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I've been presented with an opportunity to buy back into the state's pension program (Massachusetts) from my 401a plan. The process would drain my 401a (currently about 130K). Both programs are where I contribute 10% from my income.
Currently in my early 40s, I can retire at 55 with either plan. The pension would have a defined benefit of 32% of my income at 55 years of age. That goes up to about 78% if I wait til 65. If I retire at 55 but wait til 65 to take pension payments, I'd have 53%.
Payments from the 401a plan obviously depend on how well things (more or less the stock market) do between now and whenever I retire.
Another factor - as a state employee, I do not pay into SS and I cannot count on anything from SS.
I have both a Roth IRA and 403b plan that I contribute to (about 15-20k/year).
Some advice might tell me I can do better (possibly) sticking with the 401a plan.
What would you do? Buy back into the pension or stick with the 401a?
I've been presented with an opportunity to buy back into the state's pension program (Massachusetts) from my 401a plan. The process would drain my 401a (currently about 130K). Both programs are where I contribute 10% from my income.
Currently in my early 40s, I can retire at 55 with either plan. The pension would have a defined benefit of 32% of my income at 55 years of age. That goes up to about 78% if I wait til 65. If I retire at 55 but wait til 65 to take pension payments, I'd have 53%.
Payments from the 401a plan obviously depend on how well things (more or less the stock market) do between now and whenever I retire.
Another factor - as a state employee, I do not pay into SS and I cannot count on anything from SS.
I have both a Roth IRA and 403b plan that I contribute to (about 15-20k/year).
Some advice might tell me I can do better (possibly) sticking with the 401a plan.
What would you do? Buy back into the pension or stick with the 401a?
Take the pension but continue Roth. Is that $130k the entirety of your 401a?
Thanks - I'll look at the Ramsey calculator.
I don't have the official buy-back-in number from the state yet, but my guess is that it'll drain my 401a (probably the full 130K). I have the Roth at around 45-50K and also a 403b (tax deferred) that I recently started in the last couple of years at around 25K. I'm contributing to both and won't need to get rid of either (neither the 403b nor the Roth) to get back into the pension.
A really accurate answer depends on a couple of factors. Please answer these questions to the best of your knowledge.
1.You said you currently have 130K in your 401k. What is the total amount that you and the sate will contribute towards that 401 from now until your 55.
2. In todays dollars (without adjusting for inflation) if you were 55 what is the approximate monthly payment of your pension at 32%?
3. Does your pension offer any cost of living adjustment after you retire?
4. Do you plan to retire at 55 or will you wait until 65?
1.You said you currently have 130K in your 401k. What is the total amount that you and the sate will contribute towards that 401 from now until your 55.
It's a 401a (not k) - probably doesn't make a difference.
I contribute 10% they contribute 4.7% of my income. Right now that is about $7000 from me and about $3300 from them.
Quote:
Originally Posted by griffon652
2. In todays dollars (without adjusting for inflation) if you were 55 what is the approximate monthly payment of your pension at 32%?
I estimate about $2600 monthly
Quote:
Originally Posted by griffon652
3. Does your pension offer any cost of living adjustment after you retire?
Yes - according to the website - "COL Adjustments are provided by legislative act each year"
Quote:
Originally Posted by griffon652
4. Do you plan to retire at 55 or will you wait until 65?
I would like to retire from this job at 55 as I don't like it and would like to leave the state. I'm thinking to begin taking the pension at 55, but then work as well here and there if needed.
Working after retirement in the private sector - "There are no earnings limitations for superannuation retirees who work in the private sector. However, Chapter 21 of the Acts of 2009 has additional limitations to private sector employment. If you are directly employed, are an independent contractor, or a consultant for a private sector employer, and your duties consist of providing direct service to the Commonwealth, you are subject to the limitations listed above. Refer to Chapter 21, Section 21 of the Acts of 2009."
There are some other stipulations for working as a Mass employee...but that won't pertain to me.
Sorry I'm just used to typing "401K" but I knew that you have a 401a. The reason I wanted the details is because I did similar calculations for myself and based on your answers here's what I think. You should go over to the pension. Why?
