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Vesting and Pensions

Certain retirement benefits from employers require vesting. Pensions, cash balance plans, 401k matching, and money-purchase plans (401a), all will often have some vesting schedule attached to them.

Vesting is like the marriage certificate – it comes with strings attached and it’s meant to keep you around even if you wanna GTFO. Taming physician mobility is important for medical groups, otherwise doctors will jump shit constantly for better paying positions.

 

Vesting and pensions

The classic vesting scenario is the pension offered by some medical groups. You work there for 10 years, for example, and for that time commitment you will get a percentage of your income paid to you from age 65 until you die.

My Kaiser Permanente pension accumulated at the rate of 2% per year for the first 10 years, 1% per year after, for a maximum of 35-employment-years – or a total of 45% of my base salary.

The vesting schedule required a minimum of 10 years. If I worked only 9 years then I would forfeit the entire pension. I ended up leaving employment at the 8-year mark which wasn’t an easy decision.

In my case, walking away meant forfeiting $800,000. Once I was able to figure out this numeric value of the pension and realize that I didn’t need an extra $800k in my portfolio, it was a much easier decision to walk away.

 

Walking away from money

One way of looking at it is that if I stuck around just 2 more years, I would have had an extra $800k of income paid to me from age 65 until my death – assuming max longevity.

Another way of looking at it is that I never had the $800k and the 8 years I spent at Kaiser were good years; it was now my time to walk away and pursue other things.

Vesting is meant to keep you around even though other forces might be pulling you away. Vesting is a controlling force and so you have to account for it strategically. Math can be a good equalizer. Helps you set your emotions aside and focus on what’s important to you.

Emotionally, I would have rather just stuck it out another 2 years. It would have been the safe decision. But, see, two extra years would have glued me to my job even more. After an extra 2 years suffering at a job you don’t like, it becomes easy to justify another 5, 10, or 25.

 

Adding a financial value

Imagine your vesting schedule is 5 years for…. whatever, pension, matching, 457…. You have spent 4 years at your medical group and are thinking about leaving. Here are the questions to ask yourself:

Question 1: Did you take that job specifically for the retirement benefit?

Question 2: How much money would you be leaving on the table? And what is the value of that money to your financial life?

Question 3: How could you replace that money, if needed?

Q1. Reason for taking the job

If you took the job specifically for its monetary value then you decided on placing the income over your well-being.

This could make sense if it’s done for a short period of time, such as immediately after residency. But it doesn’t seem to be a sustainable practice.

If you are at your wit’s end then the last thing to thing about is the monetary value of your job. If you gotta go, you gotta go.

Q2. Value of the vested benefit

Even a 50% 401k match would be worth only $9k a year. Four years of this would come out to around $40,000.

With the pension example above, you can figure out how much you’d be paid starting age 65, how long you’d live, and then calculate the entire value in today’s dollars.

A cash balance plan (such as Kaiser’s CBP) is even easier. If it’s a 10% contribution (based on salary) which grows at 5% per year (fixed return), and you already have $50k in there, you can use a compound interest calculator to figure out the future value of this money.

Q3. Making up for the lost money

If the job is so miserable that you have to leave, and let’s say you left $500,000 on the table, how easily and quickly could you make up that money?

If you’re 35 years old and still have 30 more income-earning years ahead of you, you’d need to invest only $500/month at a conservative 6% rate of return for the next 30 years to make up that $500k.

Is your happiness worth $500/month? That’s about 2-4 hours of work per month.

 

Actionable steps

  1. Identify all your retirement benefits from your employer including: pension, cash balance plan, 401k, 403b, 457, 401a, Keogh, health insurance.
  2. Email HR and ask which of your benefits have vesting schedules and where you are in the vesting schedule; they can give you an exact date.
  3. Calculate an exact value of your retirement benefit. Your financial advisor can help with this.
  4. Figure out the replacement cost for such a retirement benefit and determine if that money is worth sticking around for.

 

A word about pensions

Most of the physicians I’ve talked to don’t have pensions from their employers. The ones that do, have pensions which don’t adjust for cost of living.

The Kaiser Permanente pension I mentioned is an example of such a flat pension. If I stayed 10 years then I would be paid 20% of my 3 highest, consecutive salaries, averaged outed. Distributions would start at age 65, about 30 years from now.

Assuming my salary was $250,000/year, 20% would have been $50k/year from age 65-death. The actual value of this money, however, would only be about $22,000 due to inflation.

One reply on “Vesting and Pensions”

I was able to vest in a very minor pension by the time I finished radiology residency and stayed 2 years as an attending (I think it will work out to $13k/yr because of it). I spoke about these “golden handcuffs” employers have in my blog by a post of that very same name. It is true that if you are close to vesting it is tough to turn away, so I am impressed you were able to do so (although 2 years is long, in the big picture it is considered a short amount of time for vesting). But to be miserable for 2 years would definitely make anyone consider forgoing the pension. I have some minor golden handcuffs with my current job that may or may not influence my decision on when to retire.

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