roth in her name, and with that we should be in a very strong position for our income and lifestyle.
No no no! Like I said above, the student loan repayment plan is like an extra 10% tax rate. That means your new tax rate will be federal 12% plus 10% SL plus state income for at least 22%. That is higher than probable retirement income and higher than what you'll be after PSLF. So that means you save tIRA for you and spouse now and then convert later to top of the 12% bracket after SL forgiveness.
I don't fully understand. I have been on IBR, I think REPAYE, since graduation. I am not exactly sure what that has done to my tax rate in the past two years. By having the law school give me a loan each year I work for the state, I will incur a 10% additional tax rate on all of my income? Sorry for my confusion.

petulant
Posts: 951
Joined: Thu Sep 22, 2016 1:09 pm

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by petulant » Thu Feb 13, 2020 10:02 pm

whereskyle wrote:
Thu Feb 13, 2020 9:29 pm
petulant wrote:
Thu Feb 13, 2020 9:18 pm
whereskyle wrote:
Thu Feb 13, 2020 9:15 pm
FoolMeOnce wrote:
Thu Feb 13, 2020 8:34 pm
whereskyle wrote:
Thu Feb 13, 2020 7:20 pm


Thanks for the input! All forecasted amounts are in present dollars. The pension does not affect my social security benefits, and I would likely never earn enough at this job to be disqualified from ira contributions. At starting pay, I should be able to max out at least one account in addition to my work retirement plan. The real hold-up for me is that, while the pension benefit is equivalent (or greater) in value over a longer retirement, if I die with the pension, my wife gets nothing, whereas if I die while living off of the $1m in investments, I leave her with a $1m (excluding whatever tax penalties I have not yet learned about). That to me is a pretty stark distinction. I think when it comes down to brass tax, if the stock market is no longer a good long-term investment, I do not see how the economy would function and thus I do not see how the pension would still be valuable. Maybe this is a straw-man I'm constructing to obscure my fear of leaving DW with nothing. I ask myself if 401ks have been iffy in the past because people have simply chosen the wrong investments. I don't see how I go wrong with the Russell 3000 with .02, unless of course Boglehead philosophy no longer applies in 30 years because something happened to the stock market that's never happened to it before. I have met people nearing retirement who long for pensions and who continue working even though they probably don't have to out of fear of what the market will do once they stop. Perhaps I'm underestimating that kind of peace of mind. I also don't want to be driving to the capitol to picket because the state is cutting pension benefits. I try to follow Bogle in all things, so that I can stay the course, and I know that I should appreciate the unique diversification that a pension offers.
A lack of a survivor benefit is a good reason to forgo the pension.

As for your AGI, are you sure you can't contribute up to $19k to your 401k (if that leaves enough for spending)? That's still confusing me.

Also, at your expected new tax rate, you should consider using Roths for you and your spouse.
Thanks. I am thinking that I will convert our $7k in a TIRA into a Roth once our tax bracket drops. Or I might just continue building on the even more minuscule holdings I already have in my Roth. I agree that it is very odd that I cannot contribute additional funds, but that is what the fine print says. No explanation for it, and I wonder what the reason could be. But even if I could, I think 15% of my salary is about as much as I will be able to contribute and maintain a reasonable standard of living. I always assume that my wife will make $0, and when she does take on a project that nets income I generally encourage us to use most of it for recreation and the things we don't buy when we're adhering to my spartan budget. If she starts earning more, we will contribute to a Roth in her name, and with that we should be in a very strong position for our income and lifestyle.
No no no! Like I said above, the student loan repayment plan is like an extra 10% tax rate. That means your new tax rate will be federal 12% plus 10% SL plus state income for at least 22%. That is higher than probable retirement income and higher than what you'll be after PSLF. So that means you save tIRA for you and spouse now and then convert later to top of the 12% bracket after SL forgiveness.
I don't fully understand. I have been on IBR, I think REPAYE, since graduation. I am not exactly sure what that has done to my tax rate in the past two years. By having the law school give me a loan each year I work for the state, I will incur a 10% additional tax rate on all of my income? Sorry for my confusion.
Read my post above--the one I did that was not a reply. I think it explains it more clearly. Let me know if that's still not clear. It's very important for you to understand this aspect of REPAYE.

TheDDC
Posts: 637
Joined: Mon Jan 08, 2018 11:11 am

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by TheDDC » Thu Feb 13, 2020 10:07 pm

I would not listen to the uninformed FUD noise on her regarding pensions. There are many “have nots” who make their voice heard in that sphere let’s just say. You will receive your pension as it is treated as property.

