Is a pension easy to equal on your own?

behaviorkeltonAugust 19, 2007

I'm on a roll w/ these questions!

So I guess the subject line says it all...

If I give up a state job for greener pastures, can I easily equal or beat the advantages of a state pension?

I know nothing about annuities or any other similar option, but I am guessing that annuities do the same thing as a pension...right?

Is maxing a regular 401k or Roth likely to be a better option?

OK... looking forward to your responses!

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I guess it comes down to what you consider to be the "advantages" of a state pension. To me, the biggest advantage of a state pension is that it's likely to be there when you are ready to collect it. In the private sector, mergers, divestitures, and bankruptcies all can and do affect pension plans. Many companies (including the one at which I work) are moving away from pension plans in favor of defined-benefit plans (401[k]s) and people joining the company now won't get a pension -- they'll get beefed-up contributions to their 401(k)s instead. For now.

If the total compensation (salary and benefits) of a private-sector job is well beyond what you're earning for total compensation now -- and if, based on your research, that company is likely to remain healthy and competitive enough to continue to offer it -- then maybe you can do without the pension because you can afford to save the additional money yourself. Keep in mind, though, that there are limits to how much money you can contribute to a Roth IRA; you'll be far better off with a 401(k) you can max out at 10-15% of your salary.

    Bookmark   August 19, 2007 at 9:08PM
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I think there are resources on-line that would help you to answer your question. My husband is a public employee, he will receive 50% of the average of his final 2 years plus cost of living increases for all of the rest of his life and mine. An actuarial table I looked at, valued that at 800,000. The 403B plan that we have been contributing to for the last 20 years is now worth just 100k, but we had a big family and only contributed 8% of his salary until very recently. I have worked off and on at various jobs in the public, private, and non-profit sectors and will have a pension of just $150.00. Given the way things are going, I think that right now I am glad out money is owed by the government. Of course if my husband had gone to work for Microsoft 25 years ago when he had the chance... I might have something better to do than dink around on computers.

    Bookmark   August 19, 2007 at 9:42PM
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There are all sorts of formulas for pensions so it's difficult to make a generalization that X equals Y. Unless you have very specific comparisons in mind, you might be able to equal it on your own....or you might not.

Plus, many government pensions are the result of union negotiations, so terms can change depending upon the results of scheduled contract talks.

That said, my DH would NEVER be able to equal the pension he will receive next year as part of CalPERS, the biggest pension fund in the US. Many agencies make up PERS, so everybody has slightly different negotiated contracts. For my DH, it's as follows:

2% at age 55 for every year worked. They want to encourage high-priced state employees to retire, so they are allowing everyone the chance to buy "forward time" of up to 5 years. We've done this, so he will have 40 yrs at age 55 (yes, it's the only employer he's ever had and he hates his job, so he's paid enough dues after having a stroke at age 50 due to stress).

That will be 80% of his highest 2 years averaged pay. Plus, his pension is fully assignable. For a slight reduction (around 11%/month), if he dies, I (or whatever beneficiary he names, if I die before he does) gets that pension amount as long as I/they live.

They are not part of Social Security, so his county employer contributes to a 403b plan for him in addition to his pension. We also contribute to a 401k the employer sponsors. Between the two plans we have a good amount saved - perhaps not as much as we should have had, but a lot more than most people have saved at our age (sad but true).

The biggest difference is that he gets full retirement medical benefits for almost nothing. This means full medical including emergency care (something not generally covered by most plans) plus dental for about $125/mo for 2 people. I fully expect these costs to go up (they are subject to contract negotiations with current employees) but it's a lot better than the market rate of $1000/mo. since we're too young for Medicare.

I figure the pension and medical benefits are worth in the area of $1.2M to $1.4M.

    Bookmark   August 19, 2007 at 10:44PM
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ooh - wish we lived in California - although my husband is happy at work in a state university so I suppose I wouldn' really trade. He won't be retiring until he is at least 66 and probably older.

