HellToupee
Footballguy
Reading a lot of bad stuff about the F fund in the tsp. Great plan with a stinker
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PBS Frontline : The Retirement Gamble, sorta Must See (2 Viewers)
- Thread starter Smack Tripper
- Start date
Johnnymac
Footballguy
pbm107
Footballguy
I am going to start a new job in three weeks and I have to decide between two retirement plans.
One is a defined benefit pension plan where I would contribute 6.25% of my earnings with a benefit of 2% x years of service x average earnings for 3 highest years (full benefit at 65).
The other is a 403B plan in which I would need to contribute 5% for a 9.29% match.
I am 38 and currently have a little over 2 times my salary in a 401k plan and a pension that is estimated to pay out about $2000 a month. I am very much motivated to stay at this new job long term because one of the benefits is that they will cover 75% of my kids college tuition if they attend the institution I will work for. I have three children 9, 7, and 5.
Which plan would you choose?
One is a defined benefit pension plan where I would contribute 6.25% of my earnings with a benefit of 2% x years of service x average earnings for 3 highest years (full benefit at 65).
The other is a 403B plan in which I would need to contribute 5% for a 9.29% match.
I am 38 and currently have a little over 2 times my salary in a 401k plan and a pension that is estimated to pay out about $2000 a month. I am very much motivated to stay at this new job long term because one of the benefits is that they will cover 75% of my kids college tuition if they attend the institution I will work for. I have three children 9, 7, and 5.
Which plan would you choose?
mquinnjr
Footballguy
Pension, for 1.25% more contribution you get a guaranteed payout. The 1.25% contribution to get the match sounds great, but then you bear market risk of loss. Plus, you'd want to know what your fund choices are with the 403B, and those could be paper tiger type funds with potentially ludicrous management fees. Without further information, I'd lean pension for the peace of mind it offers.
matuski
Footballguy
Defined Benefit.
My only question would be - define "full benefit". What if you want to retire before 65?
eta - does your wife keep the benefits after you pass?
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mquinnjr
Footballguy
I assume if PBM is fully vested out of the gate, by retiring early you pay the opportunity cost of losing years on the years of service multiplier and highest $ years, assuming salaries rising as a constant by choosing the pension. PBM, you need to check with your employer if you get a reduced % payout of what you accrue in the pension if you retire early. My employer doesn't reduce your payout, you just don't get any payouts until you actually hit the defined full retirement age (62.5 here).
pbm107
Footballguy
Thanks for the responses, and good questions that I don't have all the answers to yet. I will need to know these things prior to picking a plan.
For Death Benefit "More than 10 years of service: amount determined by formula" but it doesn't state what that formula is.
I will be vested for the pension after 10 years,
For retiring before 65 the site shows "Reduced retirement = same as (full benefit) x actuarial age reduction factor" but doesn't state what that factor is.
For Death Benefit "More than 10 years of service: amount determined by formula" but it doesn't state what that formula is.
I will be vested for the pension after 10 years,
FUBAR
Footballguy
The defined benefit plan assuming you're confident it will be there. (what happens if the company goes bankrupt?) And you're reasonably confident you'll want to keep working there long term.
The defined benefit isn't common because it's expensive to the company, even the armed forces are moving away from it somewhat. But it's a very good deal if you live long enough to enjoy it.
What happens if you die after a couple years after retirement? Can your spouse get a benefit as insurance?
The defined benefit isn't common because it's expensive to the company, even the armed forces are moving away from it somewhat. But it's a very good deal if you live long enough to enjoy it.
What happens if you die after a couple years after retirement? Can your spouse get a benefit as insurance?
pbm107
Footballguy
The defined benefit plan is a state plan, so hopefully my state won't go bankrupt or they don't change the plan on me. I definitely want to stay there long term.
If I die in retirement my wife would get a reduced benefit, but I couldn't find how reduced.
NutterButter
Footballguy
FUBAR
Footballguy
That's what I figured, these seem to be government deals. I'd love to hear a good reason to not take the defined benefit other than your possible leaving earlier than planned.
Shutout
Footballguy
Hey PBM.pbm107 said:
Defined benefit is absolutely the way to go. I'm going to toss out a few things to you here so I apologize if it's long.
-You can check your particular state's pension "funded" status online. Pension360.org is an excellent source. This will tell you how your particular state is doing in terms of being "funded" and capable of being in it for the long haul in order to pay you out during your years of retirement.
