The Pension: My Golden Handcuffs

Working in government for New York State, I am fortunate to have very good benefits. One of the benefits is having a pension plan (defined benefit plan). All of my co-workers talk about their retirement date in terms of how old they are and how many years they have in the “system.” It has nothing to do with how much they’ve saved and many save very little if anything for retirement. They are solely relying on the pension program. Some don’t retire even when they have enough time in the “system” and are old enough, because they live above their means and cannot live on anything less than their current income.

Many who don’t have pensions are understandably envious of those who do have it. I am very fortunate to have one and I don’t want to seem like I’m complaining about this wonderful benefit, but there are a few downsides of the pension for me.

With a 401k plan, the money is often portable. You save money in it. Your employer makes matching contributions. It might take a year or a few years to vest, but the money your employer contributes is yours to keep. The gold plated pension of older employees has been watered down for younger employees. For new employees, the pension plan doesn’t vest until you’ve worked for the employer for 10 years. So if you leave before then, you get no pension. They’ve also increased the retirement age from 55 years old to 62 years old. I don’t like someone else deciding when I can or cannot retire. I’d rather make that determination based on how much I’ve saved and how much I will need, not some arbitrary thing like how many years I’ve got in the system.

Another issue with pensions is that if the company goes bankrupt, it’s very likely retirees will lose the pension or get a amount that is a lot less than they were expecting. I work in government which has a slightly lower chance of bankruptcy, though you can never discount it. Some states’ pensions are in better shape than others. If you work for the State of Illinois, well then, I think you might want to worry a little more. Currently, the state constitution in New York explicitly protects pension payments. However, that doesn’t mean there will never be an amendment to the state constitution.

Having that pension also makes it hard to pull the trigger on other job opportunities currently. I can’t say that I’ve really been wowed by another job which tempted me to leave or that I’m actively looking. However, when I’ve checked out prospective jobs elsewhere, a part of me does think, “if I leave, I won’t get that pension!”

As someone aspiring to become financially independent and possibly retire early at age 45 , the pension makes the decision to leave a lot harder. So what will my pension pay? If I stay until I am 55 years old, after having worked 30 years, I will get a pension which pays a yearly benefit of about 60% of your highest three-year average salary. Let’s say my highest three-year average salary is $100,000, I will get a yearly benefit of about $60,000. Yea, I know I know…I am very lucky to have this pension. However, if I decide to FIRE at age 45 with 20 years of service and let’s just assume the same three-year average salary of $100,000, the pension would only pay $29,200 based on the online calculator. Note: I would have to wait until age 55 to collect the pension. If I decided to leave at age 50 with 25 years of service, based on the same salary, I would collect $36,500. If I waited until age 54 with 29 years of service, I would get $42,300. Obviously, if I stayed until 54, I would just go one more year to get the full amount! Yes, having a pension is a wonderful benefit, but it can also be a handcuff, albeit a golden one.

Is there a golden handcuff holding you back from leaving your job? Do you have a pension and would you take the penalty to retire early?

30 thoughts on “The Pension: My Golden Handcuffs

    1. livingrichcheaply@gmail.com Post author

      Yea I definitely do think that’s one big reason for that benefit…to keep the employee there long-term.

      Reply
    2. Lance @ My Strategic Dollar

      So true! In a way, the pension is just a way to keep you at that company/job. By giving good benefits and decent retirement, they keep their costs low by: 1) only have to give small salary increases each year and 2) reducing turnover because people are committed due in part because of the benefits.

      I know that works at my company where they give 25 PTO days from day 1.

      Reply
      1. livingrichcheaply@gmail.com Post author

        Wow 25 days PTO is pretty awesome. I started with 20 days and thought that was a lot.

        Reply
  1. Matt @ Optimize Your Life

    I work for the DC government and we do not have a pension plan. Instead we have a 457 that the employees can contribute to and a 401(a) that the employer contributes 5% to every year (which vests over 5 years). This works great for someone in my position, where I can max out my retirement accounts. It gives a lot of flexibility. At the same time I wonder about how it affects people at the lower income rungs, where a defined benefit may be significantly more beneficial than a defined contribution plan.

