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I've just been offered a job with state retirement benefits and have a few questions. First, the mandatory employee contribution rate to the plan is 6%. Currently, at the private company where I work, it's a 401k (standard across Corporate America). I've only been contributing 3%, but at age 37, I know I'm way behind and will increase contributions to 10% regardless of where I work.
With that said, it seems like 10% in a 401k over the next 25 years would net higher returns. If I accept the other position, I will contribute 6% into the state plan, and 4% into something else--maybe a Vanguard IRA or Roth IRA. The state plan is a defined benefit plan, so once you're vested, you're guaranteed the money.
The state plan benefits are fully vested in 10 years. The formula is as follows:
Average final salary (highest 5 years) x years/months of service x .0165 benefit factor / 12
Example for $50k job at 20-1/2 years of service -- 50,000 x 20.5 x .0165 / 12 = $1409.38 per month.
It seems like even though 10% in a 401k may net higher returns, the guarantee of the pension is also appealing. It should also be said that my health insurance would be paid (employee only), dental paid, short term/long term disability paid, and 2x life insurance all paid. Those are huge! Is it better to take something like this, or will it hamper my potential retirement earnings by not being able to invest in potentially higher return investments? FYI, this job also pays a little more than my current.
To me, it's a no-brainer to go with the state job and the defined pension. The only risk you have is the integrity of the pension. Does the state manage it effectively? What do you think the chances are that the pension could go bankrupt.
How's the annual pay. Often times, government jobs pay less but your tradeoff is stability and all the things you listed above. Do you think you could make a lot more money in the private sector, have stability until retirement, AND max out your 401K plan? In that case, you might come out ahead.
To me, it's a no-brainer to go with the state job and the defined pension. The only risk you have is the integrity of the pension. Does the state manage it effectively? What do you think the chances are that the pension could go bankrupt.
How's the annual pay. Often times, government jobs pay less but your tradeoff is stability and all the things you listed above. Do you think you could make a lot more money in the private sector, have stability until retirement, AND max out your 401K plan? In that case, you might come out ahead.
From what I've read, the state isn't doing its best on that and liabilities have been increasing over time. With that said, being a government entity, I doubt it would go bankrupt.
Annual pay is $5k more than my salary at a private company (including my annual increase I just received); and $7k over what my annual pay has been this year. My current employer has high costs for health insurance so when it's all said and done, this new position is really like a $10k raise with paid health and other benefits. Job stability is 0 anywhere these days. I've been laid off with severance at one job prior and have left another due to a buyout as well.
To me, it's a no-brainer to go with the state job and the defined pension. The only risk you have is the integrity of the pension. Does the state manage it effectively? What do you think the chances are that the pension could go bankrupt.
How's the annual pay. Often times, government jobs pay less but your tradeoff is stability and all the things you listed above. Do you think you could make a lot more money in the private sector, have stability until retirement, AND max out your 401K plan? In that case, you might come out ahead.
I'm thinking along the same lines as you.
OP, just FYI, your prospective pension formula is better than the federal pension scheme. A federal pension would be 50K * 20.5 * .011 (if after 62), or around $939 per month. Ask the questions above to inform your decision and best of luck to you.
Past performance is not indicative of future results.
To me, the guarantee of the pension is huge. Also, it's highly unlikely a state government will go bust (maybe Illinois notwithstanding?), where the likelihood of that is just much greater in the private sector. You can always invest any extra money.
People always say that the lower pay of the public sector "makes up" for the pension and benefits, but depending on where you are and what you do, public sector pay may actually be higher than in the private sector. Example - I used to do IT support work as a contractor to a Fortune 500. Because of the weak local economy, the pay went as low as the market would bear, and that was around $10/hr with no benefits. I had several colleagues move over to the city government doing the same work for $15/hr with full benefits and a TN pension. Governments often have a statutory wage floor that isn't there in the private sector.
That's not even mentioning other issues like age discrimination.
Past performance is not indicative of future results.
To me, the guarantee of the pension is huge. Also, it's highly unlikely a state government will go bust (maybe Illinois notwithstanding?), where the likelihood of that is just much greater in the private sector. You can always invest any extra money.
