Public or private sector for long term retirement

[Datsun72]

Hello,

new to the forum. I'm currently in my mid 30's with a wife and young child. I watched my dad work 2 jobs his whole life and he never really enjoyed his life. He worked for the City of NY and had great retirement and medical benefits. I currently work in the private sector and have a 401K which my company matches at 6% and profit sharing. The health benefits are expensive and have high deductibles. There is no pension, just the 401K and profit sharing.

I am considering going into the public sector for the long term benefits. I would like a pension an annuity and continued employer health benefits for my wife and myself until death. I know that pensions are slowly fading away but I simply do not trust my 401K and forget about social security. The pay for the public sector is much less than what I would be making now but long term I feel I would be more secure.

Anyone in a similar situation and if so what did you do?

Thanks so much!

 

[donheff]

Welcome to the forum Datsun. I worked for the Federal government for 30+ years and one of the reasons was that I liked the idea of being able to retire at a reasonable age with a decent pension. When I started out, I didn't focus on health insurance but, by the time I retired I realized how critical that is. For me, it worked out well but public employment doesn't work out for everyone. Jobs are jobs, things go wrong.

I would suggest focusing on maintaining a skill set that gives you employment flexibility and performing work you like. The mantra you will see here is to live below your means and build up an independent portfolio sufficient to support you through retirement. Pensions are great, if you stay long enough to earn one, but there are too many things that can go wrong to put all of your eggs in that basket.

 

[HarveyS]

I would not assume that all government jobs will stay with a traditional pension. Eventually, the pressure to move to a self-funded option (as industry has done over the last 15-30 years) may make the gov't pension extinct. The same push for cost savings may alter government job health insurance.

I agree with donheff that you will be much better off if you have your own independent portfolio. Not only are you actively creating your own future, but you give yourself options to change jobs, move states, live overseas, etc. The golden handcuffs of a pension can take many of those types of opportunities off the table.

 

[Red Badger]

The certainty of pensions is already dwindling down on the federal side. Example: military used to allow retirement at 20 years active duty with 50% base pay pension for life. That's gone. Now, there are multiple options (lump sum, pension "bridge" until SS, TSP, other). The lifetime 50% now requires 25 years of service. The changes aren't draconian, but the trend is away from lifetime pensions. Over the course of a career, I think that trend will accelerate. As already mentioned, build your own financial independence. Pensions are nice. I have a couple of them. But our IRA is a leg on the stool that allowed me to retire a smidgen early (60). Without it, 65 would likely been realistic.

 

[pjm-7]

I worked in both the public and private sectors. I had private positions that paid well but limited retirement benifits. My government job (a state in the mountain west) didn't pay hoot, however, I do get a very small pension out of it.

Your financial well-being is what you make of it. I always planned to retire in my mid-fifties and did so. People in both the public and private sectors asked me "how it you do it". it is definitely planning and LBYM. Don't look at it as the grass is greener on the other side of the fence. The grass over there can be just as brown!

 

[MikeWillRetire]

I worked in the private sector for 11 years, and now I have been in the federal government for almost 25 years.

I made the move when my wife and I were expecting our first child, and she decided to continue her career. I could see that with both of us working full time, it was going to be very difficult since my private sector job demanded frequent overtime. The federal government job only required 40 hours per week. As a result, we were able to maintain a dual income life while raising children and saving for retirement.

Our retirement system consists of the pension, social security, and federal version of the 401k. As for the benefits, they are pretty good, but are slowly being whittled away. For example, new hires now have to contribute 4% for the pension. I wouldn't join the federal government just for the pension. I will say that our health insurance is a great benefit in retirement.

Good luck with your decision.

 

[Montecfo]

You have gotten a lot of valuable advice and kudos to you for really analyzing things.

I spent my entire career in the private sector and retired recently just on my savings. I think having excellent marketable skills, LBYM, saving and learning to invest wisely are your best "annuities". Having said that, do you have a specific opportunity you are looking at that looks promising? One thing I would not do us take meaningfully reduced pay to do a government job unless their are lifestyle advantages.