    I do think you have hit on a big problem with modern pensions in that people tend to rely too heavily on them. It seems like people see that they have this “fully funded” retirement benefit and decide that they don’t need to think about it any more than that.
    Matt @ Optimize Your Life recently posted…The Onslaught of Automation (Why I Save So Much, Part 3)My Profile

    Reply
    1. livingrichcheaply@gmail.com Post author

      I have a 457 plan as well but no 401(a). There is no employer match. It definitely does negatively impact those in lower income rungs as well as those who are not financially literate. Moving from a defined benefit plan to a defined contribution plan basically shifts the risks and responsibility to the employee. A lot of people also wouldn’t contribute into their retirement plan if they weren’t forced to, like in defined benefit plans.

      Reply
  2. Brian @ Debt Discipline

    Imagine if you saved outside of your pension in an IRA at an early age. That would be a nice one-two punch for early retirement. I’m in a State pension plan and that’s what I’m currently doing. I don’t plan to work more that 10-15 years. I hear complaints from the other side of co-workers who didn’t take the pension and now are regretting it.
    Brian @ Debt Discipline recently posted…Time of Your LifeMy Profile

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    1. livingrichcheaply@gmail.com Post author

      I have saved in an IRA and contribute to a 457 plan so I thank my younger self for doing that. The pension is a nice thing to have but if you are someone who saves outside of it and hopes to leave early…there are some negatives.

      Reply
  3. Amanda @ centsiblyrich

    “Another issue with pensions is that if the company goes bankrupt, it’s very likely retirees will lose the pension or get a amount that is a lot less than they were expecting.” This! It’s the problem with any type of pension – it could disappear at any time, with little notice or warning.

    My husband is vested in his pension, but we had the opportunity several years ago to redirect the pension money into the 401k! Which we jumped on – because the money is then ours. One “golden handcuff” factor he has is health care funding. If he waits until 55 to retire, the company will provide a ton of $$$ toward health care (we’re talking $100,000+). We’ll see how it all plays out. My guess is he won’t stick around to get the extra $$.
    Amanda @ centsiblyrich recently posted…Teens and Money: Should they have a limit?My Profile

    Reply
    1. livingrichcheaply@gmail.com Post author

      Yes, that’s another golden handcuff I have as well. My employer will subsidize a portion of my health care premiums as well if I wait. Would be interested to read a post on why you guys will decide on not sticking it out. A part of me feels like I won’t but the money is very tempting.

      Reply
  4. Financial Samurai

    Man, I wish I had a pension! But I definitely wouldn’t sacrifice working until 55 just to collect 60,000 a year because I might be dead shortly there after.

    Early retirement is a hedge. You will not regret being free earlier. I promise you this. It’s been five years since I have gone back to work and every single day is a blessing.

    At 45, you can still find income that will help you survive !

    Sam
    Financial Samurai recently posted…Focus On Trends: Why I’m Investing In The Heartland Of AmericaMy Profile

    Reply
    1. livingrichcheaply@gmail.com Post author

      You don’t need a pension Sam! You’ve build a much bigger portfolio as well as online empire =) I can see not regretting being free earlier but I’m gonna need to hit my number before I leave. Actually I should figure out what that number is first. It would be tough unless I live NYC.

      Reply
      1. Financial Samurai

        The irony is, I felt like I had to build a passive income portfolio BECAUSE I didn’t have a pension or golden handcuff or anything. Well… I did w/ my deferred investments and company stock, but I negotiated that all as part of my severance.

        So it is the FEAR of ending up with nothing that drives one to create something more.

        Reply
        1. livingrichcheaply@gmail.com Post author

          Interesting. I was thinking about something similar recently. Being that I do have a pension, maybe that should allow me to take more risks with my investments. Since I shouldn’t have any fear of being broke in the future…

          Reply
  5. DC @ Young Adult Money

    “Another issue with pensions is that if the company goes bankrupt, it’s very likely retirees will lose the pension or get a amount that is a lot less than they were expecting.” This. This is the worst part of pensions. I feel like they also make it difficult for companies to compete because they have this huge liability on their books versus companies that pay out a 401k match and it’s done.

    While I don’t have a pension, I do think that many of the perks of corporate life keep me coming back. The ESPP, the 401k match, health insurance, the HSA, PTO….it all adds up. I don’t think it’s good enough that I would never leave, but if I was to leave for a startup it would have to be a pretty developed startup that either already or quickly would replace all those perks.
    DC @ Young Adult Money recently posted…10 Tips for Balancing Your Side Hustle With a Full-Time JobMy Profile

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    1. livingrichcheaply@gmail.com Post author

      That’s why side hustles are so awesome. You can work on them while you keep those golden handcuffs on. If a side hustle becomes more successful then the decision might become easier to leave.