That said, the pension benefit does not sound lucrative. With my state pension, we have the option of withdrawing our contributions and interest (4%) As a lump sum at retirement And receive 100% of the benefit without COLA. And we have the option of a joint survivorship (50% or 100%) at a reduced benefit. I would decline the survivorship option. I would invest the lump sum at my current AA of 100/0 and treat as “life insurance” which is mostly unneeded at retirement anyway. So that’s icing on the cake.

If you could invest into good mutual funds that beat the S&P then I would do that instead in your DC account. Also make sure the management feeds are not excessive. In my state they chose Voya for the record keeper for the DC plan. To me that seems like a ripoff.

Another option is choose the pension and also max out your tax advantaged space. So you have good 403(b) options? You would get the best of both worlds this way.

Good luck and good beverage.

-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

jlm98fl
Posts: 3
Joined: Thu Jan 29, 2015 7:33 pm

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by jlm98fl » Fri Feb 14, 2020 8:32 am

[/quote]

Thank you for the input. I do not trust my state legislators. That is for sure. (They're currently trying to merge my wonderful, small public honors college into one of the big state universities, effectively ending the independence that made it such a unique place where the seeds of rigorous logic and common sense that eventually led me to become a Boglehead could grow.)

[/quote]


Based on your comment about your small public honors college I believe I live in your state. In fact, I work for a municipal government near the other, newer university that is being considered for merging in with the state's flagship university.

My employer has a fairly generous pension, but is also a FICA alternative plan, so it is a mandatory pension in lieu of Social Security unless the employee is over age 50 when they come on board or are part of the executive team, in which case they can opt to participate in a 401a.

From the pro-deferred comp perspective, the state is not known for giving out raises, though it appears the Governor and Legislature may try to address that to a degree this year. In fact, in 2011, state employees lost 3% when they started contributing to the state pension plan. The timing was pretty rough there. Many state employees have lost ground to inflation since the recession. If that continues, your salary calculation for the pension probably won't keep up with inflation either up to the point you start collecting (I believe you earn either 1.6% or 2% of the average of your highest eight years of salary per year of service). You may want to elect to use the defined contribution plan in an attempt to beat inflation over the coming decades.

On the other hand, the state's pension plan is fairly well funded and they have been slowly reducing the assumed rate of return which results in a lower funding ratio, but less risky return assumptions in the future. It also, at least currently, does offer a DROP (deferred retirement option plan) if you attain certain years of service. This allows you to continue employment while your pension payments accrue in a tax deferred trust fund earning a set level of return. Last I knew employees could stay in DROP for five years. Once they finally left terminated employment, that money can be rolled into an IRA and then the employee collects the monthly pension payment as normal. Politics as they are, there has been occasional talk of eliminating that due to the "double dipping" image, but it's still an option.

Just my thoughts on the subject. Hope it is at least a little helpful...of course if you're not in the state I think you are, then it's not at all :D

DivesEtPauper
Posts: 32
Joined: Fri Mar 15, 2019 11:38 pm

Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by DivesEtPauper » Fri Feb 14, 2020 8:52 am

I am in a similar situation. I work for a local government, but all city/state employees get access to the same retirement options - the plan is operated at the state level.

I had a similar choice when I was hired - pension or 401k.

Our pension is essentially capped at two-thirds of your salary. (The actual formula is a bit more complex, but two-thirds is a good enough ballpark.) Of course, to get that amount you need to reach a minimum age and have worked here a minimum number of years. (The actual numbers depend on when you started - in short, old timers get to retire younger than newer folks, and they keep moving the bar.) If your age and/or years of service are below the minimums, your pension will be reduced (again, a complex formula), but there's no way to significantly increase your pension other than having a high income during the years leading up to your retirement.

Collecting a pension also includes - for now - access to some kind of health insurance, though they themselves have pointed out that nothing is guaranteed. You will not be surprised to hear that they've reduced this benefit over the years.

Our 401k sounds better than yours - I contribute 10%, my employer adds 7.5%. The only requirement to retire is to be age 55 or older. The money can be taken as a lump sum, rolled into an IRA, or annuitized (so... a pension?). There is no health insurance offered.