-It varies plan to plan and state to state, but in general, most state pensions will have a myriad of options which you can choose from that will allow you to ensure your spouse continues to receive benefits if you want (or at least gets a lump sum payout) should you pass away. The trade off is how much you receive each month once you begin receiving benefits. The more you provide for your spouse or try to hedge bets, the less you receive each month.
-For most plans across states, the plan you enter into will be set by law that it can't be altered fundamentally. So if you go into with a 2% actuarial and so much promised to cover this and that—those things won't change. What will happen is your state, if it needs to, will have its state legislatures vote to change things in the future. So, ten years from now, you may be talking to a new employee and the conditions of his hire, although you are both in the same state plan, is that his actuarial might be 1.86% and maybe his final numbers are based on final three years where maybe yours are based on "high" three years...things like that. The trends are that people coming in after you are getting watered-down benefits, much in the same way that your pension package likely isn't as good as what someone had 30 years ago.
-A thing to look at and explore in a pension (especially a state funded one) is" check to see if they offer a health insurance option. Many states will kick in so much towards a health insurance plan that they partner with. For example, an employee with 5 years service might get 20% of their health insurance policy paid for and a guy with 20 years might get 100% paid for (with other employees at different milestone years of services receiving incremental amounts, going up until they get fully provided). This is a MAJOR benefit in a pension system and a very costly one. Forget about 30 years from now for a minute. Use today's dollars and go out and price buying a PPO plan that is typical and you quickly see the value of having health insurance insulated and built in for you. Many people piece it together until Medicare kicks in but especially if you don't have a spouse to lean on her employer's plan or you are thinking of retiring in your 50's vs. late 60's, health insurance is a key aspect in a pension. Where you may have it covered, a 401(k) or 403(b) person is having to budget that from their reserves.
-In your case, 10 years to be vested seems a little long so check on this: What happens if you leave before you are vested. In most cases, what will happen is that you are entitled to either cash out YOUR contribution (not anything your employer matches also) plus interest OR you can roll it over into another investment vehicle. But this is worth looking into because there are some pensions out there that, should you leave before you are vested, you simply forfeit.
Ok, on the downside of a pension. There really is only one, in my opinion. Sure, there are people that will argue the other side and buy into the psychological draw of how they can make more money gambling with it on investments and such but, to be short, my response is simply: with a pension, you have a defined amount. You will never run out of money. I like that option much better than watching these people out there who NEVER KNOW how much is "enough"? Do I need a million? Three million? I think those folks not only gamble with the markets and risk getting swept in a bad economy but also tend to work longer because they keep chasing that carrot of making a few extra dollars to "pad the reserve", not knowing how much is enough. When you get to that point of your life, trust me: you want to be healthy and you want "knowns" in your life. Working for 2-3 more years may not seem like a big deal but when you are 62-70, 2-3 healthy years is invaluable because you simply get to the point where you want to enjoy what you worked for.
I got off track: the downside to pensions. They can force you to stay somewhere when you don't want to. If the company culture goes south. New management isn't great. Company raises and perks go stagnant. These are things you risk experiencing and find yourself saying "I should leave BUT the pension...". You have to be dedicated and COMMITTED to a pension for the long-term payout and take the good with the bad. Not eggs committed to breakfast-Bacon committed to breakfast.
Again, sorry so long but this is one of those things I think is SO important to a generally undereducated public about something that is extremely important. Pensions are awesome. They worked and worked beautifully and are a rare thing that is part of what was truly a better work environment years ago. Pensions are hard work but the work was on the employer. 401(k) and 403(b) put the employee out there almost entirely on their own and you have to ask yourself "do I TRULY understand my K (or B) plan enough to understand what is going on and how the fees impact me, etc?" Retirement is an area none of us should be lazy about.
pbm107
Footballguy
Thank you Shutout for you response. I will check out Pension360.org. Prior to asking here I was leaning towards going with going with the defined benefit plan, and it is good to see than everyone here is suggesting I do that. Concerning your question below, if I leave early they cash out my contribution play 5% interest.
Shutout
Footballguy
No problem. Happy to help.
5% on a non-vested cashout is actually quite good these days. Read the fine print. Most entities reserve the right to adjust that number as they deem necessary year to year (so just don't go into it and forget if for 5 years thinking it held that number the whole time).
Shutout
Footballguy
In PBM's case, it's backed by state and state law and while nothing in life is guaranteed, making it much more likely to continue. Also, a thing he likely has going for him is that when you are in a state pension you tend to, most states, find yourself in a pension system with a LOT of people in it so you have a lot of people on your side and wanting to have your back. If you live in Pennsylvania and your state pension gets into trouble, you have 400K best friends also interested in keeping that thing afloat...which trickles down to the general state economy, meaning the state and state businesses are interested in not having a good chunk of their citizens going broke...which trickles down to the states' credit rating....etc.etc.