I live here in an area that is heavy with government employees and I find that even prospective pensioners I know can't figure out how to fill the gap between pension income and their former working pay.

Our DNA is different, never forget that. You are asking the right questions.

 

[Rianne]

I was in Civil Service right out of college. The university system, at that time (early 80's) was rich with benefits. I recall an older friend close to retirement had a year sick leave saved up. He got a generous % of that when he retired, gold standard healthcare for life. I was smitten with the benefits, sick leave and vacation accrued quickly. But the work, supervisory, stunk. Riddled with rules and regulation. When I moved into the private sector it was a breath of fresh air. I did not mind the 50+ hours/week.

Later, work/life suffered. I left a standard 40/hour work week, very little stress but a lot of boredom for higher stress but challenging work. It's a tough call. The public sector benefits are fading quickly. They moved the generous pensions to 401K type savings. Our neighbor, a professor in the same system I was in 40 years ago, complains about his benefits and pension. He's young (mid 30's). The big difference today is the quality of work/life, especially with kids.

 

[OldShooter]

@Datsun72, this is a tougher question than maybe you think. You should review the public employee pension problems in Illinois, California, and othere states with big shortfalls. Illinois will go through some form of bankruptcy and their employee benefits will be cut, including payments to the already-retired. Chicago will probably go through the same thing. The huge tax shortfalls just now being reported will add to the urgency.

The wild card here is that once these big shoes start to drop, lots of governmental entities will use them and their own tax shortfalls as a smoke screen to also cut their employee benefits and pensions. So it's kind of the Clint Eastwood question: "Do you feel lucky?"

I suggest that you really dig into the financial situation of whatever public entity you're looking at. There's probably union. Talk to them, although they will not necessarily be straight with you as they, too, have vested interests in painting a nice picture. There are wide variations from entity to entity.

"More secure?" Maybe. Just maybe.

 

[W2R]

I took a job working for the federal government, for the health and retirement benefits as well as for job security as I grew older. I was offered almost twice the pay from the private sector, but felt federal employment was a better "fit" for me since I worry a lot.

I am glad I did it. I have been retired for over ten years and never had to worry about ACA or Medicare supplements. My federal retiree insurance converted to a Medicare supplement when I turned 65, and between the two I haven't yet paid even one cent for medical care except for prescriptions and dental work since I turned 65. My pension is tiny but it is very welcome and as reliable as the sun coming up each morning. I also take equal monthly payments from the TSP (govt 401K), to which I contributed the maximum for my entire period of federal employment.

Like others, I'd suggest being very careful if going for state or local government employment. Some have good benefits and are solidly funded, but not all from what I understand.

 

[pacergal]

@Datsun72, this is a tougher question than maybe you think. You should review the public employee pension problems in Illinois, California, and othere states with big shortfalls. Illinois will go through some form of bankruptcy and their employee benefits will be cut, including payments to the already-retired. Chicago will probably go through the same thing. The huge tax shortfalls just now being reported will add to the urgency.

The wild card here is that once these big shoes start to drop, lots of governmental entities will use them and their own tax shortfalls as a smoke screen to also cut their employee benefits and pensions. So it's kind of the Clint Eastwood question: "Do you feel lucky?"

I suggest that you really dig into the financial situation of whatever public entity you're looking at. There's probably union. Talk to them, although they will not necessarily be straight with you as they, too, have vested interests in painting a nice picture. There are wide variations from entity to entity.

"More secure?" Maybe. Just maybe.

+1 Agree
The new hires at my former workplace have no where near anything in their pension that I have as a 35+year/pension retiree.
It is also important to save outside of a pension in a 457, or whatever the entity offers.
Definitely review everything you can on the pension and benefits of a public job you are looking into.

