Leaving a government job vested in pension

[Tykimeister]

Hello, I have had a county government job for the past 11 years and I am probably going to leave this employment soon. I have been vested since 5 years of service. I am not sure if I should leave my money in with the pension program or if I should roll it over into an IRA or other financial product. I have ran the numbers and I think I am better off taking it out, due to my age and investment approach. But I would kindly like to ask if someone can look this over and let me know if I am missing something…

This is peanuts compared to some, but for me I want to make the best financial decision, even if it isn’t so significant.

The pension program is a 401 (a) defined benefit plan. I get a tax break, the money contributed lowers my taxable income. I put 6% of my earning in and the County contribution changes yearly based on legislation, currently at 9%. The balance in my account only shows what I put in, the County contribution is put into the pool.

1. I am 34 years of age
2. I can retire with full benefits at 60 with 37 years of service for $2,379 monthly $28,548 yearly
3. If I quit at 11 years of service and receive my benefit at age 60 I will get $440 a month $5,280 yearly
4. There is an option for early retirement at 55 with reduced benefits but the reduction is too great to consider.
5. The current balance in my account is $31,397
6. I will forfeit the County contribution that is in the pool, unknown total anyways, if I take it out
7. The balance will earn 4% annually if I keep it there
8. Once you start receiving a benefit the payments come from your account first, until zero, then your benefit comes from the pool.
9. I will roll it into a new product so I will not have to pay the 10% penalty(from what I understand)

Now I wanted to calculate what my money would do if I take it out and invest it myself in a traditional IRA. I already have a Roth IRA, but irrelevant for calculating this scenario (I think). I calculated what my balance alone would grow to, without putting any money into it. The same as if I were to keep the balance with the pension program but quit working here. I used different percentage of returns.

• 6% interest, from age 34 to 60, with starting balance $31397 = $142,837, ~$8,085 interest annually thereafter
• 8% interest, from age 34 to 60, with starting balance $31397 = $232,223, ~$17,201 interest annually thereafter
• 10% interest, from age 34 to 60, with starting balance $31397 = $374,195, ~$34,017 interest annually thereafter

My thinking is, if I take my money out of the pension program and invest it at only 6% for the next roughly 25 years, I will come out ahead $8,085 annually vs. $5,280 annually. And that is with forfeiting the County contributions for the past 11 years since I take my balance out of the pension program. I know 6% is conservative at my age 34, and I can likely do much better than that, hence why I added 8% and 10% calculations. But also, at age 60 I will not be earning %10 interest due to age and I will be more conservative. But to get a general idea of growth, it seems I am stupid to leave the money in the pension program.

Another few ideas. If I take the money out and invest it like this, my balance will always be mine and the interest will be better than what the county will pay me. If I stay with the pension program they will take my balance first then use the pool. This means no money left over to give to beneficiaries. There are living spouse options in the pension plan but I am not married and have no kids.

Another Idea, there is the fear that government runs out of money, stops funding the pension, makes you work longer, reduce benefits, etc. So taking the money out can help in that respect. I believe in the state of Kansas they are having issues with funding their pension plans.

I invest most my money in SP 500, but will look things over before making any decisions. Does this rational sound about right or are there major considerations that I am not grasping? All the calculations do factor in compounding interest. I do have a spread sheet if that will help. I suppose there is a chance I can end up working some place that uses the state pension program later in life. But for now I think I will likely move to a different state.

If anyone has some advice please let me know!

 

[ckelly78z]

4% is pretty meager historical returns, but probably the safest option. At 34 years old, there is no reason to be safe with your investments. I would try to roll it into something that you could control, and get much better yearly average returns. There are many mutual funds out there that return at least twice that 4% on a 10 year basis.

 

[38Chevy454]

If you leave and take a lump sum, do you lose all of the county's contribution? Or just this year's contribution? Also do you get any health care benefits as a retiree? That could be worth some consideration if there is health care, even if you have to pay some percentage.


I agree that the return seems low on the calculated value for the county. I am confused how your current contributions are invested. Do you have any options or is it just to the county pension pool where they decide, sounds like quite conservatively, what to invest in?


What do you have as new job prospects? Does it have better pay, better benefits, better hours, more security? You likely can come out ahead financially on the investments vs the 4%, but are you in a grass is greener on the other side view, and once you get there it is not really any different as far as work environment?

 

[Going camping]

I had a similar situation in 1994. I left a government pension job and rolled my pension contribution into a 401K. And then in 1998 an amazing new investment opportunity arrived, the Roth IRA. I then rolled the 401K into a Roth and paid the taxes. It has been nicely growing for 20 years with a value now over $300K.

You're around the same age I was then. I don't think you will regret pulling your pension money from the state plan. Unless you foresee going back to the state in the future, you are probably better off managing your money.

Best wishes in your new job and with your decision.

 

[Redbugdave]

There are more questions to ask. There is more to it than that. Do you like what you are doing? Are there chances for advancement where you are at? Is health insurance still provided after you retire? Is the job you have fairly secure? Can you make more money with some other company?

