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Is Your Pension Healthy?
Episode 316

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Posted by Choose FI

Episode Guide

Episode Summary:

Troy and Lindsay, part of the Households of FI series, explore critical considerations surrounding Lindsay's pension with expert Grumpus Maximus. They discuss the implications of a pension on their journey toward financial independence, evaluating the benefits and challenges involved with the Virginia Retirement System (VRS). The conversation covers essential factors including pension funding levels, potential retiree health insurance, and the significance of a cost-of-living adjustment (COLA). As they navigate these complexities, insights are drawn about the long-term value of pensions, the emotional aspects of financial decision-making, and the relevance of understanding retirement systems beyond just numbers. This episode equips listeners with knowledge to assess their own pension situations and encourages proactive financial planning.

Episode Timestamps

Episode Title: Evaluating Pensions: A Deep Dive into the Virginia Retirement System

Episode Summary:
In this episode of ChooseFI, Troy and Lindsay engage with pension expert Grumpus Maximus to discuss the Virginia Retirement System (VRS). They explore essential questions about pension values, long-term benefits, and the emotional factors involved in the decision-making process. Listeners are encouraged to consider both monetary and personal aspirations when evaluating their own pension situations.

Key Topics Discussed:

  • Introduction of Hosts and Guests
  • Background of Troy and Lindsay
  • Grumpus Maximus's Pension Expertise
  • Overview of the Virginia Retirement System (VRS)
  • Mathematics of Pension Values
  • Personal Financial Experiences
  • Resources for Pension Evaluation
  • Final Thoughts on Pension Decisions

Actionable Takeaways:

  • Research your pension's health using the public plans database.
  • Consider emotional factors alongside financial calculations when making pension decisions.
  • Develop a clear understanding of your future financial needs by tracking spending regularly.

Key Insights with Timestamps:

  • Being proactive in pension planning is essential.
  • Researching your pension's health is crucial.
  • A pension with COLA is a valuable asset.
  • Flexibility in your financial planning is key.
  • Strive for a fully informed decision for better choices.

FAQs:

  • What is the Virginia Retirement System?
    The Virginia Retirement System (VRS) is a retirement plan for public employees in Virginia, offering pension benefits to qualified teachers and state workers.

  • How does COLA affect my pension?
    Cost of Living Adjustments (COLA) help maintain the purchasing power of your pension by adjusting payments based on inflation.

  • What should I consider when evaluating my pension?
    Consider the funding status, potential benefits, your career satisfaction, and family financial needs.

Social Media Snippets:

  • Start your financial planning early for a secure future! #FinancialIndependence
  • Know your pension's health! Stay informed and secure. #PensionPlanning
  • Make decisions that redefine your journey—money isn't everything! #FinancialFreedom

Podcast Outro: "You've been listening to ChooseFI Podcast, where we help middle-class America build wealth one life hack at a time."

Understanding Pension Planning with ChooseFI

Pension planning is a critical component of personal finance. If you're navigating the complexities of pensions, especially within systems like the Virginia Retirement System (VRS), this guide will provide you with actionable insights to enhance your financial future.

The Importance of Researching Your Pension

One of the first steps in managing your pension is to understand its health and how it relates to your financial goals. Make it a priority to research your pension's health. Utilize resources like the public plans database provided by the Center for Retirement Research at Boston College. This database allows you to assess the funding status of your pension plan, giving you a clear picture of its sustainability moving forward.

Navigating Inflation: The Role of COLA

If you are part of a pension system with a Cost of Living Adjustment (COLA), you're in a better position to maintain your purchasing power in retirement. A COLA adjusts your pension benefits based on inflation, ensuring that your financial needs do not erode over time. Understanding this aspect can give you confidence in the long-term viability of your pension.

  • Takeaway: A pension with COLA is a valuable asset for maintaining your lifestyle in retirement.

Evaluating Your Pension's Value

To truly gauge the worth of your pension, a financial analysis is essential. Consider calculating how much your pension will pay out relative to your expected expenses in retirement. This will provide clarity on the gap number, which is the difference between your projected expenses and your pension benefits.

  • Action Step: Track your spending regularly to develop a clearer understanding of your future financial needs. Doing so will help you assess how many of your living costs can be covered by your pension.

Considering Personal and Emotional Factors

While monetary considerations are crucial, personal and emotional factors also play a significant role in your decision-making process. Evaluate how your current job, job satisfaction, prospective career changes, and family dynamics impact your desire to remain in your pension-eligible position.

  • Action Step: Create a pros and cons list regarding your employment situation, factoring in both monetary and personal considerations. This list will help shape your decision on whether to continue working towards pension vesting or to explore other opportunities.

Understanding Early Retirement and Its Implications

Early retirement can significantly shift your financial planning. If you are contemplating retiring before reaching the full vesting period for your pension, research the penalties or adjustments that apply to early withdrawals. In many cases, taking your pension benefits early can result in a reduced payout. It's vital to understand how those numbers affect your overall retirement plan.

  • Takeaway: Flexibility in your financial planning is key to navigating your career and retirement options.

Engaging with Supportive Communities

Joining a community focused on financial independence can be incredibly beneficial. Engaging with like-minded individuals who are on similar journeys, like the ChooseFI community, can provide insights, support, and accountability. Sharing experiences around pension planning can highlight different strategies that may help you traverse your financial path.

Regularly Review Funding Status and Contributions

Due to economic fluctuations, the funding status of pension plans can change. Keeping abreast of any developments that may affect the sustainability of your pension plan is essential. Understand the implications of the state's budget, particularly following events like the COVID-19 pandemic, where public funding was heavily impacted.

  • Action Step: Review your pension plan's annual reports and understand their current financial standing compared to historical data.