If a Pension (company or state) DOES go bankrupt, then there are specific watchdog groups that step in and protect the interest of the people who should be receiving a pension.
In general, you are MUCH MORE likely to have someone assisting you with a pension.
With a 401(k) or 403)b), the burden greatly shifts toward the individual. The most skin off an employer's nose is coming up with the match (which they can vote to discontinue or reduce at any time...so how's that for no guarantee?). After they write a check, they are out of it and all those fees and bad turns in the economy and all the things that can wipe out your retirement plans are YOUR issue, not theirs.
If you go back and study, most recently, the 2008 financial crisis, you get a great eye-opener on how retirement is going to be shaped in years forward. It coincided with a time when the leading edge of baby boomers were entering retirement age and those people literally had a vast majority of their 401 and 403's damaged to the point that they not only couldn't retire but many are still working today, 8 years later. Psychologically, there is a natural conflict of the idea of managing your own retirement that draws us in, but it is also damaging because now, after a scare like that where a person loses 50-70% of their retirement in an instant, they get concerned of ever planning to retire because "what happens if it happens again?"
At least with a pension, you know that "If I get my ducks in a row and eliminate a mortgage and get my bills and house in order, I WILL have X amount of dollars to live on" That's a budget you can actually plan from.
FUBAR
Footballguy
Don't know what the bold means, but you're right on the pension keeping you somewhere you might not otherwise choose to remain. It's been true for me the last few years.
As for the gambling on investments - the pension doesn't necessarily eliminate the unknown. Just as an example, I'm going to retire with between $36k-$48k per year in a pension. Really nice and in a worst case scenario that will keep the lights on and us fed. But it's not enough for the lifestyle we want. So we invest on the side and deal with the issue you mention, except we have a cushion where we know we won't be destitute.
mquinnjr
Footballguy
For those of you who want to go the personal advisor route, Vanguard rolling out a personal advisor service charging 0.30% vs. the industry standard 1.00% for Vanguard funds, which as we know in themselves are just about the lowest fee funds offered in the industry: https://investor.vanguard.com/advice/personal-advisor
NutterButter
Footballguy
What did he do? That sounds ridiculously high. That's better than a senator with similar time served.
matuski
Footballguy
Without giving his title he was #2 in INS/ICE, retired when GWB offered him a spot in his cabinet. Still gets called to testify in front of Congress on Immigration reform every couple years.
ETA - he makes that every month now in the private sector consulting.
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Doctor Detroit
Please remove your headgear
It's a rare salary combination that is no longer possible to obtain. SES+Law Enforcement Pay+CSRS Retirement system(now dead). In the new retirement system he'd get half that, and he was at the top levels of government.
Chadstroma
Footballguy
Had a customer today that gets $9,500 (not exactly but right about that) in pension from the state of Illinois a month.
Heard on the radio yesterday about a guy in the teacher pension system that is getting something like $250K a year in pension payments. The city where he worked said that they it did not bother them because it was not their tax payers paying for it but all of the taxpayers in Illinois.
This state is doomed.
Heard on the radio yesterday about a guy in the teacher pension system that is getting something like $250K a year in pension payments. The city where he worked said that they it did not bother them because it was not their tax payers paying for it but all of the taxpayers in Illinois.
This state is doomed.
Chadstroma
Footballguy
Actually- not $250K more than $312K last year and up to $321K this and increasing. For a guy who never made more than $300K while actually employed.
Binky The Doormat
Footballguy
IC FBGCav
Footballguy
Anyone translate this for me? This was our financial advisers solution when I complained about our expense ratios.
[SIZE=14pt]I chatted with Plan Administrators and have found several solutions. The one I favor the most is making a broad fund share class shift to lower fees by approx .5% per year[/SIZE]
[SIZE=14pt]I chatted with Plan Administrators and have found several solutions. The one I favor the most is making a broad fund share class shift to lower fees by approx .5% per year[/SIZE]
He is suggesting changing funds in order to lower expenses. They would go down 0.5%. Funds range greatly as far as fees go. You could have something like .2% for an index fund and then something close to 2% for an actively managed fund.
Assuming the fund choices are still solid, lower fees are always a good thing.