    Bookmark   August 19, 2007 at 11:08PM
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Thanks. It sounds like the answer is "no, it's not easy to beat the retirement/pension offered by a government job".... at least, not if you are attempting to fund your own version of a pension.

Makes me wonder who is really paying for these luxurious government retirement programs!

    Bookmark   August 20, 2007 at 7:16AM
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Do I recall that a few years ago California had invested pension funds in junk bonds that went blooey? State treasurer resigned? I know that the Illinois State teachers pension is 'way underfunded at present.

It could be that the best argument for self-insuring (or pensioning) is the freedom to LEAVE an awful job. Terrible to hang in there for the pension and die the day after you get your "gold watch".

I hope all those who plan to work until they die can find positions better than WalMart greeter. Or, that they are OK with that level of employment. I wouldn't count on more.

    Bookmark   August 20, 2007 at 11:12AM
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So are the lifetime annuities the same thing as a private pension?

A local "your money" radio show guy warned harshly against investing in annuities ("they're a rip off!").

    Bookmark   August 20, 2007 at 5:47PM
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Usually the owner of the money gives a pot of money now, or makes regular payments over a period of time, to usually an insurance company, in exchange for a benefit that the insurance company offers. The insurance company agrees to begin paying a specified amount to that person, beginning at a certain date and, often, continuing for the rest of the person's life. Or, at a lower rate of regular payout, to include a surviving spouse.

However ... some people found that the original owner of the money often died within a few months of beginning to receive the annuity ... and that was the end of the contract: the full amount paid was kept by the insurance company (except for the small amounts paid out).

One financial advisor that I knew had a client over 80, with no dependents, that considered buying an annuity (i.e. was in the process of being sold an annuity by an agent). He, cancelling another appointment, travelled some distance to meet with the two, and when he asked how much of a benefit there would be if the lady died in a couple of months, was told that there was no such provision in the proposed agreement.

Many people who were much younger than that lady, when considering a proposed contract, didn't like that idea, so there's an option available for the original purchaser to have a provision in the contract where the payout period will be for his/her life but, should s/he not live long after the payout begins, the annuity will continue (at a reduced rate) for a 10, or 15 year, or other length, period.

The rates that insurance companies offer regarding annuity payout lebvels usually bear some connection with current interest rates. When rates are high, often the rates of payout offered by annuities are higher than average, but usually not comparable.

When rates are low, as they have been lately, payout rates offered are usually low.

The reason being that the insurance company has guaranteed to make payouts at predetermined levels, but don't have certainty as to how much they can earn on the invested assets in the meantime.

The insurance company doesn't give a guarantee to make a level of payout that is going to hurt them in the end.

In the case of life insurance, the owner of the policy bets that s/he's going to die prematurely, when some non-employable dependents require an income for them to live on for a number of years, but leaving no one to provide it.

The insurance company bets that the buyer of the life insurance is going to live to an advanced age, paying premiums throughout.

The insurance companies are the ones with the actuaries.

In the case of an annuity, the buyer is betting that s/he is going to live for a long time ... collecting that annuity payment regularly through to, say, 104.

And the insurance company bet that s/he's going to die before they've paid out a bucket of money in total to that person.

And if they're covering a spouse, as well, or have given a guarantee that they'll continue paying for, say 10 years, even if the owner dies a month after payout begins ... the amounts of the regular payout the the company is willing to offer is lower. As their risk is greater.

I confess to a bias against insurance companies' practices, largely because they marketed whole life insurance policies for ages, telling ofthe great value in having some value build up in the policy over the years. But, in order to collect that "extra value" ...

... the owner of the policy pretty well had to arrange to be alive and dead at the same time.

For many, who want to spend some time learning how money works, and are not going to get all bent out of shape if the value of theri assets drops for a while when there are corrections in the equity markets, I think that they can likely do better investing on their own, if they do it skilfully.