I picked the 401k. I wasn't sure I'd want to work here 30+ years (I'm still not sure if I want to stay that long). Plus, 66% of my current salary just... doesn't seem like that much. I feel like I can do better with the 401k. And, unless I'm misunderstanding, annuitizing the 401k is effectively the same as getting a pension.

student
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Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by student » Fri Feb 14, 2020 9:00 am

Very few places offer Russell 3000. The only big place that I know of is TIAA, and it is big in higher ed. The lowest ER that I see at TIAA for Russell 3000 is 0.05%. So your 0.02% is a very a good deal. If you indeed have TIAA, take a look at its TIAA Traditional offerings.

tibbitts
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Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by tibbitts » Fri Feb 14, 2020 9:32 am

student wrote:
Fri Feb 14, 2020 9:00 am
Very few places offer Russell 3000. The only big place that I know of is TIAA, and it is big in higher ed. The lowest ER that I see at TIAA for Russell 3000 is 0.05%. So your 0.02% is a very a good deal. If you indeed have TIAA, take a look at its TIAA Traditional offerings.
Not sure how rare it is - my plan was not TIAA and had the R2000, so small/mid, and similar expense ratio. In any case yes if TIAA then Real Estate and Traditional are the two options you can't find anywhere else. But of course many institutions with TIAA will only offter funds with dramatically higher ERs than mentioned here - even index funds. It's not possible to generalize with TIAA.

DoTheMath
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Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by DoTheMath » Fri Feb 14, 2020 6:55 pm

dknightd wrote:
Thu Feb 13, 2020 11:48 am
I faced that decision 30 years ago. In the end I decided to opt for the 401/403 investment plan. In retrospect I would probably have been better off with a combination of pension and private savings. I did not know then that I would work in the same place for 30 years. I do not regret my decision. Toss a coin . . .
Same, but ~12 years ago. In my case the pension was based on years of service so it was clearly a good deal if and only if I spent most of my career here. Which seemed unlikely at the time, but now seems pretty likely. The other big factor was the lack of a COLA for the pension. If you're retired for 30 years, even modest inflation can bite pretty deep into those pension payments. I decided that I'd rather have the portability and long term growth of the investment plan. Our current long bull market has made that work out okay so far :-).
“I am losing precious days. I am degenerating into a machine for making money. I am learning nothing in this trivial world of men. I must break away and get out into the mountains...” -- John Muir

TheDDC
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Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by TheDDC » Fri Feb 14, 2020 9:54 pm

DoTheMath wrote:
Fri Feb 14, 2020 6:55 pm
dknightd wrote:
Thu Feb 13, 2020 11:48 am
I faced that decision 30 years ago. In the end I decided to opt for the 401/403 investment plan. In retrospect I would probably have been better off with a combination of pension and private savings. I did not know then that I would work in the same place for 30 years. I do not regret my decision. Toss a coin . . .
Same, but ~12 years ago. In my case the pension was based on years of service so it was clearly a good deal if and only if I spent most of my career here. Which seemed unlikely at the time, but now seems pretty likely. The other big factor was the lack of a COLA for the pension. If you're retired for 30 years, even modest inflation can bite pretty deep into those pension payments. I decided that I'd rather have the portability and long term growth of the investment plan. Our current long bull market has made that work out okay so far :-).
Yes, but you fix the COLA issue during your working years by saving enough on top of the pension via 403(b) that your equity position makes up for it and provides your COLA. That’s my plan.

-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

DoTheMath
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Re: State Pension Plan vs. Investment Plan (Need Advice)

Post by DoTheMath » Sun Feb 16, 2020 8:20 pm

TheDDC wrote:
Fri Feb 14, 2020 9:54 pm
DoTheMath wrote:
Fri Feb 14, 2020 6:55 pm
dknightd wrote:
Thu Feb 13, 2020 11:48 am
I faced that decision 30 years ago. In the end I decided to opt for the 401/403 investment plan. In retrospect I would probably have been better off with a combination of pension and private savings. I did not know then that I would work in the same place for 30 years. I do not regret my decision. Toss a coin . . .
Same, but ~12 years ago. In my case the pension was based on years of service so it was clearly a good deal if and only if I spent most of my career here. Which seemed unlikely at the time, but now seems pretty likely. The other big factor was the lack of a COLA for the pension. If you're retired for 30 years, even modest inflation can bite pretty deep into those pension payments. I decided that I'd rather have the portability and long term growth of the investment plan. Our current long bull market has made that work out okay so far :-).
Yes, but you fix the COLA issue during your working years by saving enough on top of the pension via 403(b) that your equity position makes up for it and provides your COLA. That’s my plan.

-TheDDC
Yes, absolutely. I would have done the same if I'd gone the pension route.
“I am losing precious days. I am degenerating into a machine for making money. I am learning nothing in this trivial world of men. I must break away and get out into the mountains...” -- John Muir

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