IC FBGCav
Footballguy
https://www.sponsorportal.com/SponsorsPortal/index.cfm?nfc&custno=f1fc5413-fc23-4593-94a9-7288aa905ab9&plan=8135&sortby=name
I don't think .5% is enough for these funds.
I don't think .5% is enough for these funds.
IC FBGCav
Footballguy
[SIZE=14pt]C, [/SIZE]
[SIZE=14pt]I spoke with PAI (the plan administrator)about transitioning your 401k assets to A shares with Columbia. They will allow me to use these at a “Load Waived” status which had not been available when we started the plan, hence the reason for going with the C shares avoiding up front loads over the years. Retail investors would not normally have access to the load waived A shares without making a $1mill investment. Glance at the annual expense differences between C and A shares on the front page of the attached fact sheets which accomplishes a lower fee structure. Since this is an open architecture plan, I will send you several other funds that can be added to your plan if changes are being made. Plan Administrators Inc informed me that there would be a flat $150 fee to make the changes plan wide including the addition of several other funds to the platform.[/SIZE]
[SIZE=14pt] [/SIZE]
[SIZE=14pt]Sincerely,[/SIZE]
[SIZE=14pt]This is the latest. The fund he recommends most is below.[/SIZE]
[SIZE=14pt]I spoke with PAI (the plan administrator)about transitioning your 401k assets to A shares with Columbia. They will allow me to use these at a “Load Waived” status which had not been available when we started the plan, hence the reason for going with the C shares avoiding up front loads over the years. Retail investors would not normally have access to the load waived A shares without making a $1mill investment. Glance at the annual expense differences between C and A shares on the front page of the attached fact sheets which accomplishes a lower fee structure. Since this is an open architecture plan, I will send you several other funds that can be added to your plan if changes are being made. Plan Administrators Inc informed me that there would be a flat $150 fee to make the changes plan wide including the addition of several other funds to the platform.[/SIZE]
[SIZE=14pt] [/SIZE]
[SIZE=14pt]Sincerely,[/SIZE]
[SIZE=14pt]This is the latest. The fund he recommends most is below.[/SIZE]
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SouthJersey
Footballguy
My dad used this last year. The advice was really generic and similar to what you would find in the Bogleheads book/blog. The only they they helped with a little was tailoring asset allocation. They more or less had him in one of these "Lazy Portfolios" -- Total Stock Market, Total Bond Market, International Stock Market & International Bond Market.For those of you who want to go the personal advisor route, Vanguard rolling out a personal advisor service charging 0.30% vs. the industry standard 1.00% for Vanguard funds, which as we know in themselves are just about the lowest fee funds offered in the industry: https://investor.vanguard.com/advice/personal-advisor
Johnnymac
Footballguy
Those are some high expense ratios.[SIZE=14pt]C, [/SIZE]
[SIZE=14pt]I spoke with PAI (the plan administrator)about transitioning your 401k assets to A shares with Columbia. They will allow me to use these at a “Load Waived” status which had not been available when we started the plan, hence the reason for going with the C shares avoiding up front loads over the years. Retail investors would not normally have access to the load waived A shares without making a $1mill investment. Glance at the annual expense differences between C and A shares on the front page of the attached fact sheets which accomplishes a lower fee structure. Since this is an open architecture plan, I will send you several other funds that can be added to your plan if changes are being made. Plan Administrators Inc informed me that there would be a flat $150 fee to make the changes plan wide including the addition of several other funds to the platform.[/SIZE]
[SIZE=14pt] [/SIZE]
[SIZE=14pt]Sincerely,[/SIZE]
[SIZE=14pt]This is the latest. The fund he recommends most is below.[/SIZE]
Depends on the health of the state pension fund you are investing it. Many/most will not be able to pay out benefits at their statutory return
mquinnjr
Footballguy
I agree with you. I still feel though that some people are just simply uncomfortable investing without the assistance of an adviser. That's fine, can't force literally everyone to take the time to read Boglehead's Guide to Investing, etc. and feel comfortable investing on their own. If we can get them into an adviser @ 0.3%, investing in Vanguard funds with Vanguard expense ratios, the investor community would be much better off in the long term than they would be going to some local guy charging you 1% for himself to put you into investments with management fees in the 1.5% - 2% neighborhood. That cuts into fee-only advisers, but this is good for business overall IMO. Competition is always good.
