When You Join a Retirement System Matters

Depending on your line of work, you may have an opportunity to invest with your company’s 401k plan (or 403b plan for public employees).  Some employees may also be able to join a retirement system with the hopes of someday receiving a pension.  The earlier you can join a retirement system, the better the benefits will be.

Does your employer offer a pension plan? Click through to find out why when you join the retirement system matters.

What’s the difference between a 401k and a pension plan?

According to Investopedia, the difference between a 401k (or 403b) and a pension plan has to do with the benefit the employee receives.  A pension plan has a defined benefit that is determined by the number of years of service and salary of the employee.  With a 401k, the amount that the employee receives in retirement is determined by employee and employer contributions, as well as the performance of the funds in the plan.

A pension plan is a defined benefit plan, while a 401k or 403b is a defined contribution plan.

Pension plans are going the way of the Dodo.

Pension plans used to be much more common in the private sector, but due to the inherent difficulties in managing these plans, many employers have moved away from offering them.  However, many teachers and other public employees are still offered and participate in these plans.

According to TeacherPensions.org, more than four out of five public school teachers are enrolled in a pension plan.  Unfortunately, most teachers across the country do not teach long enough in one school to receive the full benefit at retirement.

Whatever you choose, just get started.

I’m not here to argue about which type of retirement plan is better.

If you have access to a 401k, awesome!

If you can join a pension plan, great!

If you can do both, even better!

If you can do both, and max out a Roth IRA, you rock!

If you can do all of the above, and have money left to invest in a taxable brokerage account, wow, you’re really cooking!

You’ve heard it time and time again that the best time to start saving for retirement was as soon as you started working, but the second best time is today.  With investing, time is on your side, but the same can be said for pension plans.

Wait, hold up.  Why does it matter when you join a defined benefit plan when you will receive a DEFINED BENEFIT?

With pension plans, as long as you’ve met the requirements, you will receive a set benefit in retirement (determined by salary and years of service) regardless of how well the funds did.  This can be a great risk to employers, as they scramble to find the money to pay pensions when investments are not performing well, and people are living longer in retirement.

It’s still important to join as soon as you can, because your tier of membership (the date range you joined the system between) determines the requirements you need to meet to receive the full benefit, as well as the benefit itself.

Ten years makes a big difference.

I joined the NYS Workers’ Retirement System in 2006 when I had a summer job working for the state.  I joined the Teachers’ Retirement System in 2010, and recently completed a transfer of my tier status and service in the Workers’ Retirement System to the Teachers’ Retirement System.  I am a member of Tier 4.

Mr. Farmhouse Finance joined the Teachers’ Retirement System in 2016. He is a member of Tier 6.

It was only ten years from when I joined the retirement system to when Mr. Farmhouse Finance joined the system, but the difference is pretty huge.

After five years in the system, I was vested.  Mr. Farmhouse Finance will be vested after ten years.

After being a member for ten years (not even contributing for all of those years), I don’t have to contribute 3% of my salary anymore.  Mr. Farmhouse Finance will have to contribute a percentage (between 3 and 6%) of his salary for the rest of his teaching career.

Our pension benefits are determined by tier of membership, years of service, age at retirement, and our final average salaries.  For me, they will determine my final average salary by averaging my final three years.  For Mr. Farmhouse Finance, they will average his final five years.

I could go on and on about this, but I think you get the point.  The earlier you join a retirement system, the better it is for you.

Final Thoughts

If you are able to join a retirement system, join now, but you may not be able to live on your pension benefit alone.  I will have to teach for 25 more years to get my full benefit, and a lot could happen between now and then.

I consider the pension I will receive from teaching to be one part of the bigger picture of how we will fund our retirement.  We are maxing out our Roth IRAs, and are beginning to invest in 403bs, as well.  Hopefully, we will continue to increase our contributions to reach the contribution limit for each year, and may have more money to invest beyond that.  I would also like to look into doing something with real estate, so we could diversify our income.  I don’t want to put all my eggs in one basket.

Does your employer offer a 401k or pension plan?

Does your employer offer a pension plan? Click through to find out why when you join the retirement system matters.

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