Help! Retire Now or in 8 Years?

[Budatx]

Hello,

I've been reading ER Forum for months, but this is my first post. I am 52 yoa, married (wife 43 yoa) with 3 kids (12,10,9). I make $70K, wife makes $62K a year. I am now eligible for a pension of $2,500 a month from a previous public-sector employer. I am also now eligible for a pension of $2,225 a month from my current public-sector job. Both are fixed and are not indexed for inflation and at these amounts, both include a 50% survivor benefit. I plan to work full time 'til age 60, or another 8 years. After age 60, I plan to work part time at a job of my choice. Right now, I have 3 options: 1) continue working at my current job another 8 years and then retire and draw $3,240 a month from my current employer and $4,070 a month from my previous employer, for a total of $7,310 a month. Option 2) Retire now from my current job and take both retirements for a total of $4,725 a month ($2,500 + $2,225) AND immediately return to my current exact position as a retiree at a salary of $63K. That would give me a current total income of appox. $120K. Option 3) Continue in my current job (for 8 yrs) and immediately start taking my pension from my previous employer, which would make my current total income $93K. I am very happy at my current job and plan to stay there regardless of my decision. Our mortgage will be paid in 10 years; balance is $108K - house is valued at $280K. Two cars are paid for and we have $6K in debt. Our 3 kids have been in a State guaranteed pre-paid college tuition plan since they were infants. The plan pays all tuition and fees at the college of their choice and is paid up when they each graduate from high school. For all 3, we pay a fixed total of $900 a month. Kids also go to private school for a total of $12K a year for all 3. My wife and I each plan to take Social Security at age 62; I'll get $1,500 and she $1,700 a month. She also plans to work part time after she retires at age 57. She has a 401K with a current balance of $150K. Each of us will get 100% paid health insurance when we retire. In my case, I get it no matter if I retire now or in 8 years. Each of my pensions will increase each year depending on if I keep working at my current job or delay taking my pension from my previous employer. We both are frugal and try to live within our means. We hope/plan to have a comfortable and active retirement.

Thanks,
Budatx

 

[honobob]

Plan 1. You're working for $13,300 a year. $70,000 -(26,800+30,000)
Plan 2. You're working for $63,000 a year and collecting $56,800 pension.
Plan 3. You're working for $43,300 a year and collecting a $30,000 pension


I vote plan 2 if you insist on working.

 

[Htown Harry]

Welcome and congratulations on your accomplishments, Buda. Your generous pensions, a solid start on college expenses and having paid health insurance during retirement have you choosing between good, better and best.

If you are indeed committed to continuing working for several more years, one way to look at your options would be to weigh the increased security or enjoyment that each option holds for you. For example, option one allows you to grow your pension payout to one that more closely matches your retirement-year salary, making your retirement years income level that much more secure.

But waiting doesn't provide extra cash flow to pay off your house earlier or to start taking extra special vacations while your kids are still young. Is that more valuable to you?

You don't mention savings assets outside of your wife's 401 plan. The options where you begin to take your pension now give you an opportunity to remedy this and provide for a no-penalty-for-withdrawals cash cushion for unexpected or catastrophic expenses.

The taxman always takes his cut, so you'll need to give some consideration to that as you weigh the options. For example, option 3 adds $23k to your current income before taxes; option 2 adds $50k. To lessen the tax bite, what portion of that might you or your wife be able to save / shelter with additional contributions to 401k's or Roth IRA's?

Finally, some things to consider regarding the kids:

Room and board is about the same as tuition and fees at UT, roughly $8000 per year each category. You may want to put some additional dollars away ahead of time, likely in a 529 account. Particularly if you would like to avoid paying all of the "extra" costs beyond tuition from your pension cash flow during your kids' time in college.

Regardless of which option you choose, your survivor's pension payout will drop significantly if you were to were to unexpectedly die. At least during the years the kids will remain dependents, consider an amount of term life insurance that would be needed to partially bridge the gap.

Spreadsheets are your friend...this is not a calculation with an easy answer. Take your time, continue to learn and you'll likely find that the "right" answer will come to you in time.

 

[Trek]

I plan to work full time 'til age 60, or another 8 years.

After age 60, I plan to work part time at a job of my choice.

...immediately return to my current exact position as a retiree.

