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Evaluating Pension Plan vs. 401k
Posted on 4/9/13 at 11:41 am
Posted on 4/9/13 at 11:41 am
I've been offered a position that I really like. The only uncertainty is the new position offers a pension plan in lieu of matching 401k contributions.
My current position matches 80% up to 5% of your salary. Which I think is pretty decent.
The new company offers a 401k but doesn't really match. The pension plan fully vests after five years, but it seems sort of hard to quantify and compare the benefits.
All things considered, I'm still going to accept the position. It's a 36% increase in salary, it's where I want to be, and I won't have to travel as much.
Anyway, I was just hoping someone could give me some insight as to how to make a fair comparison between the pension and my current 401k plan. Anyone?
My current position matches 80% up to 5% of your salary. Which I think is pretty decent.
The new company offers a 401k but doesn't really match. The pension plan fully vests after five years, but it seems sort of hard to quantify and compare the benefits.
All things considered, I'm still going to accept the position. It's a 36% increase in salary, it's where I want to be, and I won't have to travel as much.
Anyway, I was just hoping someone could give me some insight as to how to make a fair comparison between the pension and my current 401k plan. Anyone?
1
Posted on 4/9/13 at 11:49 am to lnomm34
so your current 401K matches 4% of your salary if you put in 5%?
Any matching funds from the pension? what is the payout?
Any matching funds from the pension? what is the payout?
Posted on 4/9/13 at 12:00 pm to Chris4x4gill2
Yes. My current company puts 4% if I put 5%.
The new company fully funds the pension plan. I don't have to contribute.
The plan reads like legal gibberish to me. It essentially pays:
(1.2% x Average Annual Earnings up to Covered Amount) x years
Plus
1.79% x your Average Annual Earnings in excess of Covered Compensation x years.
The covered compensation is defined as:
"Covered Compensation is the average of the Social Security taxable wage bases in effect for each calendar year during the 35-year period ending on the last day of the calendar year in which you reach Social Security retirement age (the age at which Social Security payments made because of your age are unreduced)."
I have no idea what that means. . . . . and I like to quantify things.
The new company fully funds the pension plan. I don't have to contribute.
The plan reads like legal gibberish to me. It essentially pays:
(1.2% x Average Annual Earnings up to Covered Amount) x years
Plus
1.79% x your Average Annual Earnings in excess of Covered Compensation x years.
The covered compensation is defined as:
"Covered Compensation is the average of the Social Security taxable wage bases in effect for each calendar year during the 35-year period ending on the last day of the calendar year in which you reach Social Security retirement age (the age at which Social Security payments made because of your age are unreduced)."
I have no idea what that means. . . . . and I like to quantify things.
Posted on 4/9/13 at 12:14 pm to lnomm34
figure out a theoretical # for your 401k assuming you stay at present company X # of years - bankrate has a calculator to estimate yearly withdrawal.
then figure your annual distribution of the pension assuming same # of years at new company based on the formula you listed. I'm not sure what excess of covered compensation is from what you posted though
then figure your annual distribution of the pension assuming same # of years at new company based on the formula you listed. I'm not sure what excess of covered compensation is from what you posted though
Posted on 4/9/13 at 12:16 pm to lnomm34
Does the pension plan allow you to get out of paying social security? Because that is 6.2% of your salary you are never going to see.
This post was edited on 4/9/13 at 12:18 pm
Posted on 4/9/13 at 12:28 pm to lnomm34
The first question you need to ask yourself is do you think you will stay with your new employer for at least five years.
If your answer is no, then the pension is a non-issue to you.
If the answer is yes, then you need to speak to someone in your HR department and use your starting salary with some reasonable salary increase assumptions to arrive at some projected pension amount.
The wording you quoted is very clear. I'm not sure what part of it is not understandable to you.
If your answer is no, then the pension is a non-issue to you.
If the answer is yes, then you need to speak to someone in your HR department and use your starting salary with some reasonable salary increase assumptions to arrive at some projected pension amount.
The wording you quoted is very clear. I'm not sure what part of it is not understandable to you.
Posted on 4/9/13 at 12:30 pm to LSURussian
quote:
the Social Security taxable wage bases in effect
What does that mean? What is the social security taxable wage bases? Is it what is reported on your W-2 as your income? I'm not clear on that.
Posted on 4/9/13 at 12:34 pm to lnomm34
I think you need to know what the "Covered Amount" is. The last paragraph tells you what "Covered Compensation" is. It is calculated using the average Social Security wage for 35 years if you work for them that long.
Posted on 4/9/13 at 12:37 pm to lnomm34
quote:
What does that mean? What is the social security taxable wage bases? Is it what is reported on your W-2 as your income? I'm not clear on that.
I'm not sure but I believe it is the amount of income you are taxed for Social Security on. It is capped each each but also goes up each year. Not sure what it is for 2013 but it is probably somewhere around $110,000. You don't pay Social Serurity on amounts earned above that cut off point. For now that is.
Posted on 4/9/13 at 12:41 pm to lnomm34
quote:LINK
What does that mean? What is the social security taxable wage bases?
This provision in your pension plan allows those employees making over the social security annual taxable limit to receive a slightly higher pension to make up for the limit on their social security benefit.
This type of plan is referred to as being "integrated with social security" and is very common for pension plans.
Posted on 4/9/13 at 12:44 pm to LSURussian
Thanks Russian. You can tell I'm a money board rookie. I appreciate the help.
Posted on 4/9/13 at 1:01 pm to lnomm34
You're welcome.
I still recommend you sit down with someone in your new employer's HR department, probably someone who works with employee benefits.
I still recommend you sit down with someone in your new employer's HR department, probably someone who works with employee benefits.
Posted on 4/9/13 at 1:27 pm to lnomm34
I have never dealt with a pension before, so this may be a silly question.
Does this mean your pension would be based on the max SS wage, not your actual salary? If so, then if you are making more than this amount that is something to keep in mind.
quote:
"Covered Compensation is the average of the Social Security taxable wage bases in effect for each calendar year during the 35-year period ending on the last day of the calendar year in which you reach Social Security retirement age (the age at which Social Security payments made because of your age are unreduced)."
Does this mean your pension would be based on the max SS wage, not your actual salary? If so, then if you are making more than this amount that is something to keep in mind.
Posted on 4/9/13 at 1:35 pm to foshizzle
quote:No.
Does this mean your pension would be based on the max SS wage, not your actual salary?
Posted on 4/9/13 at 3:59 pm to LSURussian
I thought it was a bit odd but am anaware of whether that language is typical for a pension. Never had one in my life.
Posted on 4/9/13 at 6:51 pm to foshizzle
The supplemental pension amount for employees earning over the covered compensation levels is computed on the compensation OVER the covered comp amounts not ON the covered comp amounts.
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