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Deferred Retiment Options Program or not?
Old 05-16-2011, 06:06 PM   #1
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Deferred Retiment Options Program or not?

I have an option of going into the Deferred Retirement Options Program this June. Here is the layout.

I can stay in it for up to 2 years.

My current salary is $130,000.
I can now retire with 70% (and do 2 years of Drop) or I can wait and retire normally in 6/2013 with 82%.

IF I am in Drop I make my current salary plus they put my retirement (70% plus 2% Cola) in a savings account, which I draw after the 2 years.
130,000 plus 91,000 plus 2000 for each of those 2 years.
I can do that for 2 years then enter normal retirment with my normal 70% (91,000) plus 2% cola the rest of my life.

Or,
I can just continue to work regular for 2 more years and up my retirement percentage to 82%. No Drop. But my salary would be $106,6000 plus Cola's for the rest of my life.

Which seems like the better deal?
Basically it comes down to, do I want a lower retirement percentage with a large chuck of cash up front? Or, do I just want to retire with a higher retirement percentage?

There are a few other small variables, but that is the main thrust of it.
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Old 05-16-2011, 10:39 PM   #2
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So, you are being offered $180,000 lump sum (paid over 2 years) in exchange for $15,000 lower pension (and proportionate lower COLA). Breakeven is probably about 19 or 20 years away. What kind of longevity do you expect?
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Old 05-16-2011, 11:43 PM   #3
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For me, this is a no brainer, run Senin, run!! Take the DROP option and get on with your ER!! Regardless of which option you take, do not second guess once you have committed. May you sleep well during your ER!
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Old 05-17-2011, 02:39 AM   #4
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So, you are being offered $180,000 lump sum (paid over 2 years) in exchange for $15,000 lower pension (and proportionate lower COLA). Breakeven is probably about 19 or 20 years away. What kind of longevity do you expect?
Guys, thank you for replying. I really appreciate the input on this. I am torn.

As far as the Cola goes, it is not lower. If I elect Drop, I get the 2% cola for the 2 years I am active. If I elect normal retirement, I do not get the 2% cola until I actually retire in 2013.

But you are correct, I figure the break even spot in about 20 years. Will I live that long? Who knows? Good health now, but maybe not then.

Another factor, I have plenty of money now, will I in 20 years?
Opposite side of the same token, take lots of cash now and try to develop it over a lifetime.

It is really a toughie.
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Old 05-17-2011, 08:16 AM   #5
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If you have "lots of cash" now, why would you trade 2 additional years of work for a possible payoff of more money 20 or more years from now. Breakeven on 2 missing years is incalculable.
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Old 05-17-2011, 09:59 AM   #6
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Well, "lots of cash" relatively now. Nobody ever really has lots of cash. LOL.

It's not 2 additional years of work. Either way, I will have to work until June 2013. It is just a matter of do I work with Drop status or do I work regularly and go into regular retirement with a higher percentage.
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Old 05-17-2011, 10:09 AM   #7
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My DROP had a few more components than yours that made it a no-brainer to drop as soon as eligible. Everyone's individual situation differs of course. A spreadsheet page with three different scenarios for retirement date and the resulting change in DROP balances, pension amounts, etc., was a great tool in being able to rapidly see how decisions would affect my future.
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Old 05-17-2011, 10:28 AM   #8
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If it were me, I would consider if I have a decent cushion in my budget with the DROP, longevity, and if I expect to have larger expenses at the start of retirement or at the end. For example, a mortgage to retire, a plan to buy/build a retirement home, a plan to buy an RV or do extensive travelling earlier in retirement versus.

Lots of alternatives if you go the cash route. If the lower payout gives you a substantial cushion then you could always consider taking the cash and investing in a more aggressive manner with the aim of having that cash infusion now come out ahead in 20 years versus the higher pension.

If there's not a lot of cushion now or against projected expenses, then the higher amount might be nicer.
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Old 05-18-2011, 02:34 AM   #9
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Thanks guys for the input. Really appreciated.

It is simply a matter of retire with a big chunk of cash up front and a low percentage.

Or,

Retire without that big chunk of cash up front but a bigger percentage for life.

Obviously I am not the poster child for this Drop program. Ther are some who get 90% AND Drop. I am too young for that. I only would get the 70%.

And the kicker is..... This drop program will end on June 30 forever.
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Old 05-18-2011, 05:32 AM   #10
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Or you could retire now, spend other assets to live on for 2 years and take the 82% in 2013. You would be spending out of pocket (at 70% 182,000) for 2 years (compared to taking it today). Can you take $182k and beat the 12% cola increase for life?

It is a math and longevity problem that requires some analysis . You did not mention your age, if you are married and your basic health situation. That needs to go into the analysis.

