Defined benefit vs. defined contribution retirement plans for faculty: an exploration of the cost of a portable retirement.
White, John B. ; Miles, Morgan P. ; White, Roger 等
"In 2005 Alaska hastily reviewed its pension plan and found
that the costs increased dramatically. This is part of the reason the
legislature held hearings this year to move back to the pension system.
And in West Virginia and Nebraska, lawmakers moved back to the pension
system after a failed experiment with a system of individual
defined-contribution accounts." Anonymous 2009: A 18.
INTRODUCTION
Providing for an adequate retirement is a topic of considerable
interest today (Ezra 2007). As baby boomers approach retirement, more
and more information can be found on how to make your "nest
egg" last. Suggestions include everything from scaling back
retirement lifestyles to postponing retirement to not actually retiring
but continuing to work in some capacity. These compromises with
retirement all stem from their retirement plan being insufficiently
funded to support their original goal or retirement at a certain age.
This failure is not surprising, given the vagaries of market returns and
their own mortality. Recent high-profile bankruptcies have also played
havoc with retirement plans.
Academics are not immune to these retirement uncertainties. What
should make retirement planning easier for a faculty member at public
colleges, state-sponsored defined benefit retirement systems, adds its
own elements of risk. State retirement systems sometimes have vesting
periods that exceed the tenure decision timeline. For example, in the
University of Georgia System, vesting
occurs after ten years service, but the normal tenure decision is
in year seven. This creates the chance that you may have to leave the
system before you vest, which often entails losing the state's
contribution to your retirement fund. Even if the tenure decision is
positive and you are able to vest, the state defined benefit plan may
act as an impediment to furthering your career through mobility. Most
defined benefit plans reward service longevity by making the benefit
formula a function of years of service and some average salary figure
(such averaging the highest two consecutive years). For most employees,
these "high two" salaries are the last two years worked.
Should you take a new position after your twelfth year, you have locked
up an annuity at retirement based on your average salary for years
eleven and twelve. As faculty salaries tend to rise (from merit and/or
annual cost of living raises), there is a great deal of difference in
the average of the salary in year 11 and 12 as compared to years 24 and
25 or 29 and 30. If your intention is to work thirty years and retire,
you have only 18 years to build up a sufficient private retirement to
supplement what is already vested.
Because of these risks from the state retirement plans, private
retirement plans evolved to serve the academic community. TIAA-CREF is
the first of many plans that offer instant vesting and portability to
the faculty member. Because of these two advantages, faculty members at
state institutions often do not consider the cost of these benefits when
weighed against the retirement payout of a defined program.
This study looks at one particular state, Georgia, and compares the
contributions and payout of its state retirement plan, the Teachers
Retirement System of Georgia (TRSGA), with the optional retirement plan
(ORP) available to faculty in the state university system. The cost of
one plan over the other will be expressed as the present value of the
difference in the payout (assuming a reasonable reinvestment rate). The
cost will also be expressed as the difference in return required in the
optional plan to produce a payout equivalent to the TRSGA plan.
LITERATURE REVIEW
There have been numerous studies of retirement systems, examining
the various investment options and payout decisions faced by the
participants. Even TIAA-CREF, which was established in 1918, is the
result of Andrew Carnegie's observation that academics changed jobs
frequently and needed a retirement fund that would be portable. In the
last ninety years, other private retirement plans have evolved and
compete with (and complement) a variety of state retirement plans.
However, the variability in contribution rates, vesting periods, assumed
rates of return and payout options makes the comparison of these plans
difficult.
