Friday, April 4, 2014

Preface: Part 3 - Retirement


Government Pension
As I mentioned in my initial post, I am a local government employee.  Therefore, like most government employees, I will retire with a city pension.  My pension is often referred to as a defined-benefit plan.  Meaning, the pension I receive will be mostly defined by the amount of years that I have worked for my employer.  Each city have different plans and therefore different calculations for the pension they offer to their employees.  I am blessed to be employed by a city that pays me a generous pension that is on the higher end of the pension spectrum. As a result, my pension will likely serve as the primary source of my retirement income. 

The defined benefit plan I am part of is: 2.7% at 55.  This means that if I retire at 55 or above, I will receive 2.7% of my highest annual salary for each year that I work for my employer.  At the moment, I have 13 total years of service that would be applied to my pension calculations.  However, approximately 8 years ago, I also purchased five additional years of service (also known as airtime purchase).  Airtime purchase is no longer available so I definitely got lucky to have purchase my five years beforehand. 

So if I was 55 years old this year, with my 13 years of service and five additional years of airtime purchased, I would have been eligible to retire with an annual pension equal to 48.6% of my salary. But since I am currently only 41 year old, I still have 14 more years before I can retire with my full pension benefits.  That also means that I will then have a total of 27 years of service plus my additional five years of airtime purchase for a total of 86.4% of my salary if I stay until age 55. 

There are more variables (remaining vacation and sick time, age of beneficiary, percentage of benefit to pass on to beneficiary, etc.) that goes into the overall calculation of my pension, but for the purpose of this post, I figured I'd just keep it simple.  And the reason I said "if I stay until age 55" is because there is an opportunity to retire before 55 years of age, I just don't receive my full pension benefits.  I will definitely look at this option in greater detail as I approach 50 years of age (the earliest I am eligible for retirement). 

Lesson learned: The early bird does get the worm. Not only was I able to purchase airtime, I paid significantly less for my five 5 years than most of my colleagues.

To supplement my city pension, I also contribute a small portion of my salary towards a 457k. For those unfamiliar with a 457k plan, it is a deferred-compensation arrangement for employees of state and local governments and certain tax-exempt organizations. Most 457k plans have tax benefits similar to those in the 401k retirement plans that many private employers offer.
My current employer currently provides a 2-1 match for every dollar I contribute up to 3% of my salary.  Needless to say, I am contributing 3% of my salary so I can get the entire employer match.  So in addition to my pension plan, 4 1/2% of my salary is going to my 457k.  Since I've been contributing to my 457k for the entire 13 years I've been a local government employee, I now have approximately $105,000 in my account.  And if I can successful double my money every 7 years, which I believe is the common goal for most investors, I am hoping to accumulate approximately $400,000 in my 457k account by the time I am 55 years old.

However, if I decide to retire before I turn 55, I may not have as much money in my 457k account.  I'm just hoping that because similar to a 401k, you must be at least 59 1/2 to withdraw from a 457k, my money will still continue to grow until I turn 59 1/2.  In fact, depending my retirement needs, and how my other investments are doing, I may decide not to touch this money until the I'm required to take mandatory distributions at the age of 70 1/2.  If I'm lucky enough to make this happen, and assuming the money continues to double every 7 years, this account could be at or near $1.6 million.         

Lesson learned: Compound interest is a beautiful thing...the earlier you start saving and investing, the faster you'll see your money grow.

Roth IRA
Last but certainly not least, both my wife and I have Roth IRA accounts Together we have approximately $50K in our Roth IRA accounts.  I have about $18K and my wife has about $32K.  You are probably wondering how she has so much more given that she is 10 years younger than I am.  It's because when she left her last job and became a full-time mom to our kids, we rolled her 401K into a Roth IRA.  Although we did have to pay taxes on the roll-over, we know in the long run, we will save so much more in taxes since she still has almost 30 years before she turns 59 1/2.  By the time we are ready to tap into her Roth IRA, hopefully it will have doubled several times over.  And the best part, all of it will be ours to use completely tax free
Although we continue to contribute a little each month to both of our IRA accounts, unfortunately, our currently budget does not allow us to contribute the maximum amount. Our goal, however, is to eventually maximize our Roth IRA contributions once my wife goes back to work.  In addition to the tax exempt withdrawals, we like Roth IRAs because of the possibility to withdraw money prior to 59 1/2.  And since there is a very real possibility that I will retire at 55 (or not sooner), it is definitely an added plus to have that option as an extra precautionary measure in case for some reason we need it.
Lesson Learned: Taxes don't generally decrease; in fact, they will likely continue to increase. I'd much rather pay today's tax rates so I won't have to pay tomorrows tax rates!

Dividend Growth Stocks
Although I covered our dividend growth stocks portfolio in Part 2 - Investments, I wanted to bring it up real quickly here because the reality is that it's also part of our retirement plan.  In retirement, we are hoping to use the distribution from our dividend stocks portfolio to provide us with approximately 15-20% of our retirement income.  For this reason, we have made it our main goal to build a solid dividend portfolio with only companies who have solid track records of consistently paying and increasing dividends for decades.  Our current portfolio, although it finally consists of only dividend paying stocks, is still not entirely of Dividend Aristocrats.  Nevertheless, we have both agreed that it is direction we want to be as we move closer to retirement.
Our thinking is that if we could find a way to live solely off my pension and the income from our dividend growth stocks, this would allow us to delay tapping into the my 457k, both of our Roth IRAs, and my wife's social security benefits.  By doing that, we could allow these accounts to continue to grow and hopefully provide future generations a fairly decent inheritance.  And as Dave Ramsey would say, "completely change our family tree."

Lesson learned:  The more income streams you create, the more flexibility and options you have with money.


  1. Wow, that is a really generous pension plan. I think it is the most generous one I've ever come across. My plan is only 1.5% times years times highest salary, and payable at 65.

    1. Yes, I agree and know that I am very very blessed to be part of such a great benefit package. But for that same reason, I want to begin generating passive income elsewhere so I am not so reliant on the pension just in case it disappears one day for a reason beyond my control.

  2. The city really does have a generous pension plan.

    I work for the state of California and I'm grandfathered into 2% at 55. I too bought the 5 years. Best investment I ever bought.

    My wife just started with the state and she got 2% at 62. I feel kind of bad for her as she has to work longer than I do. Hopefully, with my pension and our passive income, hopefully she may not have to.

    1. 2% at 55 is not that bad. Congrats on buying the 5 additional years because I believe it's no longer available for purchase with the new pension reform efforts. In fact, new employees here are also at the 2% at 62 rate due to recent reform efforts. But continue growing your passive income stream and hopefully both you and your wife can exit the rat race at the same time. Good Luck and thanks for stopping by!

  3. Any concern that the city may not be able to pay this out in the future? This very generous plan will continue to compound the city cost and may eventually be to great, think Detroit and a number of others. Do you have a plan for if/when the pension fails? Either way you have a great plan and best of luck.

    1. I am aware of Detroit, and other CA cities who have recently claimed bankruptcy. Not to say that it won't even happen to us but the city I am employed with made tough choices early on and, as a result, its fiscal health is well. Nevertheless, our family is currently trying to build a portfolio of multiple income streams to reduce our future dependency on my pension.

      Thanks for stopping by and thanks for the comment.