I am very happy at my current job and plan to stay there regardless of my decision.

She also plans to work part time after she retires at age 57.

Don't take this the wrong way, but where's the retirement part?

Sounds more like a basic financial decision than a retirement one.

Good luck all the same!

 

[Dawg52]

Yes, most here are pro ER, not work until 60's and beyond. But if you enjoy working, that is ok too. You are fortunate to have nice options. Wish I had a hefty pension.

Good luck with whatever you decide.

 

[guest]

fun choices!

Quote: “Plan 1. You're working for $13,300 a year. $70,000 -(26,800+30,000)
Plan 2. You're working for $63,000 a year and collecting $56,800 pension.
Plan 3. You're working for $43,300 a year and collecting a $30,000 pension”

I vote with honobob….if you just feel you gotta w*rk. Bunch of sweet options though! Now where was that sack of money…I must have set it down someplace!!!!!

Good luck!

 

[RunningBum]

I don't get honobob's math, and I don't think the conclusion is correct.

In plan 1 he deducts the lost pension, and comparing it to the added pension in plan 2. Either he's making $70K a year in plan 1, or you compare $13K with $63K in plan 2 and ignore "and collecting the pension" part. There's just no way you are comparing $13.3K/yr with $63K+$56.8K. That's badly misleading.

It also doesn't take into account the after retirement increase if you defer the pension. That's a huge factor if you're going to be alive after retirement.

How about this:

Plan 1: You're getting $70,000/yr now and $87,720/year after age 60.

Plan 2: You're getting $119,700/yr now and $56,700/year after age 60

Plan 3: You're getting $100,000/yr now and $68,880/year after age 60

Two other factors I can't answer are yours and your wife's life expectancy (how's your health and family history?), and any chance that the pension would somehow be lost (seems highly unlikely since it is public sector rather than private).

If you are disciplined enough to invest the extra $49.7K (minus taxes) fully, figure out what investment rate of return you could expect to get and what that means in then-present values in 8 years compared to the extra pension amount you'd get for your life expectancy and then the 50% survivor for your wife. Compare plan 1 against both 2 & 3, and 2 vs. 3. A spreadsheet should be able to help you with this. Sorry, but I'm not motivated enough to figure out the formula for you to use.

If you're not going to be able to save the extra money, unless you can really use the money wisely (avoid debts or make lifetime purchases that you won't have to make later, for example) you're probably better off taking the one with the best monthly pension since it is a forced savings plan.

From a very quick calculation, I'd think if you conservatively (5-6%) invested the extra amount after taxes from plan 2, you'd have about $300-400K in 8 years. At a 4% SWR rate that's worth $12-16K/year. Compare that to the $31K extra in pension with plan 1, and it isn't even close, if my method is correct. Is that a fair comparison to make?

 

[jIMOh]

Is there a reason to increase current take home pay? I vote for delaying the pensions until you retire. Unless you need more take home pay now for some reason or another.

Or take pension from old job now, but wait to take the current pension until you maximize it's benefit.

 

[honobob]

I don't get honobob's math, and I don't think the conclusion is correct.

In plan 1 he deducts the lost pension, and comparing it to the added pension in plan 2. Either he's making $70K a year in plan 1, or you compare $13K with $63K in plan 2 and ignore "and collecting the pension" part. There's just no way you are comparing $13.3K/yr with $63K+$56.8K. That's badly misleading.

It also doesn't take into account the after retirement increase if you defer the pension. That's a huge factor if you're going to be alive after retirement.

How about this:

Plan 1: You're getting $70,000/yr now and $87,720/year after age 60.

Plan 2: You're getting $119,700/yr now and $56,700/year after age 60

Plan 3: You're getting $100,000/yr now and $68,880/year after age 60

No my math is right. He said in plan 1 he could get a pension of $56,700. He said he could give up the $56,700 a year pension in hopes of increasing his pension 8 years down the road. By that time he will have given up $453,600 in pension money. All increases in pension money come at a costs of 8 years of labor. For that he will receive a pension increase of $87,720 versus $56,700. It will take him over 14 years (age 74) to break even on the pension money. He will have $560,000 salary over those 8 years but he paid for it with 8 more years of work!!!

He can collect $56,700 for doing nothing NOW. He can work and collect $70,000. He's working, under plan 1, for $13,300 a year and the higher pension 8 years later, if he lives, that will take him 14 years to break even on.

Either way, Plan 2 is best given his parameters.

 

[VaCollector]

I vote for plan #2 also!

PLEASE keep working.....while the extra 8 years don't QUITE get me to my social security, I am hoping that what you (and other possible early retirees) might pay in will allow it to be there for ME when I turn 62 !!

 

[RunningBum]

No my math is right. He said in plan 1 he could get a pension of $56,700. He said he could give up the $56,700 a year pension in hopes of increasing his pension 8 years down the road. By that time he will have given up $453,600 in pension money. All increases in pension money come at a costs of 8 years of labor. For that he will receive a pension increase of $87,720 versus $56,700. It will take him over 14 years (age 74) to break even on the pension money. He will have $560,000 salary over those 8 years but he paid for it with 8 more years of work!!!

He can collect $56,700 for doing nothing NOW. He can work and collect $70,000. He's working, under plan 1, for $13,300 a year and the higher pension 8 years later, if he lives, that will take him 14 years to break even on.

Either way, Plan 2 is best given his parameters.

Well, your first post didn't do any comparison with the higher pension, plus you subtracted money out of plan 1 and added it to plan 2.

Put it this way, if this was just a "take my pension now or wait 8 years" question, you wouldn't say that in plan 1 you would get negative $56,700 and plan 2 he would get positive $56,700. No, plan 1 would get 0. So it's just wrong to subtract $56K from the income he is getting in the real plan 1.

And the OP did say it's a given that he will continue working. So you have to factor in the $7,000 yearly reduction in wages for the same work.

Bottomline, he will get $397,600 extra over 8 years with plan 2, minus taxes, plus what he can earn on it. All for the same work, not at a cost of 8 more years of work. You have to compare whatever that number is to the $31,020 extra (minus taxes, which I had failed to mention). The OP will have to plug in tax rates and expected rate of return, and then figure out the present value of whatever that $397K turns into with the $31K minus taxes each year.

And don't forget the wife is 9 years younger, so if they live to the same age, she gets an extra $15.5K (minus taxes) those 9 years.

I don't know which turns out better but I suspect it's plan 1, unless they both die fairly young.

 

[RetireeRobert]

In plan 1 he deducts the lost pension, and comparing it to the added pension in plan 2. Either he's making $70K a year in plan 1, or you compare $13K with $63K in plan 2 and ignore "and collecting the pension" part. There's just no way you are comparing $13.3K/yr with $63K+$56.8K. That's badly misleading.

It also doesn't take into account the after retirement increase if you defer the pension. That's a huge factor if you're going to be alive after retirement.

How about this:

Plan 1: You're getting $70,000/yr now and $87,720/year after age 60.

Plan 2: You're getting $119,700/yr now and $56,700/year after age 60

Plan 3: You're getting $100,000/yr now and $68,880/year after age 60

Two other factors I can't answer are yours and your wife's life expectancy (how's your health and family history?), and any chance that the pension would somehow be lost (seems highly unlikely since it is public sector rather than private).

If you are disciplined enough to invest the extra $49.7K (minus taxes) fully, figure out what investment rate of return you could expect to get and what that means in then-present values in 8 years compared to the extra pension amount you'd get for your life expectancy and then the 50% survivor for your wife. Compare plan 1 against both 2 & 3, and 2 vs. 3. A spreadsheet should be able to help you with this. Sorry, but I'm not motivated enough to figure out the formula for you to use.

If you're not going to be able to save the extra money, unless you can really use the money wisely (avoid debts or make lifetime purchases that you won't have to make later, for example) you're probably better off taking the one with the best monthly pension since it is a forced savings plan.

From a very quick calculation, I'd think if you conservatively (5-6%) invested the extra amount after taxes from plan 2, you'd have about $300-400K in 8 years. At a 4% SWR rate that's worth $12-16K/year. Compare that to the $31K extra in pension with plan 1, and it isn't even close, if my method is correct. Is that a fair comparison to make?

My quick impressions of the OP's post led me also to similar analysis. Those pensions at age 60, as compared to now at age 52 are significantly larger. Nowdays, 60 is still relatively young. AND the wife is now only 43 and will be only 51 then. She is looking at a 50% survivor benefit. For her, OP's age 60 pensions of $87720 x 50% looks a whole lot better than 50% of the $56700.

Since OP's DW is likely to be alive far longer than him and for many years after OP reaches age 60, on the basis of wife's benefit alone, I would tend toward option 1. Plus he will get the extra $31000 a year pensions lilely for say 14 years (using conservative actuarial male average life expectancies). Then after that, DW CONTINUES to get an extra $15,500 a year for say another 10 years after that!! (This assumes no serious health problems currently of course.)

They really have no need for increased current income before he reaches age 60. If they took the extra pension money currently as income, a larger percentage of ALL their current income including the pensions would just be lost to taxes.

I vote for option 1. (a) It provides a "smoother" stream of income now
and into retirement.
(b)It provides a "raise" at retirement.
(c) It is likely more tax efficient currently.
(d) It provides better protection for spouse.
(e) As a couple, they have something like 24 years
(using conservative actuarial expectancies) to
rake in the extra $31000 for OP for the first 14
years, then the extra $15.500 for DW for the 10
years after that.
(f)As he wants to continue to work regardless, he is
in stronger position as employee than as retiree
rehired on contract.
(g)As employee he still gets whatever company
health benefits provided.
(h)As employee he still has whatever company tax
deferred savings opportunities employer provides.

Since OP stated he enjoys his work and will continue working regardless, I say option 1. Save the pensions for age 60. For all the reasons above.

 

[honobob]

OK I admit I left out the survivor's benefit. Hell, she's nine years younger and probably a "looker" (the young ones usually are). If she can't trade up or marry the current boyfriend when he's gone then I don's see her incentive to "keep herself up" for whatever time the OP has left.

Other than that I still stand by my math!!!!

Plan one gives him 8 years of salary of $70,000 and then a pension of $87,720. Extend that out to age 74 (8 X 70 + 14 X 87.720 = $1,788,080)
Plan 2 gives him 8 years of salary at $63,000 + 22 years of pension at $57,600. Over that time he would reach the breakeven point with $1,764,000. alot of people die in their mid 70's!!

If he dies at 61 after collecting 1 year of the higher pension he will have accumulated $647,720 over the nine years of plan one + the higher survivor rate for the wife(see above). Under plan 2 he will have accumulated $1,015,200 or $$367,480 more than plan 1 but the wife will have $15,510 less pension each year but with the increased money under plan 2 it would take her almost 24 years to break even($367,480 / $15,510) That's not even counting any earnings on the higher cash over the last 8 years or the next 22 years. Blah blah taxes/longevity....Money in the future is worth less than money now.

Eventually plan 1 is mathmatically better but I think in the real world Plan 2 is best.

And that is just my opinion based on my way of thinking.

 

[RetireeRobert]

Hell, she's nine years younger and probably a "looker" (the young ones usually are). If she can't trade up or marry the current boyfriend when he's gone then I don's see her incentive to "keep herself up" for whatever time the OP has left............

Other than that I still stand by my math!!!!......................

Eventually plan 1 is mathmatically better but I think in the real world Plan 2 is best............

And that is just my opinion based on my way of thinking.

OP really doesn't have any bad choices, does he. Instead of being faced with a choice between the lesser of two evils, OP is faced with the choice of the best among three good things.

I'd say OP deserves an award for so working, earning, and arranging this desirable state of affairs. It doesn't look like he can lose no matter what he chooses.

And with a young beautiful DW to boot, it seems to me like OP must be a very happy man, living in his own heaven on earth.

Congratulations!

 

[Budatx]