Lahey, Michelson, Chieffe, and Bajtelsmit (2008) recently conducted
a descriptive comparative analysis of the largest public university in
each state. Several studies have compared a defined benefit retirement
program with the retirement income that a similar investment into a
defined contribution plan would produce. A study by Johnston, Hatem and
Forbes (2001) makes such a comparison. Their study also demonstrates how
certain defined benefit features, such as survivor benefits or cost of
living adjustments, can be incorporated into a defined contribution plan
through the purchase of a lifetime annuity or setting the retirement
payout as a growing annuity. The study estimated that the two plans were
equal after thirty years if the defined contribution plan earned a rate
of return of between 7% and 8%. (The required return varies depending on
the assumed salary growth rate. For instance, a 1.5% rate of salary
growth yields a 7.16% required return, while a 2.5% growth rate requires
7.88%.) Craig and Toolson (2008) include a number of different scenarios
in comparing defined benefit and defined contribution programs. They
point out that the defined benefit payout varies between 1.5% per year
of service up to 2.5% per year. This suggests that a thirty-year career
would translate into a retirement benefit that could vary from 45% of
the final salary to 75%. The other critical variable is the level of the
participant's retirement contribution, and whether the employer
makes a contribution as well. Finally, since defined benefit programs
favor those who remain at an institution for long periods, the choice
between the two programs often depends on long-term plans and
expectations of tenure. Given the number of variables involved, they do
come to a general conclusion that a defined benefit plan is better if
you intend to remain at the institution, the more generous the credit
per year of service, and the lower the total contribution to the
participant's retirement fund. Conversely, if you expect to move
frequently, the service credit is only 1.5% per year, and/or the total
retirement contribution is generous, then the defined contribution plan
is optimal.
This study differs from earlier studies in several significant
ways. First, it explicitly examines the value that results from some of
the characteristics specific to the Georgia Teachers Retirement System.
For instance, Georgia allows for the purchase of service credit for
military service and public education performed in another state.
Indeed, it is possible to purchase up to three years of service credit
not earned. This service credit is referred to as "air time,"
since it comes out of "thin air." Finally, Georgia also
credits unused sick leave as service credit (Member's Guide).
The focus on a single state, Georgia, makes this study much less
general than previous studies. However, other state retirement systems
have benefits and features (crediting sick leave, purchase credit, etc.)
similar to those in Georgia's TRSGA. The lack of generality in this
study provides the framework to evaluate an individual's position
in another defined benefit plan encompassing many different methods to
accumulate retirement credit. This study also demonstrates how the
specific features should be included and valued in the analysis
comparing defined benefit and defined contribution programs.
Finally, this study expands the literature by focusing on a single
state and its two competing systems. The conclusions of any general
comparison of a defined benefit program and a defined contribution
program are driven by the assumptions made regarding the two programs.
This study makes no assumptions with regard to contributions or payout.
The actual rates are used in the analysis. Using these actual rates
allows someone to evaluate the price of portability.
COMPARISON OF THE TWO RETIREMENT SYSTEMS
Prior to 1990, the Teachers Retirement System of Georgia (TRSGA)
was the only retirement system open to faculty members in the Georgia
state university system. Members contributed 6% of their salary to
TRSGA. (The member's contribution was decreased to 5% in 1994
without any change in benefits. The system required ten (10) years to
vest. The basic benefits formula was:
Monthly payment = 2% x number of years of service x average monthly
salary of highest 24 consecutive months.
Benefits can be paid after 30 years of service (regardless of age)
or at age 60, with at least 10 years of service (required to vest).
Thus, someone who retired with 30 years service and an average monthly
income of $5000 per month (averaged from their highest 24 months) would
be eligible for $3000 per month, regardless of age (Member's
Guide). (Monthly benefit = 2% x 30
years x $5000 = $3000.)
In 1990, the University System of Georgia introduced an optional
retirement plan which allowed faculty members to contribute 6% of their
salary into a private retirement system (such as TIAA-CREF, VALIC, etc.)
instead of TRSGA. Currently, both TRSGA and ORP participants contribute
5% of their salary to retirement. The state originally contributed 4% of
salary into the ORP participant's retirement fund. The state's
contribution has increased and has been 8.14% for the past several
years. Thus, a member of the ORP has 13.14% (5% + 8.14%) of their salary
going into their retirement fund.
Faculty members at the time were required to make an irrevocable
decision as to which retirement system they wanted to participate in.
Obviously, those close to retirement age or 30 years of service remained
in TRSGA. Those faculty members that were not yet vested and expected to
leave the state system opted for ORP. For those in between the two
extremes and/or uncertain of their future plans, the decision was not as
easy. Indeed, new hires today must make this irrevocable decision during
their new faculty indoctrination. They have even less certainty
regarding their long-term prospects in the Georgia system. Most public
higher education systems require a similar, irrevocable decision by the
participant at the beginning of their employment. Florida is the
exception to the rule. A defined contribution plan was introduced in
2002 and state employees were given the option of the new system or the
traditional defined benefit plan. However, those who opted out of the
defined benefit plan were given the right to convert back to the defined
benefit at any point prior to retirement (Milevsky and Promislow; 2004).
