How many of you physicians have pension plans? Care to share details?

[KPInvestor]

Im curious to see how many of you have pensions.  I am a partner with SCPMG and have the "Common Plan", which is basically our pension plan.  This is calculated based on the highest average compensation (HAC) during a 36 month period and the years of service.  .  The formula is as follows:  (2% x HAC x years of service for the 1st 20 years) + (1% X HAC X years of service over 20 years).  In essence if you work for 30 years, you will get 50% of HAC.

So if your HAC was 30K a month and you work for 30 years, the monthly payment will be 15k a month.   This is one of the main reasons I joined this group.

 

For those who have a pension, how does this change your lifestyle and investment habits?  Do you invest more aggressively knowing you have this money coming later in retirement?  Do you spend more and save less?  In general how do you calculate the value of this pension into retirement planning?  Using the example above, a 15K month single life annuity is probably worth about 3.5M dollars in value for someone my age.  Would you consider this pension the same as having a 3.5M retirement fund?

 

Thanks in advance for your thoughts.

[FIREshrink]

You can price the value of this by trying to buy a non-inflation adjusted annuity at Vanguard.

I did some calculations for myself and decided a Permanente pension was worth another 25% of my cash compensation. (Ie, if my salary were $300,000, this pension benefit would be worth $75,000). My current retirement plan is worth about 10% so the pension is worth quite a bit more. However, my current cash compensation is more than my cash compensation would be at Permanente. The total of cash plus retirement is greater at my current job than it would be at Permanente.

I'd look at the whole picture.

With regards to the impact of a pension on my asset allocation, I'd allow myself to take more risk. So instead of, say, 60/40 I might be 80/20. However this only works if you are pretty sure you're going to get a large pension benefit - ie, have worked at Permanente for 20+ years. Obviously a 5% of HAC isn't going to do much for your retirement security or your need/ability to take risk in your asset allocation.

 

[Peds]

since you needs 10 years to qualify anyways, i wouldnt count it for anything until you get there. and then adjust yearly based on how much you expect.

[q-school]

I've seen people reduce their bond allocation.

I've seen people also decide to invest money in stock market rather than rush to pay off mortgage.  I've seen people buy big fat houses in retirement with their pension money as well.  no reason not to have a mortgage and a deduction in an appreciating market, I'm told 

I think that yes people can have higher stock holdings than they otherwise would have, but this is so subjective I'm not sure how to tell whether that is a reflection of aggressiveness or the pension.

I've seen people gift more aggressively to kids while they are alive.

potentially reduces need for long term care insurance.

that's what I hear in the doctors lunch room anyways.

 

 

 

 

[KPInvestor]

So do most physicians have pension plans in place?

[ENT Doc]

I would doubt most have defined benefit plans.

[actuaryonfire]

I personally have fairly modest frozen DB benefits coming to me and the wife later in life. I think this allows me to tilt more aggressively in my investment strategy to have more equities and fewer bonds than if I had no DB benefits. Nothing too crazy - without DB benefits I might be 60/40, but with DB I'm targeting something like 75/25.

As Peds said above if you have not yet vested then I would not count it yet.

I would also only count what you have accrued to-date. So don't take advance credit for the next 30 years, just the service earned to date. Only past accrued benefits are guaranteed and so future benefits can be weakened or even eliminated.

I'm not a physician so can't opine on prevalence in the industry.

[Steven Podnos MD CFP]

Despite knowing hundreds of physicians (as peers and clients) over thirty years, I have never seen one with a true pension plan from an employer.  There are many I work with that have defined benefit plans in place that are theoretically designed to produced a pension at retirement (and self funded), but most are terminated as a lump sum and rolled to an IRA.

Two major concerns I have with non physician clients that have pensions-from corporate sponsors and non US government municipal sources-is the erosive effect of inflation on purchasing power and default.  Someone retiring with a non inflation adjusted pension (common in the corporate world) can easily lose half their purchasing power over a retirement, and that needs to be considered in retirement planning.  The risk of default over decades also seems higher all the time with both corporate and any governmental plan that can't print money (basically any municipal plan except the US government itself).

[q-school]

Steven Podnos MD CFP wrote:

Despite knowing hundreds of physicians (as peers and clients) over thirty years, I have never seen one with a true pension plan from an employer.  There are many I work with that have defined benefit plans in place that are theoretically designed to produced a pension at retirement (and self funded), but most are terminated as a lump sum and rolled to an IRA.

Two major concerns I have with non physician clients that have pensions-from corporate sponsors and non US government municipal sources-is the erosive effect of inflation on purchasing power and default.  Someone retiring with a non inflation adjusted pension (common in the corporate world) can easily lose half their purchasing power over a retirement, and that needs to be considered in retirement planning.  The risk of default over decades also seems higher all the time with both corporate and any governmental plan that can’t print money (basically any municipal plan except the US government itself).

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what do you define as a true pension plan?

is kaiser not offering a true pension plan?  state positions?  va?

thanks

 

[Steven Podnos MD CFP]

I'd call a true pension plan one that provides a percentage of salary for a full retirement.  Paid for by the employer (not from self funding by the physician).  I just have not come across anyone with such a pension (never had a Kaiser physician friend or client).  I do know some VA physicians, and they do indeed qualify for US government pensions, so I misspoke on that.

[PhysicianOnFIRE]

I believe the Mayo system has a similar defined benefit plan. I don't know the formula, but I know some physicians plan on the income as the backbone of their retirement plan.

Finishing up at 50 with 40% of salary does sound pretty amazing. That would still be a comfortable six-figure salary for many physicians.

[actuaryonfire]

Steven Podnos MD CFP wrote:

the erosive effect of inflation on purchasing power

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An excellent point. Without a cost of living adjustment you should take a ~2% per year erosion in value into account in your discounted value.

[hightower]

KPInvestor wrote:

So do most physicians have pension plans in place?

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I used to have one.  Our company froze the plan a few years ago.  Mine wasn't very big because I hadn't been working for long when they froze it (44k).  But, the funds are mine and will grow until retirement.  I can't touch the money until then or until I leave the company (I think).  I have no idea what they are invested in.  The lady I spoke to at our HR department seemed to believe they were somehow invested in the 10 year T Note?

[StarTrekDoc]

Couple of data points for you that we have in the family:

VA:  Vests 5 years;  1% per service year; and HAC 36 months

Kaiser:  Vests 5 years;  2% per service year x 20 years then 1% afterwards;  HAC 36 months

Univ Cali:  Vests 5 years;  graduating table on % from 1% at 50yo to 2.5% at 65 yo ;  HAC 36 months -- instituted PEPPRA this year(max to SS# limit ~$142k)

 

Hard to quantify pension into net worth:  I use general thumb $30,000 = $1M equivalent

--For portfolio - have diversified a lot more and heavier into direct real estate which represents nearly 50% of assets (includes primary home).

For equities:  50% -- I have a conservative "house" fund that mirrors the mortgage that allows the payoff of the mortgage at any time we feel like it.  The rest is invested pretty aggressively.

[actuaryonfire]

hightower wrote:

But, the funds are mine and will grow until retirement. I can’t touch the money until then or until I leave the company (I think). I have no idea what they are invested in. The lady I spoke to at our HR department seemed to believe they were somehow invested in the 10 year T Note?

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It sounds like it is a cash balance plan. Might be worth asking HR - Is the plan benefit a cash balance formula? If so, what's my current balance, and what is the method to credit interest each year? (Sounds like the 10year Treasury ~2.3%, but sometimes there is a nice underpin).

If you leave terminate with that employer then you should be entitled to get your hands on your funds if you wish.