People always say that the lower pay of the public sector "makes up" for the pension and benefits, but depending on where you are and what you do, public sector pay may actually be higher than in the private sector. Example - I used to do IT support work as a contractor to a Fortune 500. Because of the weak local economy, the pay went as low as the market would bear, and that was around $10/hr with no benefits. I had several colleagues move over to the city government doing the same work for $15/hr with full benefits and a TN pension. Governments often have a statutory wage floor that isn't there in the private sector.
That's not even mentioning other issues like age discrimination.
I live in a LCOL area, and honestly, this job is higher paid than any I've had (more responsibilities than my current role though), and if it were private sector, it may pay about $10k more a year; however, that increase is offset by the excellent benefits-health insurance plan and coverage being #1. Employee's is paid, and employee +1 (if we have a child) is $160 bi-weekly. My wife's company also pays her health insurance. While we are childless, it will essentially be free. I currently pay almost $140 bi-weekly for just my health insurance alone; dental and vision add about another $40. I will most likely take it as I haven't heard anything bad about the place.
#2 - paid medical, before and AFTER RETIREMENT. Often dental continues after retirement too. Ask any retiree about that, it's HUGE.
#3 - job security...once you get on in a permanent position with the state, it's unusual to be laid off and close to impossible to be fired unless you steal from them, or kill someone.
#4 - the pension amount is not dependent on performance of the stock market as your 401k would be.
#5 - your pension won't suddenly end or run out as a 401k might. It's FOR LIFE, and if you choose a survivor option when you retire, it can go on for the life of your spouse if you die first.
#6 - there are often many promotional opportunities with the state, and those positions are often not even open for outsiders to apply to.
#7 - step increases!! State jobs get step increases either every 6 months, or every year, until it maxes out for that position, usually at step 9 or some such number. So pretty much a guaranteed raise every year if you simply do your job competently.
edited to add: If you do like many of myself, and my friends, and my family, you will see that you can promote from within every five years or so, increasing your salary, and then you start a whole new round of step increases. Each raise raises your eventual pension. Can't do that with a 401K! Your starting salary is your floor...your ceiling is up to you, your ambition, and your skills/education. Often the state pays your tuition if you take courses to get your Master's degree too!
I got on with the state of Oregon in 1980. My initial pay was about $800/month. I worked for Oregon Fish and Wildlife and lived on station at Fish Hatcheries. The housing was partially subsidized, meaning we paid a percentage of the going rate for rentals. That ended up being about $80/month. We lived in a 4 bedroom house right by the fish ponds. The pay wasn't great, but I was vested in 5 years. In 1979, public employees were allowed to vote on a 6% pay increase or having 6% put into a savings plan which the state matched. That turned out to be a great decision.
I retired after 31 years with the state and get a very nice pension, about $3500/month. I also get health insurance through the state for about $400/month. My pension will continue for my spouse for the rest of her life if I pass first. I took the option to continue my pension for her which reduced my
All in all, we live a nice comfortable retirement and I have no regrets about working for the state. I'm pretty confident the state will not go bankrupt any time soon.
On a related note, the state has mostly gotten rid of the traditional pension and offer 401K's now.
The state plan is a defined benefit plan, so once you're vested, you're guaranteed the money.
Just be aware that there is no such thing as a guaranteed governmental defined benefit pension (ask all the city of Detroit retirees about that).
The PBGC is the guarantor of corporate defined benefit pensions, but they overlay their own calculations and rules and the amounts are almost always reduced (and the PBGC is having its own financial difficulties). The guarantor of governmental pensions is the ability of a government to raise taxes and to raise employee contributions to fund the plan. Many states have substantially raised employee contributions over the last few years because their plans promised high benefits and because the number of state employees are being reduced. If a state goes bankrupt, all bets are off.
When you are vested you are entitled to your vested benefits at that time, and that amount will likely increase as your employed time continues, The cost for you to continue, however, may be higher or much higher than it is today.
I am not saying it's a bad arrangement, only that you need to go into it knowing all the risks as well as all the benefits.
It sounds like a VERY good deal to me for all the reasons others have already mentioned. The only other factors that would go into your decision is the job itself. and the people you would be working with. Will there be opportunities in the future for advancement to higher paying positions, will you have opportunities to learn new skills so you can keep your skills current, and will you be working with a good group of people?
Good luck and let us know what you decide.
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