A direct comparison between these two systems is more difficult
because it is not simply a case of comparing cash flows. As stated
before, vesting periods and portability differ greatly. TRSGA also
allows the "purchase of creditable service" for years served
in another state university system. Prior military service years may
also be purchased. Another distinction, with significant financial
impact, is that earned sick leave was allowed to count as service time
in TRSGA due to
an amendment in state regulations in 1994. Finally, TRSGA
participants close to retirement may purchase what is known as "air
time," which is service credit for periods not actually worked. The
participant effectively funds the year of retirement income that would
be received a year earlier than if you actually worked the year. The tax
code permits the transfer of pre-tax funds from a 403b account to
purchase an "air year. "This is especially beneficial for
someone who wants to accelerate their retirement but has no out-of-state
service years to be purchased.
SCENARIO COMPARISONS
In each of the following scenarios, several assumptions remain
constant. The employee's contribution is 5%, and the state
contribution to ORP remains at 8.14%. The initial salary is $40,000 per
year and raises are 2.5% annually. In addition, TRSGA continues to give
a 3% cost of living adjustment to TRSGA retirees.
Internal Rate of Return (IRR) for TRSGA Participant
For the TRSGA member, their initial salary of $40,000 grows to
$79,860 in year 29 and $81,856 in year 30. The average salary for their
high two year period is $80,858. Their initial annual retirement income
is 60% of $80,858, or $48,515, and this amount is expected to grow at 3%
per year. They have contributed 5% of their salary each year. Retirement
contributions and retirement income amounts are shown in
Table 1. Retirement income is guaranteed for as long as the retiree
lives. If you die in the first two years after retirement, you have not
withdrawn all of your contribution. The undisbursed balance plus
interest is passed to your estate. However, if you survive for 5 years,
the internal rate of return on your funds (5% of your salary) invested
in retirement is 6.07%. At 10 years, the IRR is 8.96%. Survive 20 years
into retirement, and your IRR is 10.75%, and a 30-year retirement yields
an 11.29% return on the TRSGA member's investment. (Internal rate
of return analysis is featured in many finance textbooks. For instance,
see Brealey, Myers and Marcus, 2009, Brigham and Daves, 2007, or Ross,
Westerfield and Jaffe, 2008.)
An ORP participant will make an initial deposit of $5256 ($40,000 x
(5% + 8.14%)) into their retirement account. This deposit will increase
by 2.5% annually with the pay increases. The deposit stream for thirty
years is shown in Table 1. For the ORP participant to withdraw an equal
annual amount to the TRSGA member in retirement, the required return on
the ORP investment depends on the years in retirement. Since the ORP
participant's account receives 13.14% of the faculty member's
salary, the required returns for an equivalent payout is less than the
IRR of TRSGA for equivalent retirement periods. Table 1 shows that the
ORP account needs to earn only 0.54% to fund a 5-year retirement. The
10-year retirement must earn 4.41%, while 6.92% is required to fund a
20-year retirement. The ORP account must earn 7.71% to match
TRSGA's 30-year retirement payout. Thus, the required rates of
return to make ORP produce an equivalent retirement payout to TRSGA are
quite reasonable to expect. It should be noted that while the ORP
required return of 7.71% is only 2.71 percentage points higher than the
assumed 5% risk-free rate, it does represent a return 54% above the
risk-free rate of 5%.
The significant internal rates of return reflect only the defined
benefit participant's contribution to the retirement system. The
state is also making a contribution, but that amount does not belong to
the participant should they leave they system. If you assume that the
state's contribution to an employee's retirement is 8.14%,
regardless of the retirement system, then the defined benefit
participant earns what the ORP participant earns. However, several key
differences between the systems remain. First, the ORP participant has a
portable retirement, but it is possible to outlive the retirement fund
if returns are too low and/or the annual payout is too high. The TRSGA
participant has a retirement portfolio that is free of investment risk
and will continue to pay as long as the retiree lives, but the
retirement lacks portability.
