I am a recently tenured professor at a mid-major university. I have been in a 403b plan for the past six years but I have an opportunity over the next two months to change from the 403b plan to the pension and buy six years of service time. Help me decide if this is a good idea. Here are the details of the two plans. My current age is 39.
403b:
My contribution: 6.16%
University contribution: 8.74% (for a total of 14.9%)
My salary: $58,300
My current 403b balance: $60,400
Currently invested in a TIAA-CREF 2040 Lifecyle fund
Pension:
My contribution: 8.815%
My salary: $57,800
Formula: Final compensation X 2% X years of service (minimum of 27 years)
Final compensation: Average of five highest annual salaries
Transitional retirement plan:
Once I retire with either the pension or 403b, I have the option of continuing to teach a reduced 2-2 load with no other obligations (research or advising) for five years at 37% of my final years income. This is mainly for people who retire before being eligible for Social Security.
Pros of 403b:
May benefit from market rally in future; the money is mine - not the state's.
Pros of pension:
No market risk; pension payments an inviolable contract with state; could retire as early as age 60.
Cons of 403b:
Dismal global financial outlook; may have to work until closer to age 70.
Cons of pension:
My state's pension plan is severely underfunded (one of the worst); expected low future raises will lower pension payout
I put together a spreadsheet on this with all of the variables and found that the two plans are similar by age 65 with assumptions of 1.5% annual raises and a 6% annual investment return. If annual returns are more (less) than 6% the 403b (pension) is the better deal. If raises are higher (lower) than 1.5%, the pension (403b) is better. Since raises and annual returns are positively correlated (a good economy should improve both), this makes it a tough decision.
By the way, the Dow Jones at 12,000 today would be 65,000 by 2040 at 6% returns. Any chance of that happening?