 

[Gumby]

I worked as a lawyer in both the private and public sectors. I would repeat the caution conveyed by others that public sector pensions are fading away. In my state, the newest tranche of employees are in a hybrid DB/DC program. I expect that will shift entirely to a defined contribution plan in the near future. Retiree healthcare will also evaporate, I believe. In fact, given the hit to state budgets that will be dealt by COVID-19, I see these trends only accelerating.

It is common for people to claim that public sector work is overpaid. Maybe if you're a DMV clerk, that might be true. But if you are a professional, you will be grossly underpaid in relation to someone in the private sector with your education, experience and skills. I took a 77% pay cut to become an assistant attorney general, but the work was largely the same. I still battled it out in court with partners from the largest law firms in NYC and DC on huge cases that made the front page of the NYT and WSJ, only without a team of associates and paralegals to assist me. If there is a defined benefit pension and retiree healthcare in your future, you might make that trade, but I see pensions evaporating and I don't see salaries increasing to compensate.

On a more general note, consider what it means to work in a job where your typical voter would be happy to take away $10,000 from you if they get to pay $1 less in income tax. My time working for the state consisted of repeated pay freezes and furlough days whenever the state budget was tight and ever increasing required pension and healthcare contributions. My take-home pay was lower in nominal terms after I had been there 7 years than when I started, and it was even worse in real terms. In fact, the only reason I could even take that position and subsequently retire early is because I made an absolute boatload of money while working in a big NYC law firm and saved most of it. (although I only had a non-matching 401k). My pension from the state does not even cover my real property tax bill.

At this point, I could not in good conscience recommend that someone move into the public sector.

 

[swakyaby]

Within my own family, my father was an engineer in a private manufacturing company whereas my brother was an engineer as a city employee. It’s as you described—the private position paid more, had no retiree healthcare, tended to have longer hours, and had mainly a defined contribution plan combined with a very small defined benefits plan (lucky for even that), whereas the city job paid quite a bit less, had set hours, had fully paid for retiree healthcare, and a full pension. The differences in lifestyle may have been due to the individual, but I also think the type of employment had a bit to do with it. With the city job, my brother lived a low-key but seemingly low stress life. He never seemed to fret about finances, both during his work years and also post-retirement the past 2 years. The stock market upheavals left him unconcerned from all outward appearances. In contrast, my father spent quite a bit of time managing investments and grumbling about high taxes. GI upset and high blood pressure bothered him his entire career. He did retire with a sizable nest egg and great financial security. For health care, his wife fortunately was a public school teacher, so adding him to her retiree health insurance was not expensive.

Which one is better off? Both made it to retirement in good financial shape, but I do envy my brother’s retirement situation. His income is unaffected by the stock market and national economic turmoil, and he doesn’t have to worry about the ACA. Looking forward, everyone warns that defined benefit plans are waning and changing, and there are many red flags. You’re smart to be considering these career issues in your 30’s; it’s much harder to change course in your 50’s.

 

[Datsun72]

Thank you everyone for the great advice and replies.

In my current job, I love what I do, it's not as stressful and the coworkers are great. But in the back of my mind I always think about my future and my family's future

To me I'd prefer if I didn't have to come out of my pocket for my pension. For example the situation where 4% went into a pension fund. If I am already putting money into a 401k, IRA, college savings and then personal savings I am taking a lot out of my paycheck for future goals and won't have much left for the current situation. But if an employer can give me a decent pension with just my 20 year service that can help the current situation more.

While the public sectors are dwindling the benefits away, if I can get in early I might be able to be "lock in" to the current contract before it really gets bad. I believe the city of NY is 30% of your salary compared to 50% for my dad's contract. With inflation and salary increases it would almost be the same. Retiring now with 50% at let's say 100k and then retiring 20 years from now with 30% of 150k is roughly the same.

Another thing that worries me is if my 401k tanks the day before I retire. I'll be in a really bad situation. I also have to do research on how medicare works, I heard a lot of horror stories with it.

I'm new to this, and trying to gain as much financial knowledge as possible. I would love my money to "work for me". Investing would be great, have more risk now and less risk as I get older. Maybe I can look into real estate as a form of retirement income.

