Medicated Money

Tuesday, March 28, 2006

Want That Pension, Work For Your Favorite Uncle Sam

We have been enjoying the recent conversations over at Our Money Matters regarding the topic of pensions. For one, we enjoy John and Jane's subject matter, and two, both Mr & Mrs Medicated have pension plans through their work. After reading this recent topic, we realized that many of our parents, (who are near the retirement phase of life) and their friends, all have pensions. Not all, but many. Yet, on the contrary, we could not make this same statement about friends and family of our generation. This lead us to believe that pensions are the way of the past, and with the recent news of the automobile industry, we can understand this.

Pensions are expensive to companies, especially competitive companies. It is hard to keep a company in the black when so much of profits are going to the pension fund. It also doesn't help when the CEO's and VP's are rewarding themselves with lavish salaries, but that's for another story.

In just a short research period, it occurs to us that the only companies that can take on such a financial burden is a few large companies and the government. Both the Mr. & Mrs. here at Medicated Money work for a very large hospital, that is owned by a very large university, that answers to a very large state government. So, in around about way, we are government employees. And because of this, we have a pension.

Our pension invests 6% of our yearly salary into a general fund that supports the entire company's pension for all. Our direct employer matches the 6% as well. We become vested in 5 years, and payout begins at retirement, and as early as age 55. Payout is based on total years of service (employment) x 2.3% X Average of highest five annual salaries.

The pros of this system is that we are forced to save 6% of our salary for a very good pension system. Secondly, if we spend the rest of our careers in this current system plus invest in a 403(b), we would be sitting very pretty. The cons is that you have to stay in the system for your entire career. The likelihood of this occurring is very small. Most employees are no longer working just for one company their entire career. It just does not happen anymore. The second problem is that the 6% money is not currently being invested for us, but for the support of the pension.

Our plan is to eventual transfer the 6%/yr into a IRA when we do leave the company. As you can see, we are very confident that we will eventually work elsewhere. We do enjoy our work and the company we work for, but we know that we will eventually have a career at either another institution or in private practice. We do wish the company would allow us to op-out of the plan, and allow us to invest that 6% into a no-load mutual fund(s). Yet, we understand that to offer this plan, they must have a way to support the plan or end up like the many companies that are having the government, aka taxpayers, bail them out.

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