Hi. I have a general question concerning retirement. Im 40 y/o. I have a Master's degree. Most of my carrer has been in state government. The upside is I can keep my health insurance with me if I leave until I qualify for Medicare in the future. I also have a pension, in addition to my classic 401K. The downside is the pay is low compared to the praivate sector. Given, the traditional "pension" has vansihed in the private sector, Im torn between the value of my pesnion and lower pay versus taking a job in the private sector with higher pay ( the diffrerance can be 10 grand a year) or my current job with a guarenteed pension as part of my retirement plan- and job security in govt. Thanks!
Excellent question. The two major factors you need to look at would be job security in the private sector and could you produce enough retirement savings with the additional income to provide you with a similar retirement income as the govt. pension. A pension is an annuity that guarantees you a certain level of income. The annuity is funded while you work and pays out when you retire.
Now I don't know what your pension payout will be but we can figure out a realistic amount by taking the additional income from the private sector and applying it to retirement savings. So let's say you invested the additional $10k every year until you turned 62. I don't know when your pension would allow you to retire but 62 will give you an idea. Let's say that the $220k you invested over 22 years doubled so now you have $440k. If you bought an annuity to pay you for the rest of your life at today's rates (immediate income annuities rates don't change much)$440k would buy you anywhere from $2100-$2300 monthly income for life. If you took less you could also provide survivor benefits to a spouse or heirs. A pension would only cover your spouse if you chose a survivor benefit.
That being said, there is no guarantee that your $220k would double by the time you retired and the possibility exists that it could be less than you put in. Current interest rates are way to low to achieve any decent guaranteed return. If you wanted to avoid the market risk and get a decent return, your best bet would be to put the $10k a year into a properly set up fixed indexed universal life contract or a dividend paying whole life policy. You would need to purchase the least amount of insurance possible that would allow you to put in the entire 10k. That way most of your funds go toward the cash value component of the contract. This would also allow you to take loans at little or no interest, tax free at any time, and the income you took at retirement would also be non taxable. So even if you produced a similar income, the tax savings would alloy you to keep much more of it.
That being said, you have to take into consideration your happiness at any position. More money and less happiness may not be a good tradeoff. From a financial perspective, a guaranteed pension is a great thing to have when you retire. If you are going to set up your own pension as I have discussed, believe it or not, the best way to do it is through life insurance because there is no risk of loss and any loans or withdrawals are tax free if done properly. Plus your family would be protected when you died.
I hope this helps. Best of luck!