 

[anethum]

Datsun, I worked my entire career in the private sector. My suggestion is that you seriously consider a federal job, if that is a possibility for you. I see 4 big advantages to a career in the federal civil service:

The pension plan in place when you start your federal job will likely remain locked in for you. Changes typically only affect new hirees. The future of pensions for state & local jobs is less certain.

Federal benefits are outstanding compared to the vast majority of jobs in the private sector, including megacorps. You get generous annual leave, separate sick leave, excellent health insurance, and retirement health insurance is fantastic compared to what most folks have to contend with in early retirement. Also, every now and then the government shuts down and miraculously, you always seem to get back pay.

Job security in the federal government is higher than virtually anywhere else, especially as you age. Age discrimination is rampant in the private sector. I don't think you wrote what type of work you do, but for most lines of work, job security gets to be a very real problem as you get older. I believe that when rare "Reductions-in-Force" actually occur in the federal civil service, the more seniority you have, the more protection you have. If you get laid off in the private sector, the older you are, the more difficult it will be to find a new position.

In many megacorps, you are expected to work significantly more than 40 hours a week. Most (not all) government employees I know rarely have to put in overtime. One federal friend of mine sometimes has to, but he always gets comp time for it.

 

[Datsun72]

Datsun, I worked my entire career in the private sector. My suggestion is that you seriously consider a federal job, if that is a possibility for you. I see 4 big advantages to a career in the federal civil service:

The pension plan in place when you start your federal job will likely remain locked in for you. Changes typically only affect new hirees. The future of pensions for state & local jobs is less certain.

Federal benefits are outstanding compared to the vast majority of jobs in the private sector, including megacorps. You get generous annual leave, separate sick leave, excellent health insurance, and retirement health insurance is fantastic compared to what most folks have to contend with in early retirement. Also, every now and then the government shuts down and miraculously, you always seem to get back pay.

Job security in the federal government is higher than virtually anywhere else, especially as you age. Age discrimination is rampant in the private sector. I don't think you wrote what type of work you do, but for most lines of work, job security gets to be a very real problem as you get older. I believe that when rare "Reductions-in-Force" actually occur in the federal civil service, the more seniority you have, the more protection you have. If you get laid off in the private sector, the older you are, the more difficult it will be to find a new position.

In many megacorps, you are expected to work significantly more than 40 hours a week. Most (not all) government employees I know rarely have to put in overtime. One federal friend of mine sometimes has to, but he always gets comp time for it.

Thank you, sorry I am an engineer I should have stated this earlier. I'll look into federal jobs. I have friends who are working for the government and they are happy. Unfortunately not much available in NYC or near NYC for my line of work. We'll see what happens a move might be needed if I land a federal job.

 

[Walt34]

I am the lucky beneficiary of one of those COLA'd pensions, heavily subsidized health insurance, virtual immunity from layoffs when working and the like. But I started in 1973 and retired in 2002. The world of pensions is dramatically different now and at this point I would caution anyone to think otherwise. Perhaps the best benefit the federal government can still offer (my wife worked for federal govt. and several friends/family did, I did not) is job security and not having to deal with age discrimination. In fact, in most agencies seniority is an advantage, not a disadvantage. In some agencies it takes almost an act of Congress to fire someone for being incompetent. I am sure that will eventually change too, and the pace of change in federal government is usually glacial. But not always....

I worked for a county government in law enforcement and while that county is one of the ones that has been financially responsible, as others have noted other cities, counties and states have not been and have made promises that will be impossible to keep. The pension plan I'm under is just a hair under 100% funded but was discontinued about 1983 or so and has been changed several times since then, and never for the better of course. I cannot claim all this was due to any foresight on my part. It was pure dumb luck. I was age 22 when I applied and who thinks about retirement at 22? Certainly not me.

In short, don't take a government job for the benefits, unless the job security is of a high priority to you. At this time that's the only one left that private industry doesn't offer and that can change, probably when you're about age 57 or so.

