Gyroscopic Investing

So I find myself in a position I thought I'd never be in.  I'm in a situation where approximately 7% of my gross salary is siphoned off to fund an employee retirement annuity system.

They call it something else in the literature but that's really what it is.  It chaps my bum for a few reasons:

1.  It's involuntary (to be fair, working here is voluntary, see solutions to come later)
2.  I have no control over it
3.  The state government holds the purse strings

Basically what this amounts to, for back of an envelope purposes, is you pay in 7% a year for 25 years, then in this example you would get approximately 50% of your monthly salary (calculated using the average montly salary of your three highest paid years) for the rest of your life, or less (45% ish) if you chose an annuity which transferred to your surviving spouse (if you have one) upon your death.

On its face it does not sound awful, but the thing is I just don't trust the government to act in a fiduciary manner two decades from now.  The state has a history of abusing another pension system, borrowing money from it, changing the benefits, etc.  So far they've grandfathered in retirees with each "reform" and screwed the newcomers.  The one I'm paying into doesn't have this reputation, but twenty or thirty plus years is enough time to acquire it!

It's not out of the question I could be in this system for a long time (10+ years) as my current position within a few years can lead to better offers from other agencies.

However it's also reasonable I could leave this system in say 5 years, possibly 3 or 4.  I'm staying where I am for the forseeable future as I can relatively easily  get transferrable skills and professional certifications that private employers desire here.  If this thing really bugs me so much still at that point, that would be a good exit point.

Now the thing is if I leave, I get back my cash contributions plus a piddly amount of interest.  I have to roll it over to something else but that is of no concern to me.

Two questions:

A)  Am I being ridiculously paranoid or resentful?  I think I'm possibly having a knee jerk reaction here.  I like to save for retirement I just resent this perceived lack of control.

B)  Should I count the pension contributions as my "Cash" slice of the PP, and then adjust once I know in 4-5 years if it looks like I'm going or staying long term?  Or should I just completely ignore the pension, consider it a sunk cost, and work from that perspective?

Is this a government job?  Are you paying social security?

I believe there are certain gov't jobs that are actually exempt from SS and use a different pension system.

shoestring wrote: Two questions:

A)  Am I being ridiculously paranoid or resentful?  I think I'm possibly having a knee jerk reaction here.  I like to save for retirement I just resent this perceived lack of control.

B)  Should I count the pension contributions as my "Cash" slice of the PP, and then adjust once I know in 4-5 years if it looks like I'm going or staying long term?  Or should I just completely ignore the pension, consider it a sunk cost, and work from that perspective?

You're definitely not being ridiculous. 

However, it sounds like you don't really have a choice.  If it were me I'd try to view it as a form of diversification.  You may get ripped off, but probably you won't, and it's never a bad thing to have someone writing you a check every month. 

Don't consider it part of your PP (I'm assuming that you have a traditional PP).  View it as a separate asset that offers you some diversity. 

Who knows...maybe your PP will do great, and then right at retirement time the brokerage where you hold your stocks has a problem, and suddenly you're watching the next John Corzine testify before Congress as to how he has no idea where your money is. 

The more coals on the fire, the better, although I agree it's a little annoying that you're forced to do it. 

shoestring wrote: Two questions:

A)  Am I being ridiculously paranoid or resentful?  I think I'm possibly having a knee jerk reaction here.  I like to save for retirement I just resent this perceived lack of control.

B)  Should I count the pension contributions as my "Cash" slice of the PP, and then adjust once I know in 4-5 years if it looks like I'm going or staying long term?  Or should I just completely ignore the pension, consider it a sunk cost, and work from that perspective?

First of all, congratulations on being one of the few remaining people that even have a pension.  Try not to be so resentful - guaranteed 50% income for life, or 45% for your surviving partner, is a better guarantee than any corporation is offering now to new employees.  The 50%, I assume, is based on your last full year of income, so it's even better because it self-adjusts for inflation.

Worst case scenario - you pay in 7% for a few years (tax free) and get back your money + interest, which you can then rollover into an IRA.

I would consider it completely separate from the PP.  It's not cash because you can't rebalance it.  At retirement time, you might just live off these checks while your PP continues to grow.

