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  • Pension vs. 401k

    Just read this article on wsj- http://www.wsj.com/articles/the-champions-of-the-401-k-lament-the-revolution-they-started-1483382348

    I get the feeling that bad choices (high fees, too little too late, etc.) led to most employees demise with their 401k.

     

    Having said that, will start working in the U of California system soon and trying to decide between the two primary retirement choices, pension vs. savings.

    http://ucnet.universityofcalifornia.edu/compensation-and-benefits/retirement-benefits/2016-retirement-choice/index.html

    Pension:

    -employees contribute 7% of pay up to 265k (up to PEPRA max (117k) goes into pension= $8191.40, remainder goes into supplemental 401k= $10358.60)

    -UC contributes 8% of pay (up to PEPRA max) into pension= $9361.60; 5% of pay into 401k= $13250

    Savings:

    -employee contributes 7% of pay into 401k= $18,000

    -UC contributes 8% of pay= $21,200

    The retirement benefit in the pension plan is then based on your highest 36 months of service up to the PEPRA max (117k) with a few other multipliers (age, service years) tied in.

    In addition, will have access to a 403b and 457 DCP, so lots of tax protected space.

     

    So, based on my calc, I get an extra $15.5k into my own 401k per year. 7% return x 30 years = $1.58M, which is only 13.5 years of PEPRA max pension. Therefore, if I plan to live >14 years into retirement, it seems to make the most sense to pick the pension plan, correct?

  • #2
    How is the pension managed and invested? What is the minimum guaranteed return? How much is funded? I haven't had a chance to look into CalPERS lately but you should before making a decision.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Problem with these current pensions, even though Calpers tries to be as on top of it as they come, is they have massive unfunded liability. They have also tried to decrease their projected rate of return and have gotten blow back from the government for doing so, as that exposes their underfunded status on paper...but certainly helps out more long term.

      It will be interesting to say the least to see what happens in general with pensions in the future. Obviously unsustainable at this point, which is causing a run on some less smartly run pensions elsewhere (dallas police/fire).

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      • #4
        All good points, so thanks for leading me down that road. To clarify, the UC retirement plan (UCRP) is separate from CALPERS (Cal state university employees).

         

        Only info I can easily find is from this article (2015): https://dailybruin.com/2015/01/14/ucrps-unfunded-liability-proves-burdensome-to-employees-taxpayers/

        $12B unfunded, but increased UC contributions has given projections of 100% funding by 2039 (BIG assumption obviously).

        "The current status of the fund is stable, and at its current estimated annual rate of return of 7.5 percent, UCRP will be completely funded in 20 years."

         

        Anyway, sounds like a big deficit to me, but it is still one of the largest pensions in the world with assets >$50B.

         

        I also learned that given my age (34) when I start, I can have at most 31 years of service credit to gain until age 65. Their multiplying factor at that age would be 0.025 x years (31) = .775 x the PEPRA max ($117k) meaning my max annual pension income (without inflation) would be about $90k/year.

        But lots of assumptions, which I realized also exist with 401k, but at least it is solely in my hands and my decisions.

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        • #5
          I live in Dallas so hear about the problems with the Dallas police/fire pension on the radio.
          Pensions sound so nice...if they actually pan out. But taking that chance now on something 30 years down the line seems like a tough choice. The 401k seems a bit more concrete. Make the contribution every month and it is mine to control in whatever way I want.

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          • #6
            I have a pension and a 401K match. I love the idea of a pension but a question would be: Is it guaranteed in some way? There are some pensions that have federal protection so that they do not loose all their worth. You may not get as much as had been promised, but if it goes bust you still get something.

            Also, consider that pensions can be golden handcuffs. I will be at my current job a minimum of 10 years to be vested. If I stay until I am 60, then I can retire early. Either way, I figure I am married to this job for 10 years unless something amazing comes up or turns up. How long do you have to work to be vested? Are you willing to forgo other opportunities to become vested?

            Hope that helps and congrats on the job!

            - EJ

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            • #7




              All good points, so thanks for leading me down that road. To clarify, the UC retirement plan (UCRP) is separate from CALPERS (Cal state university employees).

               

              Only info I can easily find is from this article (2015): https://dailybruin.com/2015/01/14/ucrps-unfunded-liability-proves-burdensome-to-employees-taxpayers/

              $12B unfunded, but increased UC contributions has given projections of 100% funding by 2039 (BIG assumption obviously).

              “The current status of the fund is stable, and at its current estimated annual rate of return of 7.5 percent, UCRP will be completely funded in 20 years.”

               

              Anyway, sounds like a big deficit to me, but it is still one of the largest pensions in the world with assets >$50B.

               

              I also learned that given my age (34) when I start, I can have at most 31 years of service credit to gain until age 65. Their multiplying factor at that age would be 0.025 x years (31) = .775 x the PEPRA max ($117k) meaning my max annual pension income (without inflation) would be about $90k/year.

              But lots of assumptions, which I realized also exist with 401k, but at least it is solely in my hands and my decisions.
              Click to expand...


              This is the problem with these plans, its already quite unfunded and then they use an annual return rate that they are highly unlikely to get to show how they will ameliorate the problem. Its kinda like when you just keep increasing the rate on a calculator and you get to retire next year. Its nice, but not true. Calpers wants to decrease their projected return which is a responsible move, but the state doesnt want them to do it so fast because it will increase the unfunded liabilities it has and make it look worse (accounting, etc..).

              I dont see why pension plans cant be more reasonable, they are so dramatically crazy deals as on paper of course they cant deliver without larger funding from people that are in them. Why give someone their 3 highest earning years for life? Awesome, yes, but obviously thats akin to having a massive nest egg that clearly people are not contributing to. Add in some weird provisions where people are taking advantage of it (like the dallas stuff, its wild), and you have a disaster. Were this not a political process theres no reason that cutting benefits to 75% (to account for reality of spending, etc..) and increasing contributions even slightly would probably go a long way. That and getting pensions out of crazy alternative investments and decreasing exposure to fixed income as that just decreases their likelihood of making it as well. They are perpetual instruments and equities are really the only appropriate type of asset as they are kind of like the forever bond.

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