 

[OldShooter]

... Retiring now with 50% at let's say 100k and then retiring 20 years from now with 30% of 150k is roughly the same. ...

Sorry. Not even close. 30% of $150K twenty years in the future will probably buy half or less of what $50K will buy today. That's using the US long term inflation rate of 3.11%. Using the last 40 years average of around 4.5%, your $50K will have the buying power of $20K today.

From your last two posts I think you have already decided you want a public sector job and are just looking for support here. So go for it, but I think your assumptions are a bit naive. @anethum is probably right that a federal job is your best bet, but you are still making a bet and not getting a sure thing.

 

[Datsun72]

I am the lucky beneficiary of one of those COLA'd pensions, heavily subsidized health insurance, virtual immunity from layoffs when working and the like. But I started in 1973 and retired in 2002. The world of pensions is dramatically different now and at this point I would caution anyone to think otherwise. Perhaps the best benefit the federal government can still offer (my wife worked for federal govt. and several friends/family did, I did not) is job security and not having to deal with age discrimination. In fact, in most agencies seniority is an advantage, not a disadvantage. In some agencies it takes almost an act of Congress to fire someone for being incompetent. I am sure that will eventually change too, and the pace of change in federal government is usually glacial. But not always....

I worked for a county government in law enforcement and while that county is one of the ones that has been financially responsible, as others have noted other cities, counties and states have not been and have made promises that will be impossible to keep. The pension plan I'm under is just a hair under 100% funded but was discontinued about 1983 or so and has been changed several times since then, and never for the better of course. I cannot claim all this was due to any foresight on my part. It was pure dumb luck. I was age 22 when I applied and who thinks about retirement at 22? Certainly not me.

In short, don't take a government job for the benefits, unless the job security is of a high priority to you. At this time that's the only one left that private industry doesn't offer and that can change, probably when you're about age 57 or so.

Thank you.

 

[Datsun72]

Sorry. Not even close. 30% of $150K twenty years in the future will probably buy half or less of what $50K will buy today. That's using the US long term inflation rate of 3.11%. Using the last 40 years average of around 4.5%, your $50K will have the buying power of $20K today.

From your last two posts I think you have already decided you want a public sector job and are just looking for support here. So go for it, but I think your assumptions are a bit naive. @anethum is probably right that a federal job is your best bet, but you are still making a bet and not getting a sure thing.

Sorry. Not even close. 30% of $150K twenty years in the future will probably buy half or less of what $50K will buy today. That's using the US long term inflation rate of 3.11%. Using the last 40 years average of around 4.5%, your $50K will have the buying power of $20K today.

From your last two posts I think you have already decided you want a public sector job and are just looking for support here. So go for it, but I think your assumptions are a bit naive. @anethum is probably right that a federal job is your best bet, but you are still making a bet and not getting a sure thing.

Thank you, your right I didn't think of it that way.

It's not support it's more of a understanding of what sector offers the long term benefits and peoples experiences. I want to know which industry will screw me the least when i'm ready for retirement. I also want to be in a sector that will offer me the most bang for buck long term.

My understanding is if I stay in the private sector I have to put alot of my own money in for retirement and medical, if i'm in the public sector I don't have to put alot of my money in and won't have to worry as much about money coming in.

 

[OldShooter]

... My understanding is if I stay in the private sector I have to put alot of my own money in for retirement and medical, if i'm in the public sector I don't have to put alot of my money in and won't have to worry as much about money coming in.

Well, what if you looked at it this way?: The difference in salary between what you are making and what you might make in a public sector job is what you are paying for your hope that your retirement benefits will be better. That's likely to be a pretty hefty payment that, staying in your current job, you could put aside for retirement.

