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Author: NarnCeredir One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75377  
Subject: Pensions Date: 3/14/2011 4:59 PM
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Hi everyone,

I've recently accepted my first tenure-track position at a university in the Wisconsin system. All of the craziness in the state aside, I'm pretty excited. I was a little surprised, however, to learn that all state employees are required to participate in the Wisconsin Retirement System, which is a pension system and not a defined-contribution plan. I'm pretty unfamiliar with pensions, and thus my probably naive post.

Some random thoughts: pension contributions are taxable, which surprised me. But then again distributions are not taxed at the end. Another feature that is really unfortunate is that if you separate from state employee -- at any time -- you are only entitled to roll over your personal contributions of 5.8%. Whereas I get to keep both my and my employer's contributions from my current position. I suppose it's a way to try and keep public employees working for the state, but it's a little worrisome in a field where people move around quite a bit during the course of their careers. You can keep all of the money in the system, though, and still draw a pension when you retire.

I just ran some quick numbers, and basically this pension will result in potentially $100,000 less for retirement, forecasting 20 years of life after retiring at 66. Kind of crazy, at least to me. The pension system gives a percentage of the salary from your last three years of service, for the life of the annuitant. I used my starting salary (certain to go up, hopefully, sometime in the next 35 years), and was pretty surprised to see that investing the same amount of money with moderate returns of 5% per year would yield over $100,000 more. That's quite a difference! Of course there's the risk that one wouldn't achieve 5% per year. Anyway, I plan on also contributing to an optional 403 (b) as well and certainly won't be planning on relying solely on the pension.

I don't have any questions, necessarily, but wonder what other opinions are on pensions vs. defined-benefit plans. Based on my small study this afternoon, I'm a bit wary of the former and more comfortable with the latter. I knew pensions were a dying breed, and so I've been thrown off a bit with my forthcoming system as I won't be able to forecast very well how my investments are doing, since everything is simply based on a formula. It makes me uncomfortable (even though I'm sure there are proponents who can set my mind at ease)!

-Narn Ceredir
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