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Help. The best course
Old 09-12-2013, 08:07 AM   #1
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Help. The best course

Hello all, I'll will be retiring in 2019 from police work, total of 31 years. Not knowing what course to take with my retirement funds. Im currently in a 7 year D.R.O.P. plan, investing in total equities managed by the city I work for. At the end I have several options, take the lump some from my drop account ( roughly about 500K) and take the lump some from my pension (roughly about 800K). Or when I separate from the city, keep my monthly pension checks comming (roughly 5800 a month) and place my drop funds in a IRA or other type to draw off the interest annually.
Other factors come to play. Age at retirement 53, I have two children they will be 13 and 10. My mortgage will be 200K@ 5.1%.. I would like to be free of the mortgage when I retire however not too keen on paying the big penalties and the higher tax braket I will be in to uncle sam...
Im basically right now cash poor but looking forward to retirement to get out of cc debt as well. I also would like to invest in a college fund for my children but cant afford it now, waiting for retirement.
Im very worried about combining the two lump sums and investing in the market putting my entire nest egg out there. I would be constantly be worried about losses.
I would welcome the advice and greatful...I have about 6 years left and its around the corner so to speak..
Thank you!
Gene
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Old 09-12-2013, 08:18 AM   #2
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In my opinion, taking the pension at $5800/month vs a lump sum pension payout of $800K is a no brainer for taking the monthly pension.

Good luck, I'm sure the next 6 years will go by quickly.
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Old 09-12-2013, 08:39 AM   #3
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Originally Posted by y8735 View Post
when I separate from the city, keep my monthly pension checks comming (roughly 5800 a month) and place my drop funds in a IRA or other type to draw off the interest annually.
Sounds best to me too.

Near term, I would concentrate on the CC debt first, college funds second.
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Old 09-12-2013, 09:20 AM   #4
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Originally Posted by DFW_M5 View Post
In my opinion, taking the pension at $5800/month vs a lump sum pension payout of $800K is a no brainer for taking the monthly pension.

Good luck, I'm sure the next 6 years will go by quickly.
+1


Get rid of that CC debt asap.
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Old 09-12-2013, 10:06 AM   #5
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+1

Get rid of that CC debt asap.
Refinance the mortgage too?
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Old 09-12-2013, 10:13 AM   #6
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Same as the above. Also refinance the mortgage if you can, before you retire. You can reduce your interest rate a bit. There shouldn't be any mortgage prepayment penalties unless you have an unusual loan. Not sure what other DROP options you have. If you have to manage the portfolio, something like a simple 40% total stock market/60% total bond market (or pay of the mortgage as part of the bond side), or Vanguard Wellesley mutual fund, or Vanguard target retirement 2020 mutual fund might be appropriate.
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Old 09-13-2013, 08:09 AM   #7
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Welcome from another LE retiree!

+1 on paying off the cc debt asap. That's a "financial death of a thousand cuts" if it runs on.

The debate over paying off the mortgage runs on endlessly and there are good arguments on either side. In the end I suspect it has more to do with how one feels about "not owing nobody nuttin'". Mine is paid off. YMMV.

Taking the pension instead of a payout seems like a no-brainer.
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Old 09-13-2013, 09:50 AM   #8
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Welcome to the forum.

MRG
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Old 09-13-2013, 10:44 AM   #9
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Im also a police officer who has a DROP option to the pension (I'm retiring in 16 months). Do you mind giving details of how yours works? Ours is basically a cash account which pays interest equal to the running 10 yr avg returns of the pension fund, but is capped at 8% minimum and 10% max. Its currently paying 8.78%.

If your only option with your DROP account is to take the money or roll to an IRA, I would roll it and invest it in accordance with your risk tolerance. Long term you should be able to earn more than you pay in interest on your mortgage (which you should refinance). You'll get killed in taxes if you take the cash.

Like everyone else, I would take the monthly pension payout and not the lump sum.
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Old 09-13-2013, 11:10 AM   #10
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The monthly pension looks pretty darn good to me. Plugging the $5,800 benefit and the $800,000 lump sum in excel, I get an IRR of 8.4% for a 40-year retirement and 7.8% for a 30-year retirement. That's pretty hard to beat in the stock market without taking some risk. I would only consider the lump sum if you expect a short life... best wishes for a long retirement!
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Old 09-15-2013, 07:41 AM   #11
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Pension looks good -

only question: what would happen if your city declares bankruptcy like Detroit - is the pension guaranteed in entirety ? I've held muni bonds that went to zero value when a certain city declared bankruptcy.
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