Maintaining Equivalent Risk
Another, and perhaps better, way to compare the two retirement
systems is to keep the risk and return equivalent. Since the TRSGA is
backed by the State of Georgia, then a nearly risk-free rate of interest
would be the appropriate discount rate to present value the future TRSGA
retirement benefits. For the TRSGA member, the initial salary of $40,000
grows to $79,860 in year 29 and $81,856 in year 30. The average salary
for their high two year period is $80,858. Their first retirement check
is 60% of $80,858, or $48,515. Assuming a 30-year retirement and a 5%
discount rate, the present value of this growing annuity ($48,515 the
first year and growing at 3% annually) is $1,063,393 at the time of
retirement. (See Ross, Westerfield and Jaffee (2008) for a discussion of
present value and future value of growing annuities.)
If the ORP member invests in similar, risk-free portfolio earning
5%, they will accumulate $497,922 in 30 years. This is less than half of
the amount needed to fund a 30-year retirement payout equivalent to
TRSGA. To accumulate $1,063,393 in 30 years, the ORP participant's
initial deposit must be $11,225.28, over twice as much as the $5256 that
is currently deposited into their account. Thus, to achieve the same
future value at an equivalent risk-free return requires an ORP
participant's contribution to be an additional $5969.28
($11,225.28-$5256), or an additional 14.9% of the initial $40,000
salary. The ORP participant's total contribution would be $7969.28
($2000+$5256), which is 19.9% of their salary.
If the TRSGA member works 30 years and draw retirement for 20
years, the present value of the TRSGA retirement annuity is only
$774,516, since the retirement checks stop after 20 years. (You died!)
For the ORP retirement fund in a risk-free (5%) portfolio to reach that
level in 30 years requires an initial investment of $8704.87.
Subtracting the normal contribution of $5256, an additional $3448.87, or
an additional 8.6% of your salary, is required to produce a retirement
equivalent to TRSGA. The total contribution into the retirement fund is
21.74% of the salary, with 13.6% (5% + 8. 6%) coming from the ORP
participant. As expected, a shorter retirement requires a smaller
contribution. Table 2 displays the ORP contribution required to match
the TRSGA payout if risk-free investments are used.
Double Dipping
One aspect of the TRSGA retirement system is that the member is
eligible to draw a retirement benefit of 60% of your salary after 30
years of creditable service. For some, the prospect of retiring before
the Social Security minimum age of 62, or even before you can use an IRA
without penalty (59%), or even younger, is especially appealing. But
many faculty members enjoy the academic life and would prefer to
continue teaching even after they are eligible to receive retirement
benefits. If you are eligible in TRSGA to receive 60% for NOT working,
then continuing to work beyond 30 years implies you are actually earning
only the 40% differential between your salary and the retirement benefit
you could receive. ORP imposes no such penalty for continuing to work,
since your ORP retirement account continues to grow as you continue to
work and make contributions.
However, once you are eligible to receive benefits, if you retire
and accept a comparable position at any position outside of the
University System of Georgia, then you would see your income increase by
60% (the amount of the retirement payment). While the salary from the
new position is not retirement income, per se, it does represent
additional cash flow made possible by the retirement from TRSGA. Assume
you accrue thirty years of service in TRSGA and opt to take your
retirement but continue to work in a new position for an additional ten
years. Further assume that your new position maintains your former
salary and the 2.5% salary growth. Finally, assume you continue to save
5% of your salary, with a match from your new employer of 8.14% (to
match the Georgia ORP). You save ALL of your retirement income received
during those final ten years of employment to supplement your ultimate
retirement, which will begin in ten years. (This maintains equal incomes
for the ORP participant and the TRSGA member at the new job.) Finally,
assume these savings will be invested at the risk-free rate of 5%.
Saving 5% of your growing income for the ten years of the
"second career" (the first deposit is $11,024.81, 13.14% of
$83,902.70), and the deposits earning 5%, will yield an additional
$153,822.60 in a retirement fund at the end of the ten year period.
(This is the future value of an annuity growing at 2.5% earning 5% for
ten years when the initial payment is $11,024.81.) The deferred (unspent
and saved) retirement annuity, with a first payment of $47,332, will
yield $674,430 at the end of the ten years. (Again, this is the future
value of an annuity growing at 3% earning 5% for ten years when the
initial payment is $47,332.) The sum of these two amounts, $828,252,
would produce a 20-year growing annuity (growing at 3%) with an initial
payment of $51,879.94 to supplement the TRSGA retirement payment. Thus,
the retirement payment in year 41 (the first year of complete
retirement) rises from $63,610 from TRSGA to $115,490 from both sources.
