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Thread: retirement while in snowball?
12-08-2010, 12:42 AM #1
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retirement while in snowball?
I'm reviewing the paperwork needed to start contributing towards a defined benefit plan (yes, benefit not contribution) to start gaining time while I try to get hired full-time as a community college instructor. (I'm currently working as an adjunct at a community college and trying to piece together enough other public service jobs to get to 30 hours per week - if I stay full-time in public service for 10 years, it is equivalent to $10-20K a year in student loan forgiveness benefit and I think that community college instruction is a good fit for my strengths, aptitudes and desires.)
The cost will be 3% of my pre-tax pay. We're still in the debt snowball step and will be until sometime in 2012 (sooner if my employment situation improves).
I'm interested in hearing the pros and cons of making this small contribution towards a defined benefit retirement plan while still in the debt snowball.
- 12-08-2010, 06:16 AM #2
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I don't fully understand what you're trying to explain. Is the 3% benefit plan to be eligible for the student loan forgiveness? Or is the 3% for a retirement plan or a pension?
More information needed.
12-08-2010, 10:04 AM #3
How much different will the 3% make to your debt snowball? I'm guessing it may add a month or so? How much interest is that?
How much extra will you have at retirement by starting now?
I'm guessing if you run those numbers, it will be a no brainer to start contributing. You're lucky to be getting a defined benefit plan. I'd be all over that.
12-08-2010, 02:03 PM #4
You're lucky you get a choice. We have no choice with my husband's pension plan, either to not contribute, or to contribute a minimum, or to contribute more than the minimum. It's just something we have built into our budget.
2011 will be year number 5 of our debt snowball, and we'll be all done by the end of the year with everything but the mortgage. If he hadn't contributed (if it had been an option), it would have saved us a year on the debt snowball, but it would have cost him 4 years of service credit, causing him to have to work manual labor until he was 69. Not worth it. We would have probably continued to make the contribution and just suck up the year of interest payments on my student loans anyway.
12-08-2010, 02:11 PM #5
We kept the retirement percentage going while in BS1 and BS2. DH gets a match and I was not going to let free money go! lol We are in BS3 and will bump up the percentage after we finish.
12-08-2010, 02:22 PM #6
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Is the 10-20k loan forgiveness isn't the only benefit to this plan, right?
12-08-2010, 10:44 PM #7
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Ok, I must have been confusing.
Two separate ideas. Student loan forgiveness by being in public sector is independent of the 3% to get started for the defined benefit pension plan.
I'm still reading up on the differences between ERS and TRS (employees and teachers retirement systems, respectively. in NY) and learning about the benefits. Under ERS I can apparently buy credit for my prior part-time employment as a tutor when I was a community college student way back when.
More info once I understand more.
In other news, I've been called up for an interview for a full-time term position for next semester as a Mathematics Instructor! This is independent of the tenure-track search for Fall, 2011 that I am in the applicant pool for, but hopefully it will help me get in.
12-08-2010, 10:48 PM #8
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I thought that loan forgiveness was a weird thing to reward as a retirement plan.
12-08-2010, 11:53 PM #9
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In ERS, the 3% contributions will buy me a pension at age 62 after 10 but before 20 years of service of:
years of service * FAS / 60
where FAS is the average of the highest paying consecutive three years of service. After 20 years of service, the divisor changes from 60 to 50.
I think that my prior service might count for about 2 years of service. I am looking into the time my prior service counts as and how much it would cost to buy credit for it.
So, let's consider that my salary increases to give an FAS of $50k after 11 years of service (long enough to qualify for the student loan discharge and have my loans thusly forgiven). In this case, upon turning 62 (I'm 36 now) I will receive as a pension:
$50,000 * 11 / 60 = a whopping $9,166.66 per year.
If I bought credit for my prior service and it turns out to be two years worth of credit, I would get instead:
$50,000 * 13 / 60 = a whopping $10,833.33 per year.
If I stayed until I had 20 years of service and my salary increased to give me an FAS of $60K, I would have a pension of:
$60,000 * 20 / 50 = a better $24,000 per year.
And, if I just worked until the age of 62 (62 - 36 = 26 years, let's say FAS goes up to $65k):
$65,000 * 26 / 50 = an even better $33,800 per year.
On top of this, we would be managing our own defined contribution plans as per baby step 4.
Please let me know if I'm not thinking correctly.
12-09-2010, 08:27 AM #10
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First lets eliminate raises and inflation from the mix here and look solely (that word is spelled weird) at cost benefit. I'm using a salary of 30k here but interestingly enough the final ROI doesn't change regardless of the FAS you use.
We'll assume your pension will actually be there - an assumption I don't really trust.
If you stay for 10 years, the absolute minimum, you will receive a pension of $5,000 having contributed $9000. The ROI for the first year pension vs. total investment is 55.56%. Each subsequent year from 11-19 the pension amount goes up, but so does the contribution amount, and the ROI remains fixed at 55.56%.
In year 20 the ROI jumps to 66.67% and stays there.
Now over time as your salary goes up so will your contribution amount, so in the end your pension amount will actually represent a higher ROI over the actual contribution amount. Assuming a fixed 3% raise every year (COLA) your first ROI becomes 61.41% and goes up a little every year - with a BIG jump at yr 20 to 84.50% from 69.48% the year before.
So - ASSUMING the pension is going to be there and you make it at least 10 years, you're guaranteeing a life long income with an ROI of a minimum of 60%, and almost 85% after 20 years.
Not enough to live on - but a very worthy investment to be sure.
Now the real question is - what will the impact be if you don't make the contribution until your debt free. If you don't contribute this year, can you start next year? Or the year after?
And if you can, then what is the current debt load you are carrying - calculate the payoff factors with and without the 3% and compare how they end up.
If the 3% means it takes you an extra year to get out of debt, then the comparison to make, I think, is the interest cost of that last year vs. the income cost of 1 year's difference on the pension chart.
Going back to a fixed salary, a 1 year delay in starting the pension will mean a five hundred dollar difference per year in your pension amount (assuming a fixed retirement date in the 60 divisor period) or six hundred per year (in the 20+ year 50 divisor period).
Ultimately I think you'll find the pension plan is worth it - the ROI is just too good and it's not likely that the interest costs are that devastating.
12-09-2010, 09:44 AM #11
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Another real world risk consideration is that if I wait, NY will implement yet another tier of benefits that are not as good.
As far as the snowball goes, we're on track to have all of our 20%+ interest debt gone by the end of February independent of whether I start making the 3% contributions. After that we have $10 - 15K of debt around 7% and $3K at about 13%.
The 3% is pre-tax. So it works out to about 2% of net, which at my current part-time biweekly salary is about $650 * 2% = $13. This will increase if I get hired full-time, but I'd have more cashflow then too. This will not have a significant impact on our BS2 time frame.
Right now, with me being underemployed, it is mostly my wife doing the heavy lifting on the debt, with me keeping the emergency fund topped off after things like unplanned veterinary trips. I have no doubt that DR would say we could be making better progress, but progress is being made, and it is good progress if not the best progress possible.
We need to have a budget meeting and do some spreadsheet work. Typical nerd vs. free-spirit thing, but now the nerd (me) doesn't have the purse and the free-spirit is happy to be seeing the debt numbers going down each month. Also doesn't help that I'm on a 2nd shift schedule now with my wife still on 1st shift either. I'll make it happen after I enter my final grades.
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