Pension Plans In Medicine

Pension Plans Commonly Offered To Doctors

 

A pension is a regular payment that’s paid to you. Social Security is a form of a pension; after a specific age you are paid a set amount of money based on various factors. Many large medical groups offer traditional pensions. Some are based on how much money you have put into the pot (cash balance plan) and some are set amount of money you’ll receive at a specific age usually based on your income (traditional pension).

 

My Pension Example

My previous employer offered me a pension plan on top of my other benefits (401k and Keogh) in which I could get vested as long as I stayed with that company working at least 50% of full-time for 10 years. For the first 10 years of work I would get 2% of my base gross annual income, for the next 20 years I would get 1%. So, if I made $200k/yr and I worked for 15 years then I would get $40,000/yr for the first 10 years worked and $10,000/yr for the next 5 years. This total sum of $50,000 would be paid to me monthly/quarterly/annually as a pension starting at age 65 until my death.

pension calculation based on years worked

 

If I worked for this company only 9 years then I would get nothing at age 65. If I worked for this company for 40 years I would reach my maximum pension benefit by year 30. In that case I would get paid $40,000/yr for the first 10 years and another $40,000/yr for the next 20 years worked.

Some pensions in other careers (such as the military) will start paying out earlier in one’s life. However, in corporate medicine I am not aware of any pensions that pay out much earlier than 59.5. Pensions with an early retirement option will penalize you heavily for choosing this option. This makes sense since you will have more years of payments coming to you. It’s common to see payments cut in half even if you start taking payments just 6-7 years earlier.

 

Pension Loophole

There is an interesting loophole in my pension plan. They calculate your final pay based on the 3 highest years of income. I had a year where I made $420,000, $383,000 and $345,000. They will average these 3 and base my percentage calculation on that. So, even if I decided to go to 50% of full-time (that’s the minimum work requirement) my pension wouldn’t be affected. So what would prevent all docs from just working really hard some years and go to 50% right after? Well, 2 reasons. Reason 1, you really don’t start going up in base salary until years 5-7. Reason 2, doctors are notorious for lifestyle inflation in proportion to their income, the pension provider knows this.

 

Pension And Taxes

If the pension amount was calculated based on gross income then the pension payments will be taxed at your expected income tax rate. If the pension is based on after-tax income (less likely) then the income isn’t taxed.

 

Cash Balance Plan – Another Kind of Pension

I won’t get into detail here but a cash balance plan is also a form of a pension. Since traditional pensions are more costly these ‘annuity’ type pensions are becoming more common. Here, your employer will put aside a certain amount on your behalf for every year that you work at company X and as long as you have worked there for the number of years required to vest (and at the appropriate part/full-time level) you will get a payout monthly/annually starting at a certain age.

As an example, when I moved to Portland my new employer stopped offering pension plans to new hires the year before I started. Instead, they started rolling out a cash balance plan. I would need to work with this company for 5 years in order to vest. They will set aside 10% of my gross base income (currently it’s around $210,000/yr) every year for me. This money will accumulate at a set percentage (4%) and will be paid out to me once I have reached their designated retirement age (65 in my scenario) either in a lump sum (converted to an IRA) or as an annuity (generally calculated based on life expectancy).

 

Overtime And Your Pension Calculation

It depends on your particular pension plan. For the most part any bonuses or stipends paid to you are not taken into account. However, most pensions will count your extra hours worked towards your pension calculation. In my case, the year I made $420,000 I also cashed out $30k of vacation time and got a $16k bonus. So that $46,000 wouldn’t be calculated towards my pension payments. $420,000-$46,000=$374,000. My base pay was only $254,000 which means $120,000 was overtime work. In my case this overtime work will be calculated towards my pension payments. Awesome!

 

Does your employer offer you a pension?
How is are your pension payments calculated?

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