Your earned salary in year 40 was $104,783, so your initial retirement
check is 110% of your final earned salary. (This additional retirement
payment will cease after 20 years, as the $828,252 fund will be
exhausted.) Although the additional payment will end at some point in
the future, the TRSGA retirement benefit will pay as long as the member
lives.
The ORP participant, working the additional 10 years, continues to
have their retirement account grow with contributions of 13.14% of their
salary. Assuming their retirement fund earns 7.5% during their 40-year,
they will accumulate $1,614,556 in the account. If they continue to earn
7.5% and have an initial payout $115,490 that grows at 3% per year, then
the retirement fund would pay out a retirement annuity for 23 years (see
Table 4). If the ORP account is in a risk-free investment earning 5%,
then the fund accumulates only $915,579 and will pay out an amount
equivalent to TRSGA for only eight years. In order for the ORP
participant to have a retirement similar to a TRSGA participant that
"double dips," the ORP account needs to average a 7.25% annual
return over the 60 year period (40 work years and 20 years retired).
After 20 years, the TRSGA participant's supplemental 403.b account
is exhausted, but the basic TRSGA benefit continues. The ORP
participant, on the other hand, has exhausted their retirement fund and
has outlived their savings.
ADDITIONAL CONDSIDERATIONS
For faculty who select the TRSGA option and remain healthy and are
not forced to consume sick leave are allowed to count this year towards
years of service. This allows a faculty member in TRSGA to enjoy full
retirement with 29 years of service and not be required to work the full
30 years. Retiring after 29 years of active service and one year of sick
leave credit means the member's "high 24 month period"
will be years 28 and 29, or an annual income of $77,912 and $78,859.80,
respectively. The average salary is $78,885.90, which implies an annual
retirement income of $47,331.54 (60% of $78,885.90). Retiring a year
early gives you an additional year of retirement. The present value of
the growing retirement annuity for 31 years discounted at the 5%
risk-free rate is $1,062,791.
Recall the present value of the growing retirement annuity for 30
years, after having worked for 30 years was $1,063,393 at the time of
retirement. It appears that applying sick leave towards retirement
reduces the value of the retirement annuity by $602
($1,063,393--$1,062,791). However, working 30 years makes the retirement
begin a year later. The present value of the 30-year retirement in year
29 is $1,012,755. Thus, the value of a year of sick leave applied
towards retirement in this scenario is $50,036. This sick leave value
increases as you add the value of an additional year of leisure in
retirement or an additional year of salary in another job as you
"double dip." In the example above, a year's sick leave
credit means you could work 11 years in a new job while drawing
retirement from your previous job and still retire completely at the
same age.
HEDGING YOUR "BET"
The biggest question new faculty members have regarding the
selection of retirement plans is the uncertainty concerning future
employment in the system. The retirement system selection must be made
now, but a tenure decision is years away. Is there a way to hedge some
of this risk away? One way to reduce the retirement risk would be to opt
into the TRSGA system, but save an additional amount (in a 403-b, for
instance) if you are denied tenure in the future. This is not an
insignificant amount, as was shown in Scenario 1. You are saving an
additional 16% of your salary. However, this additional saving is
required only until your tenure decision is known (or becomes apparent).
If the decision is positive, you will have a tidy sum in your 403-b
awaiting you in retirement, even if you stop contributing once tenured.
If the tenure decision is negative, you withdraw your TRSGA retirement
contributions and move them into your 403-b.
This situation ignores those faculty members that may leave the
system after being tenured and vested. However, the assumption has to be
that if you voluntarily leave one job for another, then the new
situation must be better than the current one. People generally do not
move unless the new salary and benefits package represents an
improvement. How a move effects your retirement plan is part of this
package, so if tenured vested faculty are observed to move, then the
assumption must be that their financial situation has improved.
RELEVANCE & LIMITATIONS
From one perspective, this study is may seem limited in scope to
the case of public universities in one state, Georgia and therefore the
findings may not be directly applicable in other contexts. However, this
study contributes to the literature by illustrating how different
retirement systems might be financially compared. Obviously, any Georgia
public university faculty member that participates in TRSGA would find
this study helpful if they were to contemplate taking another job
outside of the system, as well as anyone evaluating an offer from a
Georgia public university. This study gives them a benchmark as to the
value of their derived benefit retirement.