I think you have to look at the whole picture before making a decision either way. You could be out of the pan and into the fire. Many companies are here today and gone tomorrow and no real benefits after you retire.

I had a govt job, that paid OK. It was secure and was just a job to me. I did not love it. But I stuck it out and invested heavily. Good benefits. Retired now and doing better money wise than I ever did when working. I was a tortoise. I could have been a hare and made more money but an insecure job future nor other benefits.

Bottom line...
The hare is very confident of winning, so it stops during the race and falls asleep. The tortoise continues to move very slowly but without stopping and finally it wins the race. The moral lesson of the story...is that you can be more successful by doing things slowly and steadily than by acting quickly and carelessly.

 

[PoorOldCountryBoy]

Another consideration is what does your county/state look like financially? Current pensions are underfunded by 40% in some states. Sooner or later that may come home to roost. NY teachers have multiple levels, each successive one less lucrative. IL is massively underfunded, etc.



Also the flexibility of a IRA is wonderful as compared to the locked in nature of a pension. I wouldn't want one for any price.

 

[Tykimeister]

If you leave and take a lump sum, do you lose all of the county's contribution? Or just this year's contribution? Also do you get any health care benefits as a retiree? That could be worth some consideration if there is health care, even if you have to pay some percentage.

I will lose all the county contributions. I don't know exactly what that total is, because the percentage they must contribute changes year to year based on legislation and it goes into the pool, not my account. There is no healthcare coverage available once someone retires at full benefits or early retirement options. Many people continue to work past their full benefits date because of the price of healthcare they will end up paying if they retire.

I agree that the return seems low on the calculated value for the county. I am confused how your current contributions are invested. Do you have any options or is it just to the county pension pool where they decide, sounds like quite conservatively, what to invest in?

The explanation of benefits does say your balance will increase at 4% each year. But it's not like a 401k that you choose what to invest it in. The benefit totals are in the opening post.

What do you have as new job prospects? Does it have better pay, better benefits, better hours, more security? You likely can come out ahead financially on the investments vs the 4%, but are you in a grass is greener on the other side view, and once you get there it is not really any different as far as work environment?

I think the future will be better. I am changing careers being a RN in the medical field. With the amount of overtime I currently work, I believe I will be increasing my pay by at least 30K per year. Possibly more considering the pandemic and nursing shortage. I am overdue with needing to move on to a new employer. I have been waiting 2 years going through school and this is what it all comes to..

 

[Tykimeister]

I had a similar situation in 1994. I left a government pension job and rolled my pension contribution into a 401K. And then in 1998 an amazing new investment opportunity arrived, the Roth IRA. I then rolled the 401K into a Roth and paid the taxes. It has been nicely growing for 20 years with a value now over $300K.

You're around the same age I was then. I don't think you will regret pulling your pension money from the state plan. Unless you foresee going back to the state in the future, you are probably better off managing your money.

Best wishes in your new job and with your decision.

Thank you for the info! I suppose I may need to consider if I want to roll over the money into a Roth IRA or a Traditional IRA. I already have a Roth that I max out every year. Maybe considering a Traditional will be OK, since my taxable income will be lower once I start taking money out of my Roth.

 

[Tykimeister]

There are more questions to ask. There is more to it than that. Do you like what you are doing? Are there chances for advancement where you are at? Is health insurance still provided after you retire? Is the job you have fairly secure? Can you make more money with some other company?

Health insurance is not offered after retirement. My job is fairly secure but I have to work a lot of overtime to make a decent living. Right now that is easy, with the economy doing fairly well and people wanting to sit at home rather than work. We have had a staffing problem for a few years now. I would say the grass is greener. I like what I do now, but the management is not very good and doesn't look viable long term. Taking a promotion will be a pay cut, since that will lead to salary and I make most my money from overtime.

I think you have to look at the whole picture before making a decision either way. You could be out of the pan and into the fire. Many companies are here today and gone tomorrow and no real benefits after you retire.

I don't think my job is going anywhere, being in corrections. Criminals will keep committing crimes. But with my goal of making more money and being able to move, switching careers seems like the best option. I went to school to be an RN and that is what I will move towards now. If some companies may be gone tomorrow I should have plenty of jobs to choose from, caring for the elderly baby boomers for years to come.

In Kansas it seems the pension is several billion in the Red. Our governor wants to cut debt payments to help pay for the budget. It seems they are wanting to extend payments. Play today, pay tomorrow.

https://www.wibw.com/content/news/K...ions-for-budget-breathing-room-566777971.html

https://sentinelksmo.org/kelly-kpers-reamortization-would-cost-taxpayers-4-4-billion/

I had a govt job, that paid OK. It was secure and was just a job to me. I did not love it. But I stuck it out and invested heavily. Good benefits. Retired now and doing better money wise than I ever did when working. I was a tortoise. I could have been a hare and made more money but an insecure job future nor other benefits.

True. Slow but stead does have benefits, in due time.

Bottom line...
The hare is very confident of winning, so it stops during the race and falls asleep. The tortoise continues to move very slowly but without stopping and finally it wins the race. The moral lesson of the story...is that you can be more successful by doing things slowly and steadily than by acting quickly and carelessly.

