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Author: Lauraly One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76397  
Subject: State pension vs Higher salary Date: 4/18/2012 5:47 PM
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I am 40 and for the last 4 years have worked as a programmer for a state agency here in Arizona.
State workers have not received a raise in 5 years, and this year is not looking like it will happen either.

When I started here, I took a 5% pay cut, which I though was a fair exchange for the state benefits, namely the pension.
Four years later my salary has stagnated, while the going rate in the public sector for programmers with my skills has gone up 10-20k.

My question is, at what point is a pension not worth it? I like the security of it, but as the wage gap increases, I wonder if I could just make my own investments with the extra money from a higher salary.
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Author: katiewa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70554 of 76397
Subject: Re: State pension vs Higher salary Date: 4/18/2012 6:17 PM
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This is NOT an answer to your question: I recommend a detailed spreadsheet to model your situation and all the variables.

My husband works for a contractor to the Dept. of Energy. Engineers for the contractor are pretty well compensated (assuming they are any good), although there are occasionally pay freezes, supervisors you don't get along with (i.e., nominal-to-no pay raises), long hours, lay-offs, changing pension plans/rules, etc.

Over the last decade my husband has seen a number of engineers move over to the DoE side in order to avoid these things. Unfortunately, many of those people have then run into the other side of the coin: lower pay than the private sector, getting paid the same as non-performing employees. Those who thought they were making smart financial choices when they were younger frequently become antagonistic and/or bitter towards their contractor counterparts (whom they oversee) as they get into their late 40's and 50's. It is not a pretty situation.

Run the numbers yourself. Think about the type of environment you want to work in. There is no right answer--pros and cons to both directions.

Kathleen

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Author: DolonAltekar Three stars, 500 posts SC1 Red Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70555 of 76397
Subject: Re: State pension vs Higher salary Date: 4/18/2012 6:41 PM
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Do you want to be stuck at the Gov't agency for 25 more years? I left the government 15 years ago and haven't looked back.

I never wanted to be one of those people who is "retired in place" where they wish they could leave, but they only have a few years before they can draw their pension. My life is too short to play that waiting game.

If you love the job, that's one thing, but I think private industry is better. More risky, for sure, but better.

For me, leaving the Gov't and first going to a contracting company, and now fully private industry has been the best decision I've ever made. The pay is better, the benefits are fine, and the extra money more than pays for itself.

If your lifestyle is fine at the government salary, do what I did - don't increase your lifestyle based on the increase you get at a contractor. Invest all that money. I bet you come out ahead, and you aren't stuck in a job waiting to retire someday.

D.

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Author: AndrewXnn Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70556 of 76397
Subject: Re: State pension vs Higher salary Date: 4/19/2012 4:16 AM
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It depends on specifics of the pension plan; some are better than others.

In addition, Gov't jobs typically have better medical plans for retirees. The retiree medical plan may be worth as much as the pension.

Ball park, I'll guess the pension plan is worth 12% of the salary and the medical plan about 10%.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70557 of 76397
Subject: Re: State pension vs Higher salary Date: 4/19/2012 9:01 AM
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We would need to know the anticipated monthly or annual income you likely will receive and at what age, your current income, and if you are saving additional dollars in a 457 or not before we could give you any decent feedback.

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Author: Lauraly One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70558 of 76397
Subject: Re: State pension vs Higher salary Date: 4/19/2012 12:13 PM
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Hawkin,
According to the state website calculator, I could retire at 59 with a monthly income of about $3200 (based on my current salary). I make 78k now and put an additional 7% in a 457 every paycheck. I have about 100K in retirement funds so far, not including the pension account.

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70559 of 76397
Subject: Re: State pension vs Higher salary Date: 4/19/2012 12:35 PM
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According to the state website calculator, I could retire at 59 with a monthly income of about $3200 (based on my current salary). I make 78k now and put an additional 7% in a 457 every paycheck. I have about 100K in retirement funds so far, not including the pension account.



as others have mentioned --more important you're doing something you like, with and for people you like ('love' would be asking too much <g>)
20 yrs is a long time if you hate getting up in the morning
a lot can happen in 20 yrs

and .. the way gov'ts are whinging about lack of money and threatening bankruptcy -- might not be a pension waiting at the end of those 20 yrs


.. good luck

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Author: joelxwil Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70560 of 76397
Subject: Re: State pension vs Higher salary Date: 4/19/2012 1:25 PM
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Well, it depends on what salary and benefits your new job will offer. While I never had a pension plan specifically, I had a very good 403B plan. Between my contributions and the contributions of the company, I was putting away 24% of my salary tax-deferred.

Now, of course, I had to manage my money myself. I was responsible for making the decisions, and so my retirement depended on what I did in that retirement account. Several decisions were very significant, such as selling everything around mid-March of 2000. That locked in some good profits and kept me from holding a significant loss. Of course, there were also choices of which mutual fund to buy, and the consequences of that decision could be significant. The bottom line is that if you have a plan like that, you should be prepared to manage your money intelligently.

If your new job offers a pension plan, remember that it can be modified at any time, and check your vesting rights. I have not looked at this sort of stuff for years, but some places required you to have put in as much as a year before vesting. Be sure that you are well informed. Just how well is the company doing, and what are its prospects?

You also need to look at Social Security. My wife and I get around $40,000/year from Social Security. Unfortunately, that is subject to government whim also.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70561 of 76397
Subject: Re: State pension vs Higher salary Date: 4/19/2012 1:47 PM
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... I could retire at 59 with a monthly income of about $3200 (based on my current salary)... going rate in the public sector for programmers with my skills has gone up 10-20k.

I plugged some rough numbers into this website and it looks like an annuity that would pay that much for a single male would cost in the ballpark of $650+K .

http://www.brkdirect.com/spia/EZQUOTE.ASP

Matching the exact terms and assumptions could change the amount significantly. There is also a huge chance that you would not stay at the job until you are 59 and you could lose a significant percentage of the pension.

FYI, getting laid off at 55 will reduce your pension by a lot more than most people realize. Spend some time looking into these numbers so you know just what you are getting into.

You can then make a spreadsheet or find a calculator on the web to see what saving 10-20K a year would grow to in 20 years. Be sure to play with the assumptions to get several numbers.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70562 of 76397
Subject: Re: State pension vs Higher salary Date: 4/19/2012 2:05 PM
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According to the state website calculator, I could retire at 59 with a monthly income of about $3200 (based on my current salary). I make 78k now and put an additional 7% in a 457 every paycheck. I have about 100K in retirement funds so far, not including the pension account.

OK, some quick and dirty calculations (please check my math). You can try these yourself at any number of websites. I will list one below that walks you through the calculation process.

https://www.networthiq.com/people/FinanceMom/tips/determinin...

So first FV. I assumed 5% for 25 years of payments (death at 84) with an annual payment of $38400 with the payments fixed (no increase for inflation). The future value of this income stream at age 59 would be $568,267.84.

Now to discount that to today. FV is $568k, IR remains 5%, number of years is the time until you take it (19). PV would then be $224,882.55.

In other words, taking another job would need to provide you additional income in excess of $225,000 (assuming all else equal like same rate of return) over the next 19 years, or about $12000 more a year in income. You would need to invest all $12000 of that (before taxes) at 5% to replace the lost income.

-----------

All else being equal, I think I would stay with the state and collect my fat pension income - that will continue to go up if you get a raise.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70563 of 76397
Subject: Re: State pension vs Higher salary Date: 4/19/2012 2:16 PM
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One other thing I forgot. If you leave, are you still vested in the pension? If not, then you would need to save even more than $12000 a year to make up for the pension (again, assumeing a 5% rate of return pre tax).

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70564 of 76397
Subject: Re: State pension vs Higher salary Date: 4/19/2012 3:14 PM
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Lauraly
Here's the math, based on the numbers you've given and a couple of assumptions.

At 40, you have 19 years to accrue a benefit of 3200 X 12 = 38,400/yr. Assuming your life expectancy is age 82, and assuming this annual benefit is not adjusted for inflation, the lump sum the state would need to buy a life annuity to fund this benefit, assuming a discount rate of 5%, would be 543,860. Assuming the pension uses a level payment formula, the accrued value after 4 years would be $56,579. After 5 it will be 72,535, or an increase of about $16,000 (rounded). Note that this annual account growth (contribution+earnings) will go up to $27,300 at year 16....hence, the accrual rate is greater the longer you work.

State govt pension plans are technically not ERISA plans, so the rules may vary ab it, but for ERISA pensions, it could have a maximum 5 year cliff vest or a graded 3 to 7 year vest. But most state plans, as I understand, do not exceed the ERISA maximum vesting periods, but you'd need to check.

As mentioned, don't forget to look at medical benefits both while working and in retirement, and compare this with what local private employers are offering. Sometimes the difference here is significant. And while at it, just to compare apples to apples, check on employer provided disability insurance (short and long term), life insurance and any FSA benefits. Individually, any one of these may not be a big deal, but collectively they may be.

And with rare exception accrued state pension benefits may not be lost...the Dept of Labor generally prohibits this and the Surpreme Court has upheld it more than once. However, the benefits formula MAY be changed, but this will effect only the years after the change, and most of the time these changes effect only new employees...existing employees are usually not affected. But Medical or other welfare benefits may indeed be changed or eliminated. These promised non-retirement benefits are generally not protected by ERISA.

BruceM

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Author: GolfForeU2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70565 of 76397
Subject: Re: State pension vs Higher salary Date: 4/19/2012 5:21 PM
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You should check information about SS possibly being affected by pension income. I think it may be called the government offset provision.

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Author: PucksFool Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70566 of 76397
Subject: Re: State pension vs Higher salary Date: 4/19/2012 9:34 PM
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Lauraly, I think you've received some excellent advice and thought.

I have a question about how secure you feel that your state government will live up to its obligation. I am a retired teacher in a state where the governor and legislators have talked about the need to default on pension obligations. Do you feel confident that AZ will honor its word to you "when you're sixty-four?"

PF

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70567 of 76397
Subject: Re: State pension vs Higher salary Date: 4/20/2012 12:08 PM
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I like the security of it...

I don't know the specifics of Arizona, but your state pension might not be as secure as you think. It may be safe now, but 5 years, 10 years, when you're about to retire.

Look at California (and a few other states), they are having big issues with pensions. IMHO, its only a matter of time before states and cities declare bankruptcy to get out from under the crushing burden of their pension systems.

I would rather be responsible for my own retirement than depend on someone/something else.

JLC

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Author: Lauraly One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70568 of 76397
Subject: Re: State pension vs Higher salary Date: 4/20/2012 2:08 PM
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Thank you all for the advice, especially the number crunching.
I do like my job and the people I work with and I don't think that AZ is going to default on its pension obligations.
I think I am going to try to negotiate a merit raise here and/or apply to another agency and negotiate a higher salary here, first. It is worth a shot.

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