There has also been some discussion in the 2009 Georgia legislative
session about permitting faculty members in the optional retirement
system to move into TRSGA. (The bills, House Bill 740 and Senate Bill
257, both died in committee this year and cannot be considered again in
the 20092010 biennium session.) This study provides a compelling
argument for those tenured faculty members who would be immediately
vested (ten or more years of service) in TRSGA if allowed to convert the
state system.
From a broader perspective, the study provides a framework to
compare any defined benefit plan with the competing defined contribution
plan. Critical variables to consider include the payout formula and
years to vest in the defined benefit plan and the employer's
contribution to the defined contribution plan. Private university and
non-Georgia system faculty could make good use of this study if they
were considering a new position that includes a defined benefit plan.
This study shows the value of the retirement portion of their
compensation package, which should be considered when evaluating a job
offer.
Finally, benefit managers would benefit from understanding the
concepts presented in this analysis. Too often, new faculty members
select their retirement program with only the most cursory explanation
of each. Implicit in a recommendation of one plan over another is an
assumption about market returns on investment, probability of remaining
at the institution long enough to vest and/or earn retirement benefits,
and even assumptions about life expectancy, to name a few. For the
faculty member to make an informed decision about retirement, they must
understand the implications of any assumptions being made.
CONCLUSION
Careers and retirement options are both economically significant
and risky decisions. In this case of one state, Georgia, the defined
benefit TRSGA plan is economically superior to the optional retirement
plan for the faculty member that remains in the University of Georgia
system until retirement. The potential to apply sick leave towards
retirement service only enhances the superiority of the TRSGA plan.
Finally, while the financial benefit of maintaining the university
system health insurance was not explicitly evaluated, it is an
additional (and considerable) benefit of TRSGA.
However, for some faculty the portable nature of the ORP plan has
an option value that may is worthwhile. What this study develops is a
framework to estimate a value of the portability option. Different
people will continue to come to different conclusions when evaluating
which retirement plan to select, even if their cash flow estimates are
the same. The different conclusions result from different expectations
on their future employment, as well as their tolerance for risk. Both
plans will remain popular with their proponents, suggesting they are
satisfied with their choice. The key is that the decision be an informed
one, since it is irrevocable in many situations.
REFERENCES
Anonymous (2009), Dumping defined-benefit plans has a cost, too.
The Wall Street Journal, June 1, A18.
Brealey, R. A., S. C. Myers, & A. J. Marcus (2009).
Fundamentals of corporate finance (Sixth Edition). Boston: McGraw Hill
Irwin.
Brigham, E. F. & P. R. Daves (2007). Intermediate financial
management (Ninth Edition). Mason, OH: Thomson/SouthWestern.
Craig, C. K. & R. B. Toolson (2008). Retirement plan options
for public university faculty--The high cost of a wrong choice. Journal
of Deferred Compensation, 13(3), 36-65.
Ezra, D. (2007). Defined-benefit and defined-contribution plans of
the future. Financial Analysts Journal, 63(1), 26- 29.
Johnston, K., S. Forbes, & J. Hatem (2001). Choosing between
defined benefit and defined contribution plans. Journal of Financial
Planning, 14(8, August), 86-92.
Lahey, K., S. Michelson, N. Chieffe, & V. Bajtelsmit (2008).
Retirement plans for college faculty at public institutions. Financial
Services Review, 17, 323-341.
Member's guide (2009). Teachers Retirement System of Georgia,
Retrieved August 20, 2009, from http://www.trsga.com/publications.aspx.
Milevsky, M. A. & S. D. Promislow (2004). Florida's
pension election: From DB to DC and back. Journal of Risk and Insurance,
71(3, September), 381-404.
Ross, S. A., R. W. Westerfield, & J. Jaffe (2008), Corporate
Finance (Eighth Edition). Boston: McGraw Hill Irwin.