For quite a long time, I said that no one cares as much about your money as you, so it's wise to learn how to manage it well.

But in recent years I've changed the tune somewhat, to ... no one cares as much about your money as you ... except some folks that would like to shift some (most? all?) of it from your pocket ...

... into theirs.

Your job is to keep that from happening ... unless you get good value in return.

Enough for now.

Good wishes for making themost effective coices, given your circumstances.

ole joyful

    Bookmark   August 20, 2007 at 8:28PM
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The question really is--should you give up a state job to go to the private sector. It depends on how old you are and what you do.
If you have a saleable skill--and the private sector wants that skill you might get stock options, etc. Is there a possibility that you might be able to retire from the state and continue working but for the private sector. Lots of people do that.

    Bookmark   August 20, 2007 at 9:02PM
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Thanks joyful...

I'm a behavior analyst, and it's in high demand for now. Finding work isn't too difficult.

I consult for the local public schools, but there is plenty of work elsewhere. The pay is 30-40% higher, but w/ no pension and health care.

On a side note: Rummaging through the various retirement calculators, it seems fairly certain that annuities shouldn't be in my future. By contributing to a retirement account... things should be fine.

    Bookmark   August 20, 2007 at 9:18PM
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since you work for a school district, you are eligible to invest in the TIAA-CREF family of funds. Check them out if you haven't already. You will see a lot of negative stuff about 403bs, but if you note the asterisk at the end of most of those rants you will see that TIAA-CREF is an exception to their generally low opinion. TIAA is an annuity program and CREF is a whole host of investment options. They have a very good web page. Weenie that I am, I have split my $ between TIAA and a Cref stock fund, but I am not putting new money into the annuity - I might later though. I also like that I can change my account any time I want to on-line.

    Bookmark   August 20, 2007 at 9:39PM
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A pension is a 'defined benefit' based on some formula, frequently 1-2% for each year worked times the salary at exit, or times an average of the highest 2, 3, 5 or whatever years' salaries. It is a fixed benefit. Usually you can opt for a lower benefit to preserve a survivor's benefit for your spouse.

A typical annuity is different in that you agree to exchange a lump sum for a monthly payout. Live a long time and you win; die soon and they win. Some have survivor's benefits. And as Joyful notes, market conditions and interest rates at the time you 'purchase' the annuity impact the deal significantly.

Things can get complicated when the annuity becomes a shell for other investments.

Back to your original question, one way to think about pension vs. drawing down savings is to figure out what kind of lump sum would generate your expected pension. Savings of 100k at 8% could throw off $8200 a year, but at 5% only $5100. Market gyrations and corrections, especially in your early retirement years, are big, big trouble. Which is why many advisors recommend initially drawing down at a rate of only 4% of your nut to be safe.

Soooooo, if your pension would be say 25K, could you sock away 600+k by switching to the private sector with its higher pay? That's using the very conservative 4% draw down. Even drawing down a gutsier 6-7% you would need about 400k to match that 25k pension. Less if you figure you won't live deep into old age and don't care to leave any estate.

That is not considering any COL in the pension or value of any other benefits like health insurance access. And there is always that insidious problem that folks do tend to spend more when they earn more... Flip side is private investment outcome being a crapshoot, and of course whether government, local and federal, can make good on all these entitlement promises.

Complicated. No clear answer.

    Bookmark   August 20, 2007 at 11:05PM
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>>California had invested pension funds in junk bonds that went blooey?Not as far as I remember. PERS is so well funded and managed, the State Legislature has raided it twice in the last 15 years for excess profits to help balance the state budget.

You might be thinking of either the City of San Diego in 2004 or Orange County in 1994. Both chronically underfunded their pension funds for retiree benefits to the point where they will probably never be able to meet all their obligations. They broke federal law in doing so, BTW.

