Should I Switch From A Pension To A 401K?

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Let's get to the phone lines. Game on. On and pop. And all right, we got Lee. She's in Columbus, Ohio. What's going on, Lee? Hi. You guys are like my two favorites here. I'm so excited. I cannot wait to tell Ken and John and Rachel and Dave. That's so kindly. Thank you.

How can we help? Well, I think my question is actually pretty timely. I work in local government, so I'm in a pension. My husband, I are on Baby Steps 4, 5, and 6 newly, but I have always been required to put 10% of my money or my salary into a pension. OK.

And now that I'm looking into it, I have the opportunity and I can only do this one. I cannot take it back to switch to a member 401k type of plan. Yes. Oh, yeah. So I just, you know, I can't roll over what's already in the pension or anything like that, but I'm just

I have, I mean, I've been in service for nine years and I love my job. So this is in a matter of like staying at my job. But if I'm looking at retirement, even 25 years from now, cause I'm 35, say at 60, is that enough time to still, you know, contribute my 10% and then I matched it like seven, seven and a half percent. Oh, very amazing. That's awesome. 100%. I would, I would switch over to the 401k. Instantly.

And the good news is for, for, and George is going to go over a bunch of reasons, but for me, you're going to get to choose the investments and you're going to have a better mix. And I think that for me is the thing. And by the way, I just want to call out, I want you investing 15% when the time comes, not 10.

Oh, right. We can't contribute more than 10% in this particular plan, even the 401k that we have. I'm contributing above and beyond in a deferred compensation. OK, got you. 457. Gotcha. So that's where the other money would go. But the 10% is what we're locked into required for. Is there a raw option with the 401k? Or is it just traditional?

It is just traditional. Okay. Cause your other option is a Roth IRA as long as you, you know, you're not above the income limits. And that can be a great place to start for some tax free growth. And then you can do the rest in that traditional 401k. So I would do this up to the match. You said it's how much is the match?

seven and a half percent. Is that regardless of your investing? Or is it up? I have to do 10% no matter what, they just happen to match up to seven and a half. Okay. Awesome. Now the 457, do you have to go to that next? Or can you go to a Roth IRA next?

Oh, I can, yeah, I can switch it to a Roth IRA. That was just something I was contributing to an addition a while ago, but now that we're in 456, I'm like, we have to look back at this. So now that I'm looking at other contributions, I can switch totally over to a Roth if I want to.

Yeah, I really like the idea of obviously you wanna get the match, but to George's point, having that Roth there, we get calls all the time of people who are on into retirement age, and most of what they have are traditional accounts, and they have these required minimum distributions and everything, and it's like, oh my gosh, they just wish that they had rolled it over into Roth style accounts earlier, and so I think it's important to have the right mix of that going in, and if you can start that earlier, I think it's a great thing.

Okay, and then one more question. I'm basically with building up, so I will be required to take, you know, once I retire, I think retirement age, it would be full benefits at 62 for the pension. It is a payout per month since I have done nine years of service.

at like 700 a month. If I were to wait till 67, it's up to 1300 a month. And I'm just like, there would be the option with the account value, which is about 100,000. You can take a lump side over. So the lump sum is 44,000 out the door, but I could roll it over. Like if I ever left public service, which I don't intend to, but if I did, I could roll over the full account value, which is about 100,000 into an IRA at that point. So I don't know if I have that chance at retirement, but I'd rather do that.

Yeah, as long as there's no penalty, when the age is right, where you can do this without penalty, I would take the lump sum and invest that on your own. And that way, again, you have more control over it. It can pass down to your heirs, because the problem with pensions is they die with you.

And so there's one big benefit to moving it over. And the other reasons Lee, the average return on pensions is not great comparatively to what you could get in a 401k where you have the options. So pension plan might be 7% with the 401k, it might be 12% or more.

And then again, when you die, you can pass it down to your heirs with the 401k with the pension. It'll die with you or maybe your spouse at a lower amount, you know, survivor benefits. And again, you own the 401k. The company owns the pension and how long does the money last? Well, it's your lifetime with the pension and with the 401k, it's until the money is gone as you keep passing it down generationally.

Oh yeah, so if the health of the business starts to go down, that could definitely affect your pension in a major way. But with the government, it'll be here to stay. So I'm not as worried with the government pension just disappearing, but I do like the idea of you doing better on your own with more control and more say. Very good, very good. End of story.

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