The Pension Is Mightier Than The Sword
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I am very fortunate that, after 4 years of training as a radiology resident, 1 year of fellowship training in interventional radiology, and staying on as a faculty attending for a little over a 1 year, I had crossed the threshold to qualify for the Ohio State pension program (OPERS).
[During the time I was there, an individual was considered vested in the pension program after 5 years of service.]
The amount of the pension depended on both the Final Average Salary (FAS) and the length of time working.
My final number for FAS reflected the fact that the majority of my years was working as a lower wage earning resident (from 1999 to 2003 my salary range was from $34k to $42k).
That FAS, coupled with my service credit of 6.6 years, gave me a pension ceiling of $14.7k/year if I waited until the maximum age (67) to claim it and has a current cash value of $75k.
The amount of this pension was certainly not going to provide a lifestyle of the rich and famous with champagne wishes and caviar dreams.
But it was still a nice feeling to know that there was a floor to the income I would have in retirement, especially when I can also add in whatever Social Security benefit I am entitled to.
Doubt started rearing its ugly head.
The internet truly is incredible.
At your fingertips you have instant access to information that previous scholars could only dream of.
However sometimes the knowledge gained can make you second guess things previously taken for granted, like me relying on this pension a few decades down the road.
Some of the more worrisome articles I came across had to do with the impending pension crisis which highlighted the fact that many state pensions are underfunded and likely to become insolvent.
An informal survey.
I decided to ask the hive (the Physician on Fire Facebook group) what would they do in my situation and gave two options in a poll:
Option A: Leave the pension alone and hope it is there as promised when the time comes.
Option B: Find a way to receive the current value and transfer it into a self-managed retirement account.
The results tilted towards option A (35 vs 10).
Along with the poll results, there were some helpful comments in the ensuing thread that followed my post:
- The importance of finding out if there is a penalty assessed by the pension program if transferring funds to another retirement account. [In my case there was not]
- “If you get nothing, it’s not the end of the world, but it’s hard to find other vehicles which might (barely) save you from abject poverty in case of financial disaster.”
- “I find valuing pensions very difficult. At first approximation it would appear you need around $367.5k to create the same income stream at retirement with a 4% withdrawal. Even applying some discount for possible insolvency or pension haircut, I would probably lean toward keeping it.”
- “I would just treat the pension as a sorta quasi-bond with a credit rating between municipal and corporate junk. Meaning you could increase equity allocation accordingly if you decided to keep the pension, assuming you already allocate to those types of bonds or total bond funds.”
I had gone into this discussion already biased on keeping the pension as is.
Even though it was a slight gamble, the risk-reward favored the reward side.
Even if I was not able to get the full amount, I would likely have some sort of reliable income source during my golden years to help raise that all important income floor.
Where Ohio ranked in the list of state pensions at risk was also a little more reassuring (#14).
I also calculated what kind of return I could expect if I took the $75k lump sum and invested with an 18 year hold.
Using a 5% conservative annual rate of return, I would end up with a final value of $180.5k, which was less than half the amount needed for a pension equivalent using the 4% safe withdrawal rate.
In addition, I really liked the concept of treating my pension value as a bond.
It was not a concept I had even considered until the discussion on Facebook occurred.
In my asset allocation models, I had just been leaving the pension out of the picture.
Because my pension is quite similar to a bond, I now find myself even more conservative in my asset allocation than I had projected and thus find myself overweight in bonds.
I plan to rectify this situation by slowly rebalancing my portfolio and offloading some bonds and picking up equities in its place.
It just so happens that, because of the current economic environment, the timing of this may be fortuitous as equities have taken a recent asymmetric beating due to the pandemic, allowing me to sell high and buy low.
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Even a steadfast DIY’er can sometimes gain benefit from the occasional professional input.
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