To Pension or Not to Pension?

When I first arrived at my current job I was given the opportunity to choose two different retirement plans. I could choose their version of a 401(k) or I could choose the pension option. I chose initially the 401k plan because I wasn’t sure if I was going to stay at that job and move on. The portability of the 401k, the choices that I could make, and the fact that I got to choose those specific investments and watch that money grow were all motivators for my decision.  A number of my colleagues made similar decisions. Over the past year, the state where I live has allowed people to buy back into the pension system and a number of my colleagues are now choosing to do so.

I understand why that many of those people are doing it. If you have a well-run state pension (and I think we do) you will most likely have a solid secure pension to retire from and if you stay in the system for 30 years you will be able to retire with 80% of the last three or five years (can’t remember which) salary. Sounds great right? For some I am sure it is. For me it is not and there are several reasons why I won’t be buying back into our pension system.

First, I am not sure that I will be at the same job for 30 years. I could be vested into a portion of the pension next year, but it would be a very small percentage of my retirement income. I could move on to another place. I could choose a different profession. Circumstances may occur where I may lose my job. If that happens then I lose control of the money that I have earned.  Moreover, I am not sure I will/want to work full-time for the next 20 years. My goal is to become financially independent, which means I make enough on my investments where it will cover all my expenses. In order for that to happen I need to pay off all of my debt, including my mortgage. I need to have enough saved to match those monthly expenses. If I put my proverbial eggs in one basket I will have little options and almost be forced to stay in that job.

Additionally, I will be honest I don’t trust the pension system as it stands now. Yes I know that there are some very well-run pensions and I think the government needs to add another layer of retirement security that is mandated for everyone to contribute. However, I have also viewed too many states and their politicians tinkering with pensions, lessening benefits, and not living up to the promises they have made. I hope those changes don’t come for my colleagues and I will advocate for them they don’t, but a pension is not the right choice for me.

Third, I, in essence, only have one leg to stand on in retirement. Traditionally, there was a three-legged stool in retirement: social security, pension, and a 401k or IRA. Well, I live in a state where the state doesn’t contribute to social security (saving it almost a $1 billion per year). I have enough quarters to be built up for social security, but in my prime earning years I am really earning nothing. Thus, my SS will be a pittance. I have chosen not to do a pension and so I really only have my 401k and IRAs. (My wife will get some SS but that isn’t enough as a major offset).

That is ok for me because I believe that by following some basic principles (a topic for another post in the future) that I will be just fine in my investments. I don’t do anything crazy. I don’t take unnecessary risks or buy gold or speculate in real estate. I believe in the stock market. And if history is correct, and it has proven to be so for 200 years, then I should be just fine. But if I screw up then I screwed up. I am not at the mercy of anyone by myself. In that sense, I guess I am declaring some financial independence.

So while I think it is great that some of my colleagues will have the opportunity to buy back into the pension system it is not something I will be doing. I will stick with my 401k, Roth IRA, pittance of social security, pay down as much debt as fast as I can, and do my best to secure my family’s future.

What do you think am I crazy? Do you have a pension? Would you choose to enroll or re-enroll?

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