I did the calculations for your 401a first. I'm assuming that when you wrote the 7000 + 3300, that was a yearly contribution amount. I added that to the 130K you have now and assumed that you were 43 (since you said you were in your early 40's). That gives your money only 12 years to grow. Since that is a short term I used a 7% yearly return for your funds. IMO based on historical rates that's an optimistic number. Your real returns could be a bit higher or could easily be slightly lower at 4-6%/yr.
But assuming that you have a 7% return you will have approximately $493K when your 55. If you continue to receive an average of 7%, you can draw 4% safely because you will need to leave the 3% for inflation. That only gives you about $1643/ month. Keep in mind that the returns I gave are actually semi-optimistic. Even with that type of return your pension is giving you about 1K more a month then your 401a guaranteed + guaranteed COLA if the information you found is correct.
So based on this, its a no brainer. Switch over to the pension. Your getting a guaranteed income for life with a built in COLA. That's really hard to beat. Now there are 2 things to consider that you should look into before you decide what's best for you.
1. The health of your state's pension system. This can be a HUGE factor in determining if your pension going to surprisingly be reduced because of bad managing. Good news is most states still have a healthy system, so hopefully you live in one of them.
2. With a pension you have NO lump sum cash value. So although the 401a gives you less monthly, you have half mil that you can draw from for emergencies. Personally, I would much prefer the higher pension but your situation may be different then mine.
So based on this, its a no brainer. Switch over to the pension. Your getting a guaranteed income for life with a built in COLA. That's really hard to beat. Now there are 2 things to consider that you should look into before you decide what's best for you.
1. The health of your state's pension system. This can be a HUGE factor in determining if your pension going to surprisingly be reduced because of bad managing. Good news is most states still have a healthy system, so hopefully you live in one of them.
2. With a pension you have NO lump sum cash value. So although the 401a gives you less monthly, you have half mil that you can draw from for emergencies. Personally, I would much prefer the higher pension but your situation may be different then mine.
Lots of us think "Detroit" when the health of pension systems comes up, but there is a major difference between states on the one hand and cities and counties on the other hand: States cannot declare bankruptcy. That doesn't mean people with state pensions are home free, of course. Legislatures can make changes to certain aspects of pension benefits, depending on the specific state constitution and state laws. In California the legislature cannot reduce pension amounts for people already retired, but it can (at least for the school teachers in CalSTRS) take away the automatic yearly COLA increase.
Detroit retirees are facing a 4.5% pension reduction under the latest proposed settlement by the bankruptcy judge. It could have been a lot worse for them, it seems to me.
Thank you so much griffon652, that makes sense. I was heavily leaning toward the pension but am wanting to see if someone is seeing something I'm not. Financial advisers have said I could do better with the 401a, but the important word here is *could*. And I have to consider any advice in terms if it's coming from someone with a ball in the game. Based on average returns, and all the reasons you outline, I think the pension will suit my situation better.
I'm in Massachusetts and there are several pension programs for this state. The one I am in is the healthiest of the MA pensions and is somewhere in the high 70s in terms of percent funded. That's not the best looking across all US state pensions, but it's not the bottom either.
Last edited by foxboro82; 07-18-2014 at 05:20 PM..
Thank you so much griffon652, that makes sense. I was heavily leaning toward the pension but am wanting to see if someone is seeing something I'm not. Financial advisers have said I could do better with the 401a, but the important word here is *could*. And I have to consider any advice in terms if it's coming from someone with a ball in the game. Based on average returns, and all the reasons you outline, I think the pension will suit my situation better.
I'm in Massachusetts and there are several pension programs for this state. The one I am in is the healthiest of the MA pensions and is somewhere in the high 70s in terms of percent funded. That's not the best looking across all US state pensions, but it's not the bottom either.
Your welcome. I learned very early that doing research yourself ends up being more beneficial then just relying on the so called "experts" for guidance. Most professional's however do serve a purpose so although I may know as much about a subject I will still hire one. Unfortunately financial advisors are akin to car salesmen. Although there may be one or two out there that are honest; most will steer you towards something that will benefit them and most likely cost you thousands. I'm glad you were astute enough to pick up on the "could." Because if I calculated the detailed probabilities of what types of returns you would get in a 12 year period, I doubt even the most optimistic individual would invest if they have the option of a guaranteed pension. Good luck to you and your future retirement!
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