The Art of Pension Hopping
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Clients who are unlikely to complete a traditional 30-year defined-benefit pension and are willing to pursue an un-orthodox strategy of switching work locations, continually re-purchasing prior service completed in another location will increase their work options, their retirement security and their overall pension income.
The 401(k) has won out, and defined benefit plans are becoming extinct. But, if one is fortunate enough to have a defined-benefit plan, becoming ‘vested’ is usually the goal. Vesting usually occurs within three to 10 years, and assures the participant that a pension is guaranteed to themselves and/or their heirs.
It seems heretical to suggest there can be value in not being vested, but in certain cases, it’s true. As this article will show, if the pension plan allows previous similar service to be purchased, then job-hopping participants can increase their retirement income and security by not being vested.
Consider the hypothetical case of Ms. Falta D’Nero, who at one time had a mid-six figure 401(k) plan. At 21, she graduated from an Ivy League college, worked two years to gain experience and, at 25, armed with an MBA, she landed a job on Wall Street. For the next 20 years she climbed the corporate ladder, and bought a beautiful house in nearby New Jersey.
However, six years ago the Great Recession knocked her off the corporate ladder. With her severance pay, her year of unemployment compensation, and her 401(k) plan, she thought locating another corporate job at her former level wouldn’t be a problem. A year ago, with her severance long gone, her unemployment cut off and her 401(k) plan down to a five-figure “201(k)” plan, she realized that is she facing not only an outdated skill set in the marketplace, but also possibly ageism, as she has had no nibbles to her job search in years.
She switched tracks to pursue a career she had considered in college: secondary math teacher. Being bilingual helped, so over the last year she completed her student teaching and became certified in the high demand area of bilingual math Instruction. At 51, she is ready to start teaching, and wanted to know what her New Jersey pension would be. She realized that she will probably have to work past her normal Social Security retirement age of 67, but refused to work past age 69.
At this point, many readers might wonder why Falta doesn’t simply aim to ”power save” and then retire at 67. According to Quinn (2013), Falta can accomplish this by simply ramping up the amount contributed to her upcoming 403b(7) plan. Falta was always a saver and is open to power saving, but on her future teacher income she doesn’t know how much she can realistically save. Moreover, recent events have convinced her that while having a tax-deferred retirement savings plan is nice, the returns can be disheartening at precisely the point when they are needed the most. Her plan is that any monies accrued in a deferred retirement plan will be considered extra, but a pension and social security will form most of her retirement income.
New Jersey’s pension plan has undergone several reforms under Governor Christie: new workers since 2011 come in under Tier 5. Along with a residency and full-time work requirement, Tier 5 participants are vested with 10 years of service, and can collect a pension at age 65. To calculate a pension under Tier 5, take the number of years of service divided by 60, then times that number by the average of the last five years’ salary. Falta hopes to work in the nearby Ridgewood school district. If she were to start working this year and work for the next 18 years, her multiplier to calculate her pension would be 18/60, or a 30% pension. Ridgewood’s contract can be found here, and is shown below: