LPuzzle checks in

[lpuzzle]

I'm not yet FIRE, but look to be at 46 yo. My plan was not the 80/20 mix, but a state government job which allows early retirement after 25 yrs of service(with a penalty). However, this year, the legislature (GA) passed a law allowing anyone with 25 yrs to buy in 3 years, allowing me to retire with 29+ years credit (1+ yr in unused sick leave), thereby overcoming almost all of the ER penalty. Based on my calculations, the amount needed to buy in 3 years will in essence be a 10% inflation adjusted annuity over the rest of my life. A no-brainer as some would say. The resulting pension (w/medical insurance) will supply more than my current spending level. Hence, the rest of my nest egg is pure emergencies/fun money. My nest egg was acquired by paying off my mortgage ASAP (took 5 years) and saving/investing all the extra monthly income after that. Still invest/save over 50% of my yearly gross income. Now I'm, in my view, overweighted in equities (70%). I'd like to move to a 50/50 split. However, my losses since Mar 2000 are just 9% of my total portfolio, so have not been drilled as much as many by the stock market slide.

I'm a high school chemistry teacher - the front end pay may not be the best, but the back-end (pension) sure is nice. Should mention however, that I must contribute to this pension fund every year (4.5% of salary), along with SS.

 

[intercst]

lpuzzle writes,

I'm not yet FIRE, but look to be at 46 yo. My plan was not the 80/20 mix, but a state government job which allows early retirement after 25 yrs of service(with a penalty). However, this year, the legislature (GA) passed a law allowing anyone with 25 yrs to buy in 3 years, allowing me to retire with 29+ years credit (1+ yr in unused sick leave), thereby overcoming almost all of the ER penalty. Based on my calculations, the amount needed to buy in 3 years will in essence be a 10% inflation adjusted annuity over the rest of my life. A no-brainer as some would say. The resulting pension (w/medical insurance) will supply more than my current spending level.
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Congratualions!

This sounds phenomenal! Just so that the rest of us can understand what a good deal this is, if you paid $1,000 to buy the extra 3 years, how much extra per month would a 46-year-old get in his pension benefit?

intercst

 

[Prometheuss]

LPuzzle,

Congratulations on your pending retirement. I am sure that it is well deserved. How did you manage to limit your losses since March 2000 to just 9% of your total portfolio? As you sell of equities, what do you plan to buy?

Regards,
Prometheuss

 

[lpuzzle]

Intercst asks:

This sounds phenomenal! Just so that the rest of us can understand what a good deal this is, if you paid $1,000 to buy the extra 3 years, how much extra per month would a 46-year-old get in his pension benefit?

LPuzzle responds:

I cannot buy it in until I have the 25 yrs served, but taking inflation into account, my best estimate is that it will cost me between 70K-75K in early 2004. This will increase my pension by $9002 annually. Or, for each $1000 cost, the extra per year is between $120 - $130. This amount is subject to a 1.5% COLA each 6 months. In 9 years, I would have back my inflation adjusted principle and then am guaranteed the 12% or so return until I die. I figure this is equivalent to a 12% inflation-adjusted immediate annuity.

Prometheuss asks:

Congratulations on your pending retirement. I am sure that it is well deserved. How did you manage to limit your losses since March 2000 to just 9% of your total portfolio? As you sell of equities, what do you plan to buy?

LP responds:

All of my equities are not in indexes and my MUNI bonds pay in the 5.5-7.5% range. Individual stocks that have lifted my overall portfolio include GIS, SPG, AA, IP. 'Course I've also got some WCOM! But less than 2%of my overall portfolio was in it. GPS is my other individual loser. I also have some in Vanguard tax managed balanced, Van tax managed G&I and Van Extended Index along with a couple of other large cap mixed funds (received through inheritance - these will probably be what I sell off eventually). Until the slide this year, I was still showing an overall gain. Besides MUNIs, my bond holdings are I-Bonds (bought when paying 3% or more above inflation). My MUNIs I'm sure will be called at the first available date. I will move out of equities slowly as other MUNIs become available or I-bond rates improve. I also need to have some more pure cash/CDs sitting on the sidelines than I do now - to fund the retirement buy-in and a few more K available if the car goes kaput or some such.

 

[intercst]

lpuzzle writes,

I cannot buy it in until I have the 25 yrs served, but taking inflation into account, my best estimate is that it will cost me between 70K-75K in early 2004. This will increase my pension by $9002 annually.
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That's fabulous! A 46-year-old would only get about $3,300 per year if he put $75,000 in a commercially available lifetime inflation-adjusted annuity.

intercst

 

[lpuzzle]

lpuzzle writes,

I cannot buy it in until I have the 25 yrs served, but taking inflation into account, my best estimate is that it will cost me between 70K-75K in early 2004. This will increase my pension by $9002 annually.
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intercst :
That's fabulous! A 46-year-old would only get about $3,300 per year if he put $75,000 in a commercially available lifetime inflation-adjusted annuity.

LPuzzle:
Well, it's only fabulous because of the early retirement penalty imposed for from 25 - 30 years of service (7%/yr). I'm still hoping for a 25 yr, no penalty retirement (my pension would increase $8000 annually), so I can save my 75K! The system involved is the GA TRS (teacher retirement system) not the general GA plan for all state employees.

 

[intercst]

lpuzzle writes,

Well, it's only fabulous because of the early retirement penalty imposed for from 25 - 30 years of service (7%/yr). I'm still hoping for a 25 yr, no penalty retirement (my pension would increase $8000 annually), so I can save my 75K! The system involved is the GA TRS (teacher retirement system) not the general GA plan for all state employees.
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Oh, I see. They're penalizing you for more than the actual cost of getting the benefit 5 years earlier.

Again, looking at commercial inflation-adjusted life annuities, a 46-year-old could get a 4.30% inflation-adjusted initial benefit (i.e. $4,300 from $100,000 in the first year). A 51-year-old would get 4.66% or $4,660 from $100,000. That's only a 7.7% reduction for the 46-year-old. At 7% per year (35% total) the reduction is way more than the actual cost.

intercst