Conclusion

Pension planning may seem daunting, but with the right tools and resources, you can make informed decisions that align with your goals for financial independence. By actively researching, calculating your financial needs, and considering both emotional and monetary factors, you can secure a future that meets your desires and expectations.

By taking proactive steps today, you can pave the way for financial security in your retirement years. Remember, the insights shared within the ChooseFI Podcast and its community are invaluable in this journey. Embrace the opportunity to learn and engage with others who are also pursuing financial independence. Your journey to understanding pension planning begins now.

 Back in another installment of ChooseFI's "Households of FI" series are Troy and Lindsay. Brad and Jonathan are also joined by Grumpus Maximus to help analyze Troy and Lindsay's pension program.

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https://youtu.be/mKV2yovyTHA

Lindsay and Troy from Households of FI with Grumpus Maximus

What You'll Get Out Of Today's Show

  • In episode 241, Brad helped them calculate their FI number, but Lindsay is a teacher with the potential to earn a pension. In this episode, they touch base with Grumpus Maximus to discuss the health of their pension.
  • While the conversation is geared toward the health of the Virginia Retirement system, others who are eligible for pensions will learn where to access data about their own pensions and interpret it to assess its health.
  • Linsday is 32 and in her seventh year of teaching under the Virginia Retirement System. Troy is 34 and an IT professional working on government contracts and does not have access to a pension. Troy and Linsday have a young son.
  • Grumpus Maximus is a retired military officer who lives in New Zealand with his wife and two kids. Grumpus experienced a post-traumatic breakdown around year 16 of his military career that had him calculating whether or not it was worth staying in the military for the additional years required to earn his pension.
  • Many defined benefit plans these days have different levels because they are so expensive. The Virginia Retirement System (VRS) has 3 options, 1, 2, and a hybrid plan. Linsday is on option 2.
  • Both COVID and having their son have had Troy and Lindsay thinking about the future of their careers. The possibility of working from home or retiring early were things they began to consider, but the VRS's calculators would allow Lindsay to play with numbers to look at retirement before the age of 58.
  • After some investigation, Grumpus found that 30 years is the standard full vestment period, but partial vesting is reached at just five years, although it wouldn't pay out until also reaching the minimum retirement age.
  • Option 2 appears to be tied to the social security retirement age, so taking it earlier likely results in a reduced benefit.
  • Lindsay wants to understand how to calculate what her pension would be. Grumpus says there is a way to calculate it but warns that doing it this far in advance will require a lot of assumptions.
  • The retirement budget Troy and Lindsay are shooting for is around $4,000 per month. They can go online to calculate the pension amount and then see how big the gap is. The smaller the gap is, the more valuable the pension is.
  • Lindsay's pension has a COLA which hopefully negates inflation and makes her pension more valuable and allows her pension's purchasing power to remain the same.
  • The VRS pension also does not replace social security, so she will have social security income coming in as well.
  • Her pension also has other earned pension benefits (OEPB), like life insurance, health insurance, and the option of survivorship.
  • The Grumpmatic method of calculating a pension's worth includes a pros and cons list, which includes pension benefits, but also personal issues. It takes into account the non-mathematical considerations, such as happiness, job satisfaction, and potential changes to the pension system.
  • He encourages everyone to write the list down on paper to create a physical record of why the decision is being made because it shouldn't be purely a numbers-based decision.
  • When asked about how Grumpus and his wife came to the decision that they did, he said several factors played into the decision. It was a transition for his wife to go from career to full-time parent wasn't easy. They even had marriage counseling.
  • Troy had trouble even finding information on Lindsay's pension. Grumpus says because he's been looking t pensions for so long, he knows what to look for. In addition, Boston College runs The Center for Retirement Research and has a public plan database with most of the major state and city plans in it.
  • With Public Plan Database, you can get an overall view of what the pension plan looks like. It also compares the plans to national averages which can give you an idea of the overall health of your plan.
  • Virginia's plan is not fully funded for all current and future obligations, which is pretty much average. Very few public plans are fully funded. An accounting change in the late 90s also changed many pensions from 100% funded to underfunded and then the market crash from the .com bubble didn't help. Most plans have steadied since then at around 75%.
  • The American Academy of Accuraties came out with a paper stating that there is a myth claiming anything funded at 80% is well off and won't have issues in the future. It's better to look at the trend lines for the last five years. If they have been going down, there is cause for concern.
  • Grumpus warns that all the funding spent on COVID this year may impact pension funding. If states skip paying into plans, it will need to be rolled into future payments. That is shown in the database as ARC payments.
  • In Lindsay's pension plan, she is accruing cash that she could roll over with the interest into an IRA after five years of service. Grumpus says that goes in the pro column for leaving since she could take what she's earned with her, but he says there are very few cons to her system overall.
  • The VRS pension uses a formula based on age, the number of years worked, and average annual salary. There is a multiplier for every year worked of 1.7%. Payments will start right away if she works to full-retirement age.
  • Concerning health insurance under VRS, credits are accrued for the length you stay that contribute to a subsidy. If you leave, you won't keep that.
  • Because of the COLA, it makes for an easier pension calculation, but there's no magic equation to spit out a yes or no answer. The goal should be to have a fully-formed decision.
  • While she is enjoying teaching from home, Troy and Lindsay are considering a second child which could change how she feels. Grumpus says the advantage is that they don't have too much time invested into the pension yet.
  • Teachers have other ways to invest money, such as 403bs and 457s. Lindsay could be doing those in the meantime to give herself flexibility.
  • People who have pensions need to make some real in-depth considerations from both a financial and psychological perspective. Not every decision comes down to money. You have to decide what works best for you.

Resources Mentioned In Today's Conversation

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