316 | Is Your Pension Healthy? | Grumpus Maximus

Apr 26, 2021

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Back in another installment of ChooseFI's Households of FI series are Troy and Lindsay.
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.

Grumpus Maximus

Website: Grumpusmaximus.com

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