Portfolio Review - Pension Rollover?

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Topic Author
snipesbaskin
Posts: 4
Joined: Fri Jul 01, 2022 11:25 am

Portfolio Review - Pension Rollover?

Post by snipesbaskin »

Hello Bogleheads,

I appreciate all the advice I've gained from this forum over the years! I’m looking forward to reading your responses :)

Emergency funds: 3 months

Debt:
Mortgage 200k (30 year at 2.625%) bought home in 2020.
CC paid off monthly

Tax Filing Status: Married Filing Jointly

Tax Rate: 12% Federal, 6.8% State

Annual Income: ~120k

State of Residence: Minnesota

Age: Both 34; 2 young children

Desired Asset allocation: 95% stocks / 5% bonds
Desired International allocation: 20% of stocks

Approximate portfolio size 200K without Pensions
His Pension Contributions ~45K
Her Pension (No longer contributing) ~18k

Current retirement assets

His 403b ($600 match per year) ($5/Month Fee)
8.23% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (.04%)
3.93% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (.11%)
2.98% Vanguard Total Bond Market Index Fund (VBTLX) (.05%)

His Roth IRA at Vanguard
37.36% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (.04%)
6.93% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (.11%)

His HSA
9.64% Vanguard 500 Index Fund Admiral Shares (VFIAX) (.04%)

His VEBA
1.63% Vanguard 500 Index Fund Admiral Shares (VFIAX) (.04%)

Her 457b
3.18% Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX) (.02%)

Her Roth IRA at Vanguard
11.52% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (.04%)
6.89% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (.11%)

Her 401a
.95% Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX) (.02%)

Taxable (Joint Account)
6.75% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (.04%)

Contributions

New annual Contributions ~33.5K
$6600 his 403b ($600 employer match)
$8000 her 401a (10% of salary employer contribution, 5% mandatory employee contribution)
$3250 her 457b (also specify any employer matching contributions)
$6000 his Roth IRA
$6000 her Roth IRA
$3650 his HSA

Questions:
1. DW is no longer contributing to her pension due to a job reclassification. Should she roll her pension (roughly 18k) into a retirement plan? The pension estimate is $5800 per year at age 66.

2. If we roll the pension, which account would be best? Options include: 401a, 403b, tIRA, rIRA. I think we could roll all or most of it into a Roth IRA and remain in the 12% tax bracket.

3. Roth vs Pre Tax accounts. Currently we are able to stay in the 12% federal tax bracket so I like putting money into Roth but understand it all depends on our marginal tax rate. I see this increasing hence the preference for Roth. Does this make sense for us?

4. Anything else I should be considering?
Valuethinker
Posts: 49038
Joined: Fri May 11, 2007 11:07 am

Re: Portfolio Review - Pension Rollover?

Post by Valuethinker »

snipesbaskin wrote: Tue Jul 05, 2022 2:25 pm
Questions:
1. DW is no longer contributing to her pension due to a job reclassification. Should she roll her pension (roughly 18k) into a retirement plan? The pension estimate is $5800 per year at age 66.
That looks very high for a benefit at age 66.

I am presuming it is not CPI indexed?

You can work out what that pension would cost now as an SPIA annuity at age 66. Various checkers on the web.

Then (x/18000)^(1/32)-1 would give you the % pa return implied in that.

Once you have that calculation you can compare that rate of return to what you might get on a portfolio.

Say we assume inflation will be 3% pa over that time period.

Stocks might return 4% real so say 7% pa. Bonds 1% real or 4% pa. A 60-40 portfolio then might return 5.8% pa (before expense ratios).

You could compare that to the assumed return.

Re CPI indexation:

- if it is CPI indexed then don't worry about inflation. You could use 1% real for bonds and 4% real for stocks. That's fairly conservative.

Overall, the lump sum is small enough (ie pension benefit) that it's probably better to have the lump sum money & not have to worry about that paperwork for the next 34 years-- keeping track of that pension. Also if it is not CPI indexed, then that's a lot of inflation risk to take on, whereas a portfolio of 60% stocks and 40% TIPS bonds should almost certainly beat inflation over that time horizon.

Survivor benefit on the pension does make it somewhat more attractive (the more so if the survivor is a female spouse due to longer life expectancies).
ShowMeTheER
Posts: 511
Joined: Mon May 24, 2010 9:12 am

Re: Portfolio Review - Pension Rollover?

Post by ShowMeTheER »

1. Roll
2. tIRA
3. Roth
RetiredAL
Posts: 3537
Joined: Tue Jun 06, 2017 12:09 am
Location: SF Bay Area

Re: Portfolio Review - Pension Rollover?

