Evaluating a Job Offer: Defined Benefit Retirement vs 401K is the salary increase enough to make the move

Question

I am currently enrolled in the NYS Employee Retirement System and would get up to 66% of my highest three years as a retirement pension. My current employer also contributes $2800 a year to my private retirement fund.

The new employer will contribute the following: My Contribution: $5700 Matching: $3325 Their Base Contribution: $3800

I will have to pay an additional $3500 for health insurance and the coverage is worse as I will have a 20% co-insurance and a deductible. I currently have a $20/$25/$100 co-insurance cost and no deductible or co-pay.

My current salary is 79000 and the offer is for 95000.

The real question I am struggling with is if the $16K difference is enough to make the move. I know I am down to $12500 just on the increased insurance cost.

I am currently 46 and have 14 years in the retirement system. I need to work another 19 years to get the maximum pension from the defined benefit plan. I will likely work another 20 years.

Any advice would be appreciated. My rough guesstimate is that the defined pension is worth around 1.2 million (assuming I live for 20 years after I retire).

Answer 1

Assuming the numbers work out roughly the same (and you can frankly whip up a spreadsheet to prove that out), a defined benefit scheme that pays out an amount equal to an annuitized return from a 401(k) is better. The reason is not monetary - it is that the same return is being had at less risk. Put another way, if your defined benefit was guaranteed to be $100/month, and your 401(k) had a contribution that eventually gets to a lump sum that, if annuitized for the same life expectancy gave you $100/month, the DB is better because there is less chance that you won't see the money.

Or, put even simpler, which is more likely? That New York goes Bankrupt and is relieved of all pension obligations, or, the stock market underperforms expectations. Neither can be ruled out, but assuming even the same benefit, lower risk is better.

Now, the complication in your scenario is that your new job pays better. As such, it is possible that you might be able to accumulate more savings in your 401(k) than you might in the DB scheme. Then again, even with the opportunity to do so, there is no guarantee that you will. As such, even modelling it out really isn't going to dismiss the key variables.

As such, can I suggest a different approach? Which job is going to make you happier now? Part of that may be money, part of that may be what you are actually doing. But you should focus on that question.

The marginal consideration of retirement is really moot - in theory, an IRA contribution can be made that would equalize your 401(k), negating it from the equation. Grant you, there is very slightly different tax treatment, and the phaseout limits differ, but at the salary ranges you are looking at, you could, in theory, make decisions that would have the same retirement outcome in any event.

The real question is then not, "What is the effect in 20 years?" but rather, which makes you happier now?

Answer 2

Without running the numbers, if they are close I prefer a 401K over DB. With a 401K the money is yours, with a DB you are at the mercy of the employer. Two things could happen: You could lose your job or they could just take away or reduce the DB.

In my mind DB is much higher risk than 401K.