One thing I know for sure is I want to retire early at 55. Or at least have the option available to make that choice. If I keep working for the county I will have to work until 60 to get full benefits. And that after working for the county for 37 years. I am 11 years in, 26 to go. I just feel I can do better if I switch careers and continue to save. But taking the money out of the pension or leaving it in, is the question. I just wanted to know if there is major financial framework I am missing when calculating the benefits of taking it out vs keeping it in. I know I will have to work hard and overcome any mistakes that can happen. But maybe there are investment choices, penalties, limitations I am not recognizing.

 

[kitesurfer2]

good luck getting 6% for the next 4 years. smart money predicts much less because of ( you know why ) i had to delay my retirement under Obamma admin by 6 years because of a stagnant economy. my point is, don't depend or even expect things financially to stay the same.

 

[Tykimeister]

good luck getting 6% for the next 4 years. smart money predicts much less because of ( you know why ) i had to delay my retirement under Obamma admin by 6 years because of a stagnant economy. my point is, don't depend or even expect things financially to stay the same.

I haven't been watching much financial news for a while. If I am not going to touch the money for another 25 years, does the next 4 years really matter? As long as I average 8% or higher in the next 25 years, that is what my calculations are based on.

 

[Tykimeister]

Thank you for the info! I suppose I may need to consider if I want to roll over the money into a Roth IRA or a Traditional IRA. I already have a Roth that I max out every year. Maybe considering a Traditional will be OK, since my taxable income will be lower once I start taking money out of my Roth.

https://www.wibw.com/content/news/Ka...566777971.html

https://sentinelksmo.org/kelly-kpers...s-4-4-billion/

I think they are losing money and delaying the repayment of debt. Even with a booming economy for the past several years it seems they are having trouble with paying back on the debt.

There are different tiers with the pension system. I missed the original tier by 4 months. They can retire with full benefits at age + years of service = 85. So I am in the next tier and I must work until 60. So 60 + 37 years of service = 97. I will work 12 years longer than someone in the original tier for full benefits, but I do not know exactly how much different the benefit amount is. But the option of retiring earlier is definitely off the table if you want full benefits.

 

[Bamaman]

As a single and being a RN, you have job skills and the ability to make a good income.

Roll the dice and rollover the pension fund into an IRA Rollover account. Chances are good you'll do much better, especially if you pay close attention to the new account and invest in one of the better funds.

 

[MrsHaloFIRE]

Your statement that "criminals will keep committing crimes" is prob very true, but lots of prison systems are privatizing, both the guards, the buildings and the health programs. Just a thought

 

[musher]

Another consideration is the potential effect your 401(a) may have on your social security benefits. If this plan replaces social security contributions, then you will be subject to WEP and GPO rules at retirement. These provisions have the potential to mostly erase the additive benefit of your pension. I believe rolling over the pension funds to an IRA before you reach the eligibility age for the pension will avoid the WEP and GPO. You'd have to do the calculations to decide whether the pension was worth more than the potential lost SS income and spousal benefits.

 

[Tykimeister]

As a single and being a RN, you have job skills and the ability to make a good income.

Roll the dice and rollover the pension fund into an IRA Rollover account. Chances are good you'll do much better, especially if you pay close attention to the new account and invest in one of the better funds.

Thank you for the advice!

 

[Tykimeister]

Another consideration is the potential effect your 401(a) may have on your social security benefits. If this plan replaces social security contributions, then you will be subject to WEP and GPO rules at retirement. These provisions have the potential to mostly erase the additive benefit of your pension. I believe rolling over the pension funds to an IRA before you reach the eligibility age for the pension will avoid the WEP and GPO. You'd have to do the calculations to decide whether the pension was worth more than the potential lost SS income and spousal benefits.

I have been paying into the pension program and also social security. I don't think WEP will apply, but I am not an expert. Does that mean since my 401 (a) plan is pre tax contributions, that my pension payments at age 60 will be used to reduce my calculated social security benefit? Or does WEP just apply if I never payed into social security at all while putting money into the 401 (a)?

Is WEP and GPO the same thing? Their definitions seem quite similar. I pay into social security every pay check, I don't think GPO will apply?

 

[38Chevy454]

As a single and being a RN, you have job skills and the ability to make a good income.

Roll the dice and rollover the pension fund into an IRA Rollover account. Chances are good you'll do much better, especially if you pay close attention to the new account and invest in one of the better funds.

I agree with Bamaman. RNs are in demand almost everywhere, that also gives you opportunity to live almost anywhere you would like. My DW was RN and the potential OT is good money. Sure it requires the hours and RN can be a tough job. But you are young and now is the time to max out your savings and let compounding do its magic. You may look into traveling RN positions, those have great pay and have per diem living expenses allowance on top of the work pay. Good for a single person like yourself.



Take your state money and do the rollover, since you are looking at longer term, go high in equities. Don't be too conservative. Keep investing (LBYM) as much as you can. You will reach FIRE status if you stick to your plan.