It is a complicated situation to understand, because PERS handles the employees' monthly pensions, but the individual agencies handle the retiree benefits. Also, I don't believe all CA governmental agencies belong to PERS, I believe joining is voluntary. The State Universities, for instance, have their own retirement system that runs along similar lines to PERS but is not part of it.

The agency my DH works for agreed during the last contract negotiations to double-fund the retirement medical benefits. THAT'S where a lot of the government systems (just like Ford and GM) fall down; they aren't funding those retiree benefits anywhere at the level they should, given the rapid rise in medical costs over the last two decades.

    Bookmark   August 21, 2007 at 12:19AM
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Thanks, jkom51. I was thinking of Orange Co. and their mess. Glad the PERS system is solvent -- sounds like MORE than solvent!

(I don't see health care reform in the USA until the biggies like your PERS and GM, etc. finally say "enough" to the present draining system.)

    Bookmark   August 21, 2007 at 10:39AM
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I think we missed one of the OP's original questions: Is maxing a regular 401k or Roth likely to be a better option?

I think this depends on whether your employer matches your 401k contribution. Not all of them do. My DH's government agency, for instance, does not, since they already have a 403b and a defined pension with COL index and substantial retiree benefits.

If they match your 401k, contribute at least up to the match. If they don't, then assuming you have at least 20 yrs to retirement, the Roth wins out. But since you can contribute more to the 401k than to the Roth (unless your employer offers one of the new 401k Roth plans), you would do the reverse of what is normally recommended: you'd contribute first to the Roth, then to the 401k to the max you can afford/are allowed to contribute.

Also, there was the later question: So are the lifetime annuities the same thing as a private pension? And again, there's that apples and oranges mix. Defined pension plans litter the ground (since they can always be stopped by the employer) and their features vary dramatically.

It's generally recommended if you are NOT covered by a defined pension plan, upon retiring you may wish to put up to (no more!) than 25% of your assets in buying an immediate annuity.

Immediate annuities are the unloved stepchildren of the insurance industry. They cost consumers the least and pay the agents the smallest commissions; therefore they are unpopular and the best buy you can make.

The downside is you are dependent upon the health of the insurance company to survive you - my stepfather-in-law lost his annuity pension when not only Mead Paper but the insurance company holding the paper both went bankrupt. And there is no inflation index, so your liquid portfolio must work a little harder to compensate for the decline in the value of your monthly annuity check.

For inflation indexing you would need a variable annuity, and these are the products that have gotten so much flak from consumer advocates. The surrender charges tend to be outrageous, the holding period substantial (often 7-10 yrs), and huge agent's commissions which immediately reduce the value of the annuity just purchased. You must remember you are paying a premium for the inflation protection because the insurer must still MAKE money to pay you YOUR money, so they skim a little off the top before sending you your check. And you are still at the mercy of corporate stability - is this company going to survive me?

These are just my opinions based on the research I've been doing over the past three years for not only our, but also my MIL's retirement portfolio. So if I've gotten anything wrong, please feel free to correct me!

    Bookmark   August 23, 2007 at 12:06PM
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Simple answer--if you are motivated to put money away you can do just fine. My 403b is lousy, my teachers pension in my state stinks. We are much better off with my self-employed husband's attention to detail and investments. I wish I could have not had to put money into my teacher's retirement.


    Bookmark   August 23, 2007 at 4:55PM
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I was worried about my girlfriend's future retirement because I know she tended to move out of state more than most of us... often without getting vested in the state she left.

I called her Georgia retirement system, and they allow you to withdraw the pension money that was taken from her check. She's not vested there, but COULD be vested if we moved back and she worked just 2.5 more years. Not sure if that would be worth it! Otherwise, her 7 years of employment adds up to just 15,000. So, I'm wondering if she should flip that into her 403b or just plan on moving back one day putting in a little time in Georgia! (a strange notion, but it might make sense... and we might like living in Georgia).

jkom, thanks for the input. that was helpful

    Bookmark   August 24, 2007 at 2:02PM
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