You will get WAY more out than what you put in.

It's a great deal.  Just enjoy the opportunity.  Fewer and fewer people have such opportunities.

Your situation sounds like a 401k with no matching.


Personally, I dislike 401k with no matching and IRA account because they have many restrictions. I contribute to my 401K up to the matching from the company and then I have better use for my money in a non-retirement account.


In your situation, let's say I make $60,000 and it remains constant for the 25 years. Contributing 7% of $60,000 per year is $4,200 and for the next 25 years, it is over $100,000. Why would you want to put $100,000 of your own money in the pension if they don't match you.

Odysseusa wrote: Your situation sounds like a 401k with no matching.

Personally, I dislike 401k with no matching and IRA account because they have many restrictions. I contribute to my 401K up to the matching from the company and then I have better use for my money in a non-retirement account.

In your situation, let's say I make $60,000 and it remains constant for the 25 years. Contributing 7% of $60,000 per year is $4,200 and for the next 25 years, it is over $100,000. Why would you want to put $100,000 of your own money in the pension if they don't match you.

That's not how most state and local government retirement plans work (which is what I assume the OP is talking about).

In the typical state and local government retirement plan the employee is required to contribute a fixed percentage of pay (there is no election as with a 401(k) plan), but the eventual pension benefit is determined by reference to a traditional defined benefit plan formula (such as final average compensation x a fixed percentage x years of service).

In these plans, the amount contributed by the employee is rarely more than a third to a half of the value of the benefit they receive from the system upon retirement.  In other words, in order to fund the benefit that he will one day receive on a sound actuarial basis, he would need to actually be contributing 15%-20% of compensation each year (and investing it to achieve the projected return used by the plan).

In other words, plans like this are a great deal.  They should be enjoyed.  They are rare.

Thanks, M.T.

Yes it is a blessing. My wife has a generous pension plan. Having that safety net was a big part of why I decided to take on the risk of starting my own business. Try and look at the upside as MT suggests  Also,see if you have access to a deferred compensation plan(457b or the like).

I earned a pension with a company that was supposed to pay me $850/month starting at age 65 (2 1/2 years from now). They discontinued the plan in 2007 and cut me a check for $85,000. That money is now part of my PP.

Since I had no choice in the matter I never did the math but if you had a choice which would you rather have?

MediumTex wrote: That's not how most state and local government retirement plans work (which is what I assume the OP is talking about).

In the typical state and local government retirement plan the employee is required to contribute a fixed percentage of pay (there is no election as with a 401(k) plan), but the eventual pension benefit is determined by reference to a traditional defined benefit plan formula (such as final average compensation x a fixed percentage x years of service).

In these plans, the amount contributed by the employee is rarely more than a third to a half of the value of the benefit they receive from the system upon retirement.  In other words, in order to fund the benefit that he will one day receive on a sound actuarial basis, he would need to actually be contributing 15%-20% of compensation each year (and investing it to achieve the projected return used by the plan).

In other words, plans like this are a great deal.  They should be enjoyed.  They are rare.

This is spot on.  I'll elaborate a bit.

I see roughly 7.5% or whatever it is skimmed off my end.  Much like payroll taxes though there's a hidden system going on here.  My "employer" (really the state) claims they are "matching" my contribution.  In reality what it means is they're playing silly games and I'm actually contributing double this amount to the plan, it's just the way it's presented I only see half of it on the pay stub.  It's really my money in that that's more they could pay me.  It's the same mechanism as SS, I only see my part of it, not the employer's part, which again is money they're willing to spend to actually employ me, so like most Americans I'm really being deprived of what I'm objectively worth on the market.

Anyway it does work out it really is a 15% or so contribution.  There's not really a free ride here because otherwise they could be giving me that money and I could be saving it myself.

These are all good responses.  I'm trying not to freak out about this too much,  this is a case of trying to spend 3-4 years building credentials I need to have other options and reassessing at that point.

My real problem is I really want to get where I'm not depending on this pension and it's just a bonus like a SS check might be.  I just don't trust the system to not take it away from me.  But I guess there's my answer, I just need to think long term how to engineer that.  I suppose doing my best to earn raises and then saving the raises is all there is to it.  It's not sexy or quick but there it is.