Post by RetiredAL »

snipesbaskin wrote: Tue Jul 05, 2022 2:25 pm
1. DW is no longer contributing to her pension due to a job reclassification. Should she roll her pension (roughly 18k) into a retirement plan? The pension estimate is $5800 per year at age 66.

2. If we roll the pension, which account would be best? Options include: 401a, 403b, tIRA, rIRA. I think we could roll all or most of it into a Roth IRA and remain in the 12% tax bracket.

3. Roth vs Pre Tax accounts. Currently we are able to stay in the 12% federal tax bracket so I like putting money into Roth but understand it all depends on our marginal tax rate. I see this increasing hence the preference for Roth. Does this make sense for us?

4. Anything else I should be considering?
If me, I'd:
3. Yes to Roth's, if for no other tax reason than the "last one standing" filing as single will not stay in the 12% bracket.

2. tIRA and if/as you still have 12% room left, then convert it to Roth, slowly if necessary to stay within the 12%.
Topic Author
snipesbaskin
Posts: 4
Joined: Fri Jul 01, 2022 11:25 am

Re: Portfolio Review - Pension Rollover?

Post by snipesbaskin »

Valuethinker wrote: Tue Jul 05, 2022 4:46 pm
snipesbaskin wrote: Tue Jul 05, 2022 2:25 pm
Questions:
1. DW is no longer contributing to her pension due to a job reclassification. Should she roll her pension (roughly 18k) into a retirement plan? The pension estimate is $5800 per year at age 66.
That looks very high for a benefit at age 66.

I am presuming it is not CPI indexed?

You can work out what that pension would cost now as an SPIA annuity at age 66. Various checkers on the web.

Then (x/18000)^(1/32)-1 would give you the % pa return implied in that.

Once you have that calculation you can compare that rate of return to what you might get on a portfolio.

Say we assume inflation will be 3% pa over that time period.

Stocks might return 4% real so say 7% pa. Bonds 1% real or 4% pa. A 60-40 portfolio then might return 5.8% pa (before expense ratios).

You could compare that to the assumed return.

Re CPI indexation:

- if it is CPI indexed then don't worry about inflation. You could use 1% real for bonds and 4% real for stocks. That's fairly conservative.

Overall, the lump sum is small enough (ie pension benefit) that it's probably better to have the lump sum money & not have to worry about that paperwork for the next 34 years-- keeping track of that pension. Also if it is not CPI indexed, then that's a lot of inflation risk to take on, whereas a portfolio of 60% stocks and 40% TIPS bonds should almost certainly beat inflation over that time horizon.

Survivor benefit on the pension does make it somewhat more attractive (the more so if the survivor is a female spouse due to longer life expectancies).
Thank you for the response. The pension doesn't appear to be CPI indexed. There is a 1.5% COLA post retirement. I crunched the numbers and got a 4.8% pa return using your formula above. I feel more confident about moving forward with the rollover at this point.
Topic Author
snipesbaskin
Posts: 4
Joined: Fri Jul 01, 2022 11:25 am

Re: Portfolio Review - Pension Rollover?

Post by snipesbaskin »

ShowMeTheER wrote: Tue Jul 05, 2022 7:32 pm 1. Roll
2. tIRA
3. Roth
Thanks! I am planning to go this route now.
Topic Author
snipesbaskin
Posts: 4
Joined: Fri Jul 01, 2022 11:25 am

Re: Portfolio Review - Pension Rollover?

Post by snipesbaskin »

RetiredAL wrote: Tue Jul 05, 2022 7:46 pm
snipesbaskin wrote: Tue Jul 05, 2022 2:25 pm
1. DW is no longer contributing to her pension due to a job reclassification. Should she roll her pension (roughly 18k) into a retirement plan? The pension estimate is $5800 per year at age 66.

2. If we roll the pension, which account would be best? Options include: 401a, 403b, tIRA, rIRA. I think we could roll all or most of it into a Roth IRA and remain in the 12% tax bracket.

3. Roth vs Pre Tax accounts. Currently we are able to stay in the 12% federal tax bracket so I like putting money into Roth but understand it all depends on our marginal tax rate. I see this increasing hence the preference for Roth. Does this make sense for us?

4. Anything else I should be considering?
If me, I'd:
3. Yes to Roth's, if for no other tax reason than the "last one standing" filing as single will not stay in the 12% bracket.

2. tIRA and if/as you still have 12% room left, then convert it to Roth, slowly if necessary to stay within the 12%.
Thanks, we will open a tIRA account. I haven't performed Roth conversions but it seems pretty straight forward and I like that strategy.
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