The Pension Route to Early Retirement
“I can just work 25 more years and ride off into the sunset with my pension. I would be entitled to 90% of my salary (average of my last three working years) for the rest of my life!”
Earlier this week, my coworker shared with me her potential early retirement plan. It was a pretty simple plan but it involved working for the government for 25 more years.
Why 25 more years? As city employees, that’s how our defined benefit pension plan is setup. If you work 30 years, you are entitled to receive 90% of your salary (average of last three years), for the rest of your life.
Given the fact that we are around the same age, her plan piqued my interest! If I followed her plan, I could retire at 56. Given the standard retirement age is 65, that’s what I would call a late early retirement.
This plan excited me, until I remembered that I would have to work for the government for 25 more years. This, along with other reasons, gave me pause. I’ll discuss the other reasons later in this post. For now, let’s get back to learning more about defined benefit pension plans!
Defined Benefit Pension Plans
For most people, defined benefit plans, are not even an option. According to a CNN Money article, only 4% of private sector employees have access to it as their primary retirement account.
For comparison, 64% of state and local government employees have access to one.
As a local government employee, it is mandatory that I participate in the plan. 9.5% (social security is not taken out) of my salary is taken out every paycheck, whether I like it or not. The only voice I have in the matter is voting for our retirement plan administrator, which I failed to do this year.
Advantage of Pension Plan
To me, making it mandatory that I contribute a certain percentage of my salary, is an advantage of the plan. If I were given a choice, would I be contributing 9.5 percent of my paycheck to retirement?
As a personal finance blogger, I would like to think I would contribute even more. But not having a choice definitely helps!
Another advantage would be contributing a small amount into the system and reaping such a large reward. Let’s say, I average $60,000 over my 30 year working career with the city. That means I have contributed $171.000 towards the pension plan.
Using the social security actuarial life expectancy chart, I learned that there is a high probability that I will live to reach 78 years old. With this information, I can project a payout of approximately 1.19 million from my pension.
Of course, that is highly speculative! I have no clue how long I will live. However, I hope to live a long, fruitful life.
Disadvantages of Pension Plan
On the flip side of things, there are some disadvantages with having a pension plan as your primary option. Maybe you can think of some more disadvantages (let me know in comments section), but here are two potential disadvantages that immediately come to my mind:
- No 401 (k) match for me
- Lack of control over how pension funds are invested
For those who have access to a 401 (k), most personal finance professionals recommend that they take advantage of their employer match, if one is offered. I often wonder how much money I am missing out on by not having this option available to me.
Also, the lack of control over how my money is invested is something else I ponder sometimes. Could I make more money by investing my dollars myself?
Other Investment Options Available
To counter the disadvantages above, there are other investment vehicles available to government employees. You can, of course, contribute to a Roth or regular IRA (5,500 if you are under 50). In addition to that, you can contribute to a deferred compensation account (up to 18,500).
For now, I have decided to supplement my defined benefit plan contribution by opening a Roth account.
Now that we have covered some advantages/disadvantages of the pension plan, let’s get back to taking a look at whether I should follow my coworkers plan.
Should I Take the Pension Route?
Taking the pension route to early retirement seems like a good strategy for my coworker. She has purchased a condo and has recently married the love of her life. It is safe to say she plans on living in her current location for a while!
I, on the other hand, am a single male who does not own a home. Nor am I locked into a lease agreement. I live with my brother and cousin and we split the utility bills and rent collected by my mother.
My unique situation allows me to take advantage of unforeseen opportunities. While my brother and cousin would probably upset if I left (I pay more than my fair share), they would get over it.
Moreover, I intend to get married at some point. My mom always jokes, “You are always the groomsman, never the groom!” One day, Mom! One day I will be the groom.
I’d have to discuss living in my current location for the next 25 years with the future Mrs. Peerless!
While my coworker’s plan to retire early, seems solid, it probably will not work for me. It requires a 25 year commitment to working for the same employer. As a single guy who wants to get married, I don’t even have a clue where I will end up living five years from now.
Plus, I would not want to limit my career options. Like my coworker, I would love to enjoy a late early retirement, but I will likely choose another route there!
Am I crazy for doing so, though? Who knows!
*I am not a certified to give professional financial advice. My blog is written purely for your educational entertainment. Don’t listen to anything I tell you; I am just a personal finance addict who loves to write…*
- What would you do if you were in my situation?
- What are some things that could go wrong with my coworker’s potential plan?
- Did I overlook any potential advantages/disadvantages to having a pension plan?
Jerry is a Business Insider Contributing Writer who is obsessed with personal finance. He believes you can improve your financial situation by applying principles taught by the financial independence community to your financial life.
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