John B. White, United States Coast Guard Academy
Morgan P. Miles, Georgia Southern University
Roger White, University of Pittsburgh
Table 1: Internal Rate of Return on TRSGA and Defined Contribution
Retirements
Year Defined Defined Years
Worked Benefit Contribution Retired
Deposit Deposit
1 $2,000 $5,256 1st
2 $2,050 $5387 2nd
3 $2,101 $5,522 3rd
4 $2,154 $5,660 4th
5 $2,208 $5,802 5th
6 $2,263 $5,947 6th
7 $2,319 $6,095 7th
8 $2,377 $6,248 8th
9 $2,437 $6,404 9th
10 $2,498 $6,564 10th
11 $2,560 $6,728 11th
12 $2,624 $6,896 12th
13 $2,690 $7,069 13th
14 $2,757 $7,245 14th
15 $2,826 $7,427 15th
16 $2,897 $7,612 16th
17 $2,969 $7,803 17th
18 $3,043 $7,998 18th
19 $3,119 $8,198 19th
20 $3,197 $8,403 20th
21 $3,277 $8,613 21st
22 $3,359 $8,828 22nd
23 $3,443 $9,049 23rd
24 $3,529 $9,275 24th
25 $3,617 $9,507 25th
26 $3,708 $9,744 26th
27 $3,801 $9,988 27th
28 $3,896 $10,238 28th
29 $3,993 $10,494 29th
30 $4,093 $10,756 30th
Year Retirement Defined Defined
Worked Payout Benefit IRR Contribution
IRR
1 $ (47,331.54) < 0% < 0%
2 $ (48,751.49) 0.63% < 0%
3 $ (50,214.03) 3.27% < 0%
4 $ (51,720.45) 4.91% < 0%
5 $ (53,272.07) 6.07% 0.54%
6 $ (54,870.23) 6.93% 1.69%
7 $ (56,516.33) 7.61% 2.59%
8 $ (58,211.82) 8.15% 3.31%
9 $ (59,958.18) 8.59% 3.91%
10 $ (61,756.92) 8.96% 4.41%
11 $ (63,609.63) 9.28% 4.83%
12 $ (65,517.92) 9.54% 5.20%
13 $ (67,483.46) 9.77% 5.51%
14 $ (69,507.96) 9.97% 5.79%
15 $ (71,593.20) 10.15% 6.04%
16 $ (73,741.00) 10.30% 6.25%
17 $ (75,953.23) 10.43% 6.45%
18 $ (78,231.82) 10.55% 6.62%
19 $ (80,578.78) 10.66% 6.78%
20 $ (82,996.14) 10.75% 6.92%
21 $ (85,486.03) 10.83% 7.05%
22 $ (88,050.61) 10.91% 7.16%
23 $ (90,692.13) 10.97% 7.27%
24 $ (93,412.89) 11.03% 7.36%
25 $ (96,215.28) 11.09% 7.45%
26 $ (99,101.73) 11.13% 7.53%
27 $ (102,074.79) 11.18% 7.61%
28 $ (105,137.03) 11.22% 7.67%
29 $ (108,291.14) 11.25% 7.74%
30 $ (111,539.87) 11.29% 7.79%
Table 2: Required Deposits to Defined Contribution Plan if Investing
in Risk-Free Assets
Retired Present Initial Additional Additional
for N Value of Amt Saved $ Amount $ as a %
years retirement Required of income
5 $222,388 $2,499 $(2,757) -6.9%
10 $424,380 $4,770 $(486) -1.2%
15 $607,871 $6,832 $1,576 3.9%
20 $774,516 $8,705 $3,449 8.6%
25 $925,913 $10,406 $5,150 12.9%
30 $1,063,393 $11,225 $5,969 14.9%
Table 3: Double Dipping
Work 30 years, retire from TRSGA and work another 10 years.
Contribute 5% + 8.14% to a 403.b these 10 years, earning a
risk-free rate of 5%.