I want to thank each of you for taking the time to respond to my call for help. Each of you have given me valuable insight and analysis as I consider the different options available to me and my family. It's good to know that all 3 of my options are favorable and that it basically comes down to tapping one or both available pensions now, or waiting 8 more years for substantially increased pensions (and survivor benefits), and of course, hoping to live at least an additional 14 years (to age 74) from that point to break even. At 52, I am in good health (my dad is 83, grandpa lived to 82, grandpa's brother lived to 95, my mom is 80), so I think I can more than break even. Also, I do not feel ready to quit working and I really enjoy my current job. The socialization and chance to do meaningful work are there, I am respected and appreciated for my knowledge, skills and abilities, my boss is great, and the job conditions are great. I work 40 hours a week, no nights, weekends or holidays. I get 4 weeks of paid vacation a year, over 2 weeks paid sick leave, 12-14 paid holidays, and have am able to flex my schedule as needed to attend kids' school events, or other personal business. Also, I currently have over 850 hours of sick leave and 5 weeks of vacation that continue to grow and when I do decide to retire all unused vacation and sick leave (unlimited) will be converted to additional service credit. I hope by age 59 to have at least one year of unused time to convert to service credit, thereby, actually working only 7 more years but getting credit for 8. One thing I failed to mention on my initial posting is that regarding life insurance, we have a $400K term policy on me and a $500K term policy on my wife. Additionally, I have a 401K at work currently worth $32K. With all that said, and considering the input from each of you, (specifically the increase pensions and tax efficiency issues) I am leaning toward plan 1 (work 7/8 more years and take both pensions). However, if any time between now and then circumstances change and/or I feel/discover a burning desire/passion to try something different, I know that I'll be on firm ground to take that path. Again, thanks to each of you. I look forward to keeping in touch through ER Forum.

 

[jIMOh]

I want to thank each of you for taking the time to respond to my call for help. Each of you have given me valuable insight and analysis as I consider the different options available to me and my family. It's good to know that all 3 of my options are favorable and that it basically comes down to tapping one or both available pensions now, or waiting 8 more years for substantially increased pensions (and survivor benefits), and of course, hoping to live at least an additional 14 years (to age 74) from that point to break even. At 52, I am in good health (my dad is 83, grandpa lived to 82, grandpa's brother lived to 95, my mom is 80), so I think I can more than break even. Also, I do not feel ready to quit working and I really enjoy my current job. The socialization and chance to do meaningful work are there, I am respected and appreciated for my knowledge, skills and abilities, my boss is great, and the job conditions are great. I work 40 hours a week, no nights, weekends or holidays. I get 4 weeks of paid vacation a year, over 2 weeks paid sick leave, 12-14 paid holidays, and have am able to flex my schedule as needed to attend kids' school events, or other personal business. Also, I currently have over 850 hours of sick leave and 5 weeks of vacation that continue to grow and when I do decide to retire all unused vacation and sick leave (unlimited) will be converted to additional service credit. I hope by age 59 to have at least one year of unused time to convert to service credit, thereby, actually working only 7 more years but getting credit for 8. One thing I failed to mention on my initial posting is that regarding life insurance, we have a $400K term policy on me and a $500K term policy on my wife. Additionally, I have a 401K at work currently worth $32K. With all that said, and considering the input from each of you, (specifically the increase pensions and tax efficiency issues) I am leaning toward plan 1 (work 7/8 more years and take both pensions). However, if any time between now and then circumstances change and/or I feel/discover a burning desire/passion to try something different, I know that I'll be on firm ground to take that path. Again, thanks to each of you. I look forward to keeping in touch through ER Forum.

The new information offers another suggestion (if someone already said this, my apologies):

Take both pensions now (the choice you indicate)
Defer max to 401k from current job (using pension to replace take home pay). This might significant lower your tax bracket, depending on situation.

Have you analyzed this?

 

[Budatx]

The new information offers another suggestion (if someone already said this, my apologies):

Take both pensions now (the choice you indicate)
Defer max to 401k from current job (using pension to replace take home pay). This might significant lower your tax bracket, depending on situation.

Have you analyzed this?

I apologize for not being clear. Actually, what I meant to say is that I am leaning toward plan 1 (work 7/8 more years and wait until then to take both pensions). In other words, continue as I have been and do not change anything until age 60. However, in light of your suggestion, "take both pensions now, Defer max to 401k from current job (using pension to replace take home pay)," that is definitely an option I'll consider. I have not analyzed this, but I will to determine the tax efficiency. The other thing I realize is that even if it may not be in my best interest to change anything now, I'll always have the comfort of knowing that if I need to or want to make a change within the next 7/8 years, I'll have that option.

 

[martyb]

Hey, I used to hang out in Buda, TX! Not relative to the post, but I just thought I'd throw it in there! When I lived in Austin and later, Bastrop, I had friends in Buda. OK, back to the original post..........