Sunday, October 7, 2012

Thinking about retirement

So as part of the standard paperwork overload of starting a new position, I had to fill out paperwork relating to my retirement account.  In both this new position and the position I had last year, I had two options: pension or private.

Unlike my old university, which let you choose one and then swap 5 years down the road if you so chose (one time only), at my new university, you have to choose one within 6 months of starting, and you can never, ever, ever (ever ever) go back.  Even if you leave the university and come back later, you're stuck in that same original choice.

The pension plan is typically a good deal if you plan to stay with that university (or within the state university system) for the rest of your career.  The way the pension plan works (at least at my new university), is you put in a set amount of your paycheck (~10%) into the pension plan (pre tax), and when you retire, they calculate how much your pension will be based on a special formula.  From what I understand, this formula takes into account how many years you've worked for the pension system (30 years seems to be what's needed to get the 'maximum' benefit), an average of your highest 3(?) salaries, and how old you are. So hypothetically, if you worked 30 years paying into the pension system, was of retirement age (~67ish?), and your highest 3 years of salary were $100,000, you'd end up somewhere with $80,000/year in pension until you croak.  If you worked fewer years, retired earlier, or made less salary, your pension would be lower.  Still, the benefits are largely guaranteed, so once you put in your time, you can sit back and let the cash roll in.
...So that seems like a pretty sweet deal.

The 'alternative' retirement program worked as follows: You put in the same amount (pretax) that is withheld from the pension (~10%), but that goes into a private retirement account that you own.  You can choose 3 providers to manage that account (e.g., TIAA-CREF), and the university will put in a matching amount of ~5%.  So in essence you end up with ~15% of your salary going into your retirement account each year, though it only costs you ~10% of your salary to do this (the rest is matching).  You are 100% vested from the start, which means that's your money (both your own and the matching) if you ever leave the university.  Your retirement fund grows over the years through your contributions, university matching, and as the markets increase in value.  Meanwhile, you have a few options of how to use your funds, such as in money market, real estate, bonds, stocks, etc.  All of these are mutual fund type investments, so you don't actually put your money in specific homes (if you choose real estate) or specific stocks, instead you buy shares in a mutual fund that uses their resources to purchase a number of different investments within that field (e.g., many different stocks).  From all of the literature I've seen, if you have a balanced investment strategy you can reasonably expect to earn 5-7% per year on your money (whether that holds up in real life, who knows).  You can't withdraw your retirement funds before you retire, otherwise you pay a HUGE amount of taxes/penalties on it.

The key things I had to consider when choosing between these options were:
1. Do I think the pension plan will still be around in ~35 years?  (Most definitely)
2. Do I think I'll stay with the same university/university system to ~35 years (Hopefully?)
3. Would I get seriously screwed over if I left the system early, such as not getting tenure or taking another position elsewhere in 10 years (Yes)
4. Do I expect to retire on time (late 60's) to start collecting the pension? (Maybe)
5. Do I expect to live a really long time in retirement? (Probably not)

So while I like my new position, and I hope to be at the same university until I retire, I ended up choosing the 'alternative' plan.  

There were a few reasons I did this:
1. I simply can't predict the future, and it seems like too much of a gamble to plan on being at the same university for 35+ years.
2. I'm not sure I'd want to retire when I hit mid/late 60's, since being a professor is a pretty sweet gig, and once you make full professor, you can pretty much do whatever you want in terms of research, and you always get summers off, and if you have a 2/2 load, the teaching is very reasonable.
3. I'm not convinced I'll live until I'm 80 or 90, so I'd rather have something that would go to my wife/children if I croak sooner rather than later.
4. I'm untenured, and while I'd like to think I'll get tenure at my new university, that decision is still 5+ years away.  If I don't get tenure, and I have the pension plan, my options would be to go to another state-university school (hard to do, unlikely to be a Ph.D. program, likely a big hit in salary), or take a HUGE hit on my retirement account and leave the system.
5. Even if I get tenure, if I wanted to move on to someplace new in 10 or 15 years, the pension would seem like a pair of golden handcuffs.  Good to have, but making it too costly to go anywhere else.

Another thing I had to consider was that under the university/state system, I don't pay social security tax (yay!), but I also wouldn't GET social security when I retire (boo!).  I fully expect social security to have crashed and burned well before I retire, or at best, be severely eviscerated, so I'm not too worried about that.  It basically gives me 4-6% more in my salary that I could use for a supplemental retirement fund (or beer).

Hopefully I'm making the right decision.  I expect that the pension system might have been a slightly better choice, since I don't plan on leaving the new university, but the alternative system seems like the safer of the two.  There's nothing I can do about my choice now (since, again, the only way to change your choice is with a time machine), so I guess I should just not worry and work instead on getting tenure.

...Of course, in 40 years if I'm stuck eating cat food because the market crashed and I don't have social security, I'm going to look back on this post and be pretty pissed.
While Professor Fluffykins' 401k crashed and burned,
the prospect of having to eat cat food in retirement
doesn't seem all that bad to him.


  1. I think either retirement program would be good if you plan your retirement carefully and consider the kind of life you want to live after everything is said and done. Your finances are an essential part of the big picture, so it would be best to think about what you want when you retire - where you want to live, or what activities you want to do. Carefully consider every factor, every aspect in your life. That is how you will be able to determine what kind of retirement plan to go with.

  2. Like what Cara said, it is important to secure our future. Having a good financial and retirement plan will surely give you a comfortable life after working for so long. There are a lot of retirement plans that you can choose from. Hence, you should be wise and carefully choose the plan that can meet your needs and suit your budget at the same time.