Retirement TRSGA benefit
YR Earned income savings (saved)
31 $83,902.70 $11,024.81 $47,332.00
32 $86,000.27 $11,300.44 $48,751.96
33 $88,150.27 $11,582.95 $50,214.52
34 $90,354.03 $11,872.52 $51,720.95
35 $92,612.88 $12,169.33 $53,272.58
36 $94,928.20 $12,473.57 $54,870.76
37 $97,301.41 $12,785.41 $56,516.88
38 $99,733.94 $13,105.04 $58,212.39
39 $102,227.29 $13,432.67 $59,958.76
40 $104,782.98 $13,768.48 $61,757.52
Earned TRSGA
Income = $0 benefit
(Retired)
41 0 $63,610.25
42 0 $65,518.56
43 0 $67,484.11
44 0 $69,508.64
45 0 $71,593.90
46 0 $73,741.71
47 0 $75,953.97
48 0 $78,232.58
49 0 $80,579.56
50 0 $82,996.95
51 0 $85,486.86
52 0 $88,051.46
53 0 $90,693.01
54 0 $93,413.80
55 0 $96,216.21
56 0 $99,102.70
57 0 $102,075.78
58 0 $105,138.05
59 0 $108,292.19
60 0 $111,540.96
Total Saved
YR (earns 5%)
31
32 $121,327.05
33 $189,190.87
34 $262,243.89
35 $340,798.00
36 $425,182.22
37 $515,743.62
38 $612,848.23
39 $716,882.07
40 $828,252.18
403. b Total
payout retirement
income
41 $51,879.94 $115,490.19
42 $53,436.34 $118,954.90
43 $55,039.43 $122,523.54
44 $56,690.61 $126,199.25
45 $58,391.33 $129,985.23
46 $60,143.07 $133,884.78
47 $61,947.36 $137,901.33
48 $63,805.78 $142,038.37
49 $65,719.96 $146,299.52
50 $67,691.55 $150,688.50
51 $69,722.30 $155,209.16
52 $71,813.97 $159,865.43
53 $73,968.39 $164,661.40
54 $76,187.44 $169,601.24
55 $78,473.06 $174,689.27
56 $80,827.26 $179,929.95
57 $83,252.07 $185,327.85
58 $85,749.64 $190,887.69
59 $88,322.13 $196,614.32
60 $90,971.79 $202,512.75
Table 4: Years to exhaust ORP fund matching TRSGA payout at various
rates of return
$1,614,556 Balance at retirement
YR Nest egg Annual End-of-year
i = 7.5% Payout Balance
41 $1,735,648 $115,490 $1,620,158
42 $1,741,669 $118,955 $1,622,714
43 $1,744,418 $122,524 $1,621,894
44 $1,743,537 $126,199 $1,617,337
45 $1,738,638 $129,985 $1,608,652
46 $1,729,301 $133,885 $1,595,417
47 $1,715,073 $137,901 $1,577,171
48 $1,695,459 $142,038 $1,553,421
49 $1,669,927 $146,300 $1,523,628
50 $1,637,900 $150,689 $1,487,212
51 $1,598,752 $155,209 $1,443,543
52 $1,551,809 $159,865 $1,391,944
53 $1,496,339 $164,661 $1,331,678
54 $1,431,554 $169,601 $1,261,953
55 $1,356,599 $174,689 $1,181,910
56 $1,270,553 $179,930 $1,090,623
57 $1,172,420 $185,328 $987,092
58 $1,061,124 $190,888 $870,236
59 $935,504 $196,614 $738,889
60 $794,306 $202,513 $591,793
61 $636,178 $208,588 $427,590
62 $459,659 $214,846 $244,813
63 $263,174 $221,291 $41,883
64 $45,024 $227,930 $(182,905)
$915,579 Balance at retirement
Y Nest egg Annual End-of-year
R i = 5% Payout Balance
41 $961,358 $115,490 $845,868
42 $888,161 $118,955 $769,206
43 $807,667 $122,524 $685,143
44 $719,400 $126,199 $593,201
45 $622,861 $129,985 $492,876
46 $517,520 $133,885 $383,635
47 $402,816 $137,901 $264,915
48 $278,161 $142,038 $136,123
49 $142,929 $146,300 $(3,371)
$1,521,979 Balance at retirement
Y Nest egg Annual End-of-year
R i = 7.25% Payout Balance
41 $1,632,322 $115,419 $1,516,903
42 $1,626,879 $118,882 $1,507,997
43 $1,617,327 $122,448 $1,494,879
44 $1,603,257 $126,122 $1,477,136
45 $1,584,228 $129,905 $1,454,323
46 $1,559,761 $133,802 $1,425,959
47 $1,529,341 $137,817 $1,391,524
48 $1,492,409 $141,951 $1,350,458
49 $1,448,367 $146,210 $1,302,157
50 $1,396,563 $150,596 $1,245,968
51 $1,336,300 $155,114 $1,181,187
52 $1,266,823 $159,767 $1,107,055
53 $1,187,317 $164,560 $1,022,757
54 $1,096,907 $169,497 $927,410
55 $994,647 $174,582 $820,065
56 $879,520 $179,819 $699,700
57 $750,429 $185,214 $565,215
58 $606,193 $190,770 $415,422
59 $445,541 $196,493 $249,047
60 $267,103 $202,388 $64,715
61 $69,439 $208,460 $(139,021)