You seem to be pretty nervous about investing. I'll suggest two things to read:

• "If You Can" by William Bernstein https://www.etf.com/docs/IfYouCan.pdf (free 16 page download)
• "The Coffee House Investor" by Bill Schultheis https://www.coffeehouseinvestor.com/

 

[Sunset]

OP - Crucial to your thinking is the logical mistake you are making, thinking a public pension will be there, yet considering Social security will not be there.

If Social Security is not there when you retire, it's likely all public pensions won't be either.

 

[Gumby]

One other thing. Just because you get a foot in the door now does not mean that your pension rights can't change before you get a chance to retire. In CT, the state employee unions have bargained away a number of pension rights for existing employees in return for some protection against layoffs. These included tripling required pension contributions and retiree health care contributions, raising the retirement age and years of service formula, increasing the penalty for retiring before the normal retirement age, increasing the co-pay for retiree health care, and eliminating pension COLAs. You are only protected against pension changes after you have retired, not before, and maybe not even then. At least with a private 401k, the money you have put in is yours and can't be taken away.

The old saying applies - Don't buy a pig in a poke.

 

[Doribe]

To me I'd prefer if I didn't have to come out of my pocket for my pension. For example the situation where 4% went into a pension fund. If I am already putting money into a 401k, IRA, college savings and then personal savings I am taking a lot out of my paycheck for future goals and won't have much left for the current situation. But if an employer can give me a decent pension with just my 20 year service that can help the current situation more.

While the public sectors are dwindling the benefits away, if I can get in early I might be able to be "lock in" to the current contract before it really gets bad. I believe the city of NY is 30% of your salary compared to 50% for my dad's contract. With inflation and salary increases it would almost be the same. Retiring now with 50% at let's say 100k and then retiring 20 years from now with 30% of 150k is roughly the same.

Another thing that worries me is if my 401k tanks the day before I retire. I'll be in a really bad situation. I also have to do research on how medicare works, I heard a lot of horror stories with it.

Most public pensions are partially paid for by employees. In my experience the cost is usually about 9%. In my case I paid 12% over most of my 27 year career. in my area some teachers and most school superintendents get their portion of the pension paid by taxpayers. When friends complain to me about how good I have it, I justify it that I paid in twice what SSI requires to get out about twice the benefit. In my situation, after 20 years of service I would have received about 40% of final salary.

I paid 12% into my pension. I still invested in 457b (public equivalent to 401k), IRA, personal savings and college funds. In my case, there is no SSI.

I'll add that my health care is neither free nor guaranteed.

The biggest positives were that I was able to leave government at 59.5 by taking a reduced pension after 27 years. I use my 457b and IRA assets to make up for income shortfalls. The ability to count on a pension allowed me to be more aggressive with my investments.

I became locked into the civil service jobs, reducing opportunity and having to endure a few miserable years and concern that the pension may go bust, ergo still worrying that I may need my own assets to support myself.

NY like IL has several Tiers of pension benefits, so don't rely on what your relatives had in the past. I would not recommend public service in IL to my children.

 

[Bamaman]

My father worked for our government owned power company. They topped out at 33K employees, and the white collar employees were working for less than normal wages. But they had great pensions, healthcare and vacation benefits. And he retired at age 59.

Management decided they had to have the largest power plants--nuclear plants. And they built their own. But it quickly became evident that they were unable to produce enough cash to pay future pensions for so many workers. They went out of the construction business and sub-contracted building and annual maintenance. They laid off about 20K workers. And even with most workers deceased, they still cannot produce enough profits to properly fund pensions of the reduced workforce.

My message is that don't go to work for a governmental agency and think defined pensions are going to be there forever. My Ford pension was top of the line, but they too switched to a 401k many years ago for employees. We had to personally go the IRA routes to save enough for ER, and work the equity market aggressively.

If you decide to go that route, try to work for an agency that's stable. Our local economy is heavily governmental with NASA and Redstone Arsenal that will be approaching 50K employees in another few years. 4,000 FBI employees are being moved out of D.C. and Virginia in the next 18 months, and their lives will change. And not all governmental agencies are going to be around for the long run. Only thing you can count on in life is change.