      Reply
  6. Jason

    I had the option of a pension, but decided to go with our 401k instead because of the portability issue and I didn’t think I would be here as long as I have. My golden handcuffs are as I get longer in my current position my salary goes up exponentially. For example, my salary will go up 25% in the next 3 years because of contractual raises and a promotion. That is hard to leave, particularly when I am in the accumulation phase of FI. Moreover, if I were to leave I would have to take a demotion, less pay, and start over again. I like being a big fish in a small pond, but it can also jade my opinion of what I can do other places.

    Reply
    1. livingrichcheaply@gmail.com Post author

      Yes, I can see how a 25% increase in salary would be hard to give up! It’s tough that if you leave you’d have to take a demotion and start all over again.

      Reply
  7. Laurie @thefrugalfarmer

    Love that you talked about this, Andrew. Rick kinda sorta has a pension: he has a healthy sum of money waiting for him from his years as a part-time firefighter in our former suburb. It’s required that this money stay in the city fund until he’s 50. It’s by far the largest of our retirement assets (he was on the department for 23 years) so it makes me nervous to have all of those eggs in one basket.

    That being said, most think it’s unlikely that the city will fail (they’ve been pretty snooty and prosperous of it so far) but it does happen and has happened.

    The next question is, are the banks any more secure? If we roll over the money to a bank or investment firm in three years, even if we choose a low risk product, does that really lessen our risks given the often-lack of responsibility of so many financial institutions today?

    The account with the city earns a guaranteed 5 percent, so maybe we should just leave it there?

    Reply
    1. livingrichcheaply@gmail.com Post author

      Great that Rick has a pension. And yea, a 5 percent guaranteed return is tough to find anywhere else.

      Reply
  8. Ms. Frugal Asian Finance

    Thank you for sharing! I have to admit I didn’t know much about pension until I read your post. I think you put it really well: it’s a golden handcuff. I’m sure a lot of people would love to have a pension, but the 10 year vesting period does seem a bit long. I want to stick with an employer for a long time. But if I think there’s not much room for growth, I will definitely consider another opportunity.

    Reply
    1. livingrichcheaply@gmail.com Post author

      Fortunately for me, I started earlier and the vesting period was 5 years. My wife also works for the state here and she has to wait 10 years. Actually, I’ve already been working for 10 years so I would be good either way. Definitely agree that it’s better to seek a job with room for growth rather than sticking it out with an employer just so your pension vests!

      Reply
  9. Joe

    I have a tiny little pension from my old employer. It will kick in when I’m 65 and will probably pay for a nice meal out every month…. It didn’t hold me back from ER because the amount is so small.
    Mrs. RB40 could get a nice pension if she works 20 more years, but I doubt she will last that long.
    I’m with Sam on this one. It’s been 5 years for me and I don’t have any regret.

    Reply
    1. livingrichcheaply@gmail.com Post author

      Yea, a small pension wouldn’t be much of a golden handcuff and 20 years is a long time. I agree with you and Sam, but I just don’t know if I’ll hit my number to pull the trigger.

      Reply
    1. livingrichcheaply@gmail.com Post author

      True, you can try and create your own pension by contributing a large amount to your retirement accounts. I think for most younger generations, the pension is not even an option anymore. They’re on their own so they better make sure to save enough in their retirement accounts.

      Reply
  10. mustardseedmoney

    I’m pretty close to having the golden handcuffs placed on my hands. In two years I’ll get an extra week of vacation and then will essentially feel like an idiot if I leave before retirement since I’ll also have a pension. I definitely feel likes when I weigh offers to leave vs. alternatives to stick around. Definitely not an easy decision at times but I’ve stuck around at this point.
    mustardseedmoney recently posted…What Does Freedom Mean to You?My Profile

    Reply
    1. livingrichcheaply@gmail.com Post author

      Yes that pension is a tough thing to leave. The longer you stick around, I think, the harder it is to leave!

      Reply
  11. GYM

    I also have a defined benefit pension, but I don’t look at it as golden handcuffs. I will likely aim to leave earlier than the ‘magic number’ but I view the amount that will be given per month as a bonus, and will rely on my investments/ nest egg to match up the rest.

    Reply
    1. livingrichcheaply@gmail.com Post author

      That’s awesome and a good mindset to have. I just have a hard time since it feels like I’d be leaving a lot of money on the table.

      Reply

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