Today's Classic is republished from Physician on Fire. You can see the original here.
Just when I’m starting to feel good about my future, Transamerica rains on my future parade with a lousy e-mail. “Your retirement outlook is… Rainy.” They insert a cute little stormy cloud in case I didn’t get their point the first time.
Do these downer e-mails leave me in a state of despair? Of course they don’t. I know something that Transamerica doesn’t. Namely, that the money I’ve got stashed in their accounts represents less than 20% of my retirement assets. The rest is in Roth and taxable accounts with Vanguard.
It’s not entirely Transamerica’s fault. After all, I didn’t tell them that I had money elsewhere. I don’t think they asked me, either, but I learned that if you do tell them, their computers will listen.
Growing weary of the little gray cloud, I decided it was time to open up about the long-term relationship I’ve had with the other brokerage. Linking my accounts, I gave Transamerica access to my balances over at Vanguard. If computers experience envy, Transamerica’s hard drives would be a brilliant shade of green.
It must have come as quite a shock to know that all this time, I was nurturing a more meaningful relationship with another company. It shouldn’t have come as much of a surprise. After all, every fund I’m holding within the Transamerica account is a Vanguard fund.
Not only did it feel good to have everything out in the open, but my honesty was rewarded with a change in disposition. The storm cloud was replaced with a bright, shiny sun. My retirement outlooks is now… Sunny!
I was rewarded with the Sun emoji by keeping my stated retirement income needs low. From the reigning Rain King to Walking on Sunshine with a few clicks of the mouse. If I had chosen the standard “70% to 80% of income replacement” the dark cloud would ominously hover overhead.
Interestingly, when I input a desired retirement income of $100,000 (pre-tax), the program suggests I’ll be left with $59,700. Assuming a tax rate > 40% with a portfolio that is < 20% pre-tax money is a poor assumption. I can almost guarantee that my actual tax rate would be < 10% (see The Taxman Leaveth) when I’m done earning an income.
Another silly assumption made by Transamerica was that I didn’t have money elsewhere. The truth is, though, that I had provided incomplete information. Once I filled in the blanks, Transamerica was able to make an improved, albeit imperfect, projection.
My Incorrect Assumption
Earlier, I explored the idea of leaving my job a year earlier than planned. Ants in the pants, and all that. There was one big problem. I would be walking away being only 25% vested in the employer contributions to my 401(k). That adds up to a penalty of about six week’s pay. It wouldn’t make or break me, but it’s a significant chunk of money.
I based that assumption on the language in my Benefits Summary:
“For anesthesiologists hired after December 31, 2011, the annual contribution will vest 25% after two years and will be 100% vested after five years.”
There was no further delineation, and being a rather literal person, I took that to mean that I would be stuck at a 25% vest until I hit the five year mark. Having been an independent contractor for most of my career, I have no other experience with vesting schedules, and didn’t imagine it would be any different than what was spelled out.
Last week, I logged into my Transamerica account, not to explore this question or to see a sad, gray cloud, but to investigate my 401(k) fees. You know how I hate fees. It turns out that mine are indeed rather minimal. I had looked at this once before, but I just wanted to be sure I wasn’t missing something.
I don’t often check my balances via the Transamerica website. Personal Capital pulls the information for me, so I rarely have a reason to log in to Transamerica. Since I was there, though, I clicked on the 401(k) and clicked again on the “Balance Details” button.
In the Details, I was presented with two balances.
The total balance and the vested balance. I did a double take. There was a gap between the two, but it was not 75% of the employer contribution, as I had expected. I calculated it to be 55.49%. A day or two later, the discrepancy was 55.45%. My unvested portion was shrinking!
Like Transamerica, I started with incomplete information, and made an assumption. Like Transamerica, my assumption turned out to be incorrect, and led me to make decisions based on a false premise.
An e-mail to a Transamerica representative confirmed my suspicion. Interestingly, I asked if the vesting increased linearly from year 2 to year 5, and the response was that I would be 50% vested at year 3, 75% at year 4, and 100% at year 5. While that is true, it does ignore hundreds of data points in between. I guess we don’t all think in terms of X-Y axes*.
The Transamerica rep pointed me to a part of the site I hadn’t found that displays my total employer contribution (which was larger than I thought) and my vested percentage (exactly 50%). I received the year 3 bump to 50% after being credited with 1,000 hours worked in 2016 (calculated at 40 hours per week), which happened on June 11th this year.]
What This Means
The handcuffs that I had once imagined to be 24 karat gold, then downgraded to silver, are merely a set of plastic cuffs that I once used to play cops and robbers with my older brother and his friends. They can be broken with minimal effort and little regret.
By the time I have put in the equivalent of 25 weeks of full time work in 2018, I will be 100% vested in my employer’s 401(k) contributions.