I have not done the math... but a 12% increase for a joint life cola annuity for a 2 year wait seems like it might be a pretty good deal.

You need to compare all options in a spreadsheet and do some projections and comparisons.
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Old 05-18-2011, 08:02 AM   #11
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Frankly I think there's more to look at than strictly which one has the better expected payout. If even the lower payout of retiring now was comfortably more than I needed to live on, I'd get out now even if waiting 2 years was "optimal" financially. Only if the income I'd receive for retiring now was insufficient or marginally enough would I consider w*rking longer.
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Old 05-18-2011, 09:19 AM   #12
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Quote:
Originally Posted by Senin View Post
I have an option of going into the Deferred Retirement Options Program this June. Here is the layout.

I can stay in it for up to 2 years.

My current salary is $130,000.
I can now retire with 70% (and do 2 years of Drop) or I can wait and retire normally in 6/2013 with 82%.

IF I am in Drop I make my current salary plus they put my retirement (70% plus 2% Cola) in a savings account, which I draw after the 2 years.
130,000 plus 91,000 plus 2000 for each of those 2 years.
I can do that for 2 years then enter normal retirment with my normal 70% (91,000) plus 2% cola the rest of my life.

Or,
I can just continue to work regular for 2 more years and up my retirement percentage to 82%. No Drop. But my salary would be $106,6000 plus Cola's for the rest of my life.

Which seems like the better deal?
Basically it comes down to, do I want a lower retirement percentage with a large chuck of cash up front? Or, do I just want to retire with a higher retirement percentage?

There are a few other small variables, but that is the main thrust of it.
Wow, 6% a year into a defined benefit retirement is awesome. That's the highest I've seen. Are you sure that's accurate? Who holds the retirement program assets? Is the system stable as far as you know?

When my former employer was considering offering a DROP program I would have come out ahead taking the DROP in every scenario I could think of. i definitely would have taken it had it been offered. But that was with a much lower increase in the retirement % per year (2.67% vs. your 6%).

Personally, I like cash now. You don't know what the future holds. Once that cash is in your account they can't take it away.

Does your retirement have a survivor benefit built into it? If so, how much would your survivors get?
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Old 05-18-2011, 10:01 AM   #13
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Wow, 6% a year into a defined benefit retirement is awesome. That's the highest I've seen. Are you sure that's accurate? Who holds the retirement program assets? Is the system stable as far as you know?

When my former employer was considering offering a DROP program I would have come out ahead taking the DROP in every scenario I could think of. i definitely would have taken it had it been offered. But that was with a much lower increase in the retirement % per year (2.67% vs. your 6%).

Personally, I like cash now. You don't know what the future holds. Once that cash is in your account they can't take it away.

Does your retirement have a survivor benefit built into it? If so, how much would your survivors get?
6% a year? No. I would be making only 2% a year Cola (there is another possibility for a small additional supplemental cola but no need to go into that detail).

It is stable-- a big city muni government.

I am 50. Healthy-- so far. Married, she has a very good job but I didn't want to muddy the waters with her info (she definitely can take care of herself). And if I pass, she will get 50% of pension (there is an option to spend money so she can get 100% but we don't need that). We also have a half million dollar life insurance policy until 2023.
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Old 05-18-2011, 01:36 PM   #14
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Quote:
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6% a year? No. I would be making only 2% a year Cola (there is another possibility for a small additional supplemental cola but no need to go into that detail).

It is stable-- a big city muni government.

I am 50. Healthy-- so far. Married, she has a very good job but I didn't want to muddy the waters with her info (she definitely can take care of herself). And if I pass, she will get 50% of pension (there is an option to spend money so she can get 100% but we don't need that). We also have a half million dollar life insurance policy until 2023.
Maybe I misunderstood your original post. You said if you waited 2 more years you would get 82% instead of 70%. That's 12% difference. 12% / 2 years = 6% per year.

It looks like your wife will be set, so I agree not to muddy the waters with her info.
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Old 05-18-2011, 02:00 PM   #15
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Maybe I misunderstood your original post. You said if you waited 2 more years you would get 82% instead of 70%. That's 12% difference. 12% / 2 years = 6% per year.

It looks like your wife will be set, so I agree not to muddy the waters with her info.
Ok, Patrick, I got ya. Sorry I didn't understand. Now I know where that 6% came from.

Yep.
If I go out right now it's 70%
If I go in 6/12 it is 76%
If I go in 6/13 it is 82%
If I go in 6/14 it is 88%
And if I wait a bit later it is 90%-- max.

But I am getting to the point where I am ready to retire. That is why I think 6/13 is my best bet.
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