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Grace Under Pressure
Footballguy
wilked
Footballguy
wilked
Footballguy
Great planet money podcast about a million dollar bet Buffett made. 20 mins long, queue it up for your commute home.
http://www.npr.org/sections/money/2016/03/04/469247400/episode-688-brilliant-vs-boring
http://www.npr.org/sections/money/2016/03/04/469247400/episode-688-brilliant-vs-boring
matttyl
Footballguy
There was talk earlier about pensions and leaving a benefit to a spouse. That's a big part of what I do - called pension maximization (through life insurance).
To keep the math simple - say you and your wife are both 65 when you retire and you have a full pension of $100k a year. You can take that full amount and if you die at 66, your wife gets nothing. She might not like that.
You can accept a "survivor benefit" where you take a reduced amount, say 78% or $78k a year so that if you die, she will continue to receive that $78k for the rest of her lifetime. A few downsides to that are - 1) what if she pre-deceases you? 2) what if you live to 89 and she only to 90 (you gave up $22k a year, indexed for inflation, for 24 years for her to only get one year of benefit, not a good deal.
Many people are better off taking their full unreduced pension, and instead buy a life insurance policy. $15k a year into a permanent life policy buys a whole lot of coverage. You end up with $85k a year during your lifetime, and if something happens the spouse gets the death benefit of the policy, income tax free, to do with what they please. Also, if both of you live a long, long time - you'll likely have quite a bit of money in "cash value" of the life insurance policy that either can dip into for medical expenses, home improvements, or whatevers needed.
This idea works extremely well if both spouses have a pension to "maximize" (and both are in relatively good health to be able to obtain the insurance).
To keep the math simple - say you and your wife are both 65 when you retire and you have a full pension of $100k a year. You can take that full amount and if you die at 66, your wife gets nothing. She might not like that.
You can accept a "survivor benefit" where you take a reduced amount, say 78% or $78k a year so that if you die, she will continue to receive that $78k for the rest of her lifetime. A few downsides to that are - 1) what if she pre-deceases you? 2) what if you live to 89 and she only to 90 (you gave up $22k a year, indexed for inflation, for 24 years for her to only get one year of benefit, not a good deal.
Many people are better off taking their full unreduced pension, and instead buy a life insurance policy. $15k a year into a permanent life policy buys a whole lot of coverage. You end up with $85k a year during your lifetime, and if something happens the spouse gets the death benefit of the policy, income tax free, to do with what they please. Also, if both of you live a long, long time - you'll likely have quite a bit of money in "cash value" of the life insurance policy that either can dip into for medical expenses, home improvements, or whatevers needed.
This idea works extremely well if both spouses have a pension to "maximize" (and both are in relatively good health to be able to obtain the insurance).
Shutout
Footballguy
It's a saying I picked up from a charming southern business man years ago. In discussing how committed each of our companies were to a joint venture, he used the phrase and explained it as "when you sit down to eat a big country breakfast, the chicken is "invested" in the meal (she laid the eggs) but the pig is COMMITTED to it (it's literally his ### on the line).
Shutout
Footballguy
Illinois is one of the listed worst states in trouble with their pension systems. Incredibly underfunded.
matttyl
Footballguy
IC FBGCav
Footballguy
I am taking over, starting with adding these VTSAX, VSIAX, VFWAX, VEMAX, VICSX. Any insight will be apprecaited.
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wilked
Footballguy
Good list. I personally don't tilt to small-cap, but that is your decision.
Something like:
VTSAX (Total Stock) - 40%
VSIAX (Small Cap) - 10%
VFWAX (All-World) - 20%
VEMAX (Emerg Markets) - 10%
VICSX (Total Bond) - 20%
Personally I skip the small-cap and insert REIT for that 10%
Something like:
VTSAX (Total Stock) - 40%
VSIAX (Small Cap) - 10%
VFWAX (All-World) - 20%
VEMAX (Emerg Markets) - 10%
VICSX (Total Bond) - 20%
Personally I skip the small-cap and insert REIT for that 10%
Binky The Doormat
Footballguy
Yeah, typically if its got some guy's name on it, expect some high to unreasonable fees. "Rock star" pickers that you are paying to outperform and supposedly worthy of their large fees. (they don't provide refunds
)
IC FBGCav
Footballguy
xulf
Footballguy
SaintsInDome2006
Footballguy
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Chadstroma
Footballguy
The bond fun may or may not make sense depending on age. You typically want to shift more towards a bond fun as you get closer to retirement while the further you are away the less you need to put in. I still have no funds in any bonds.
Chadstroma
Footballguy
The bond fun may or may not make sense depending on age. You typically want to shift more towards a bond fun as you get closer to retirement while the further you are away the less you need to put in. I still have no funds in any bonds.
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