kyounge1956
Thinks s/he gets paid by the post
- Joined
- Sep 11, 2008
- Messages
- 2,171
I'm a 52-year old single and have been working for my city government for 23+ years. I had been hoping to retire at age 55, but a recent consultation with a financial planner has me doubting whether this will be possible.
Retired City employees receive a defined-benefit pension (based on age & # of years of service). I also have some tax-deferred retirement savings and a Roth IRA, but my main question has to do with the pension. It increases 1.5% yearly, but is guaranteed not to go lower than 65% of its original purchasing power. If I did the math right, at (constant) 3.5% inflation it would take 23 years to shrink that much, and after that would keep pace with inflation.
I asked the financial planner to determine whether I had enough in pension benefits and personal savings to fund a bare minimum budget until age 100. (Social Security was to be left out of the calculations to provide a cushion and because I figure in order to keep the system from going bust either benefits will be reduced or taxes will be raised.) The difficulty is that my financial planner's Monte Carlo software is unable to model the 65% guarantee. According to the results she has given me, not only is my current savings rate inadequate, in order to retire even by by age 57 (=30 years of service=maximum pension) I would have to save an impossible amount on top of making maximum contributions to my Roth and tax-deferred savings. She says the only thing she can do to estimate the effect of the guarantee is raise the annual rate of increase on the pension above 1.5%, but I thought that would overstate the amount of money available in the early years of the scenario, which would then adversely affect accuracy in the later years.
I've run a number of scenarios using "Flexible Retirement Planner" (I found this group via a link from their support forums). Replicating the figures I gave to the financial planner on FRP as closely as I was able to, and using a "no COLA" pension for the full length of the scenario, gave about the same probability of success as she reported to me. (The "no COLA option is roughly equivalent to the FP's projection--she raised the needed income 1%/year faster than inflation, and that was OK with me since medical expenses go up faster than the general inflation rate.) I also tried several pairs of scenarios with and without the 65% guarantee on the later years of the scenario. That single change often raised the percentage of successful scenarios as much as 20 percentage points, compared to a "no COLA" pension for the entire length of retirement. I'm not surprised that the guarantee makes a difference, but I am kind of surprised at how much difference it made, and I'm wondering how much confidence I should place in my own calculations (and the Flexible Retirement Planner site's) vs a CFP's.
Has anyone else run into this situation? Did your financial planner (if you used one) have a way to include in any projections the guarantee that the pension wouldn't shrink beyond a certain point, and if so, how? Is there a way to model my pension accurately in a software program that will only accept a single COLA? My planner is fee-only, so I don't want to keep dinking around trying this idea and that, at umpteen dollars an hour.
Karen
Retired City employees receive a defined-benefit pension (based on age & # of years of service). I also have some tax-deferred retirement savings and a Roth IRA, but my main question has to do with the pension. It increases 1.5% yearly, but is guaranteed not to go lower than 65% of its original purchasing power. If I did the math right, at (constant) 3.5% inflation it would take 23 years to shrink that much, and after that would keep pace with inflation.
I asked the financial planner to determine whether I had enough in pension benefits and personal savings to fund a bare minimum budget until age 100. (Social Security was to be left out of the calculations to provide a cushion and because I figure in order to keep the system from going bust either benefits will be reduced or taxes will be raised.) The difficulty is that my financial planner's Monte Carlo software is unable to model the 65% guarantee. According to the results she has given me, not only is my current savings rate inadequate, in order to retire even by by age 57 (=30 years of service=maximum pension) I would have to save an impossible amount on top of making maximum contributions to my Roth and tax-deferred savings. She says the only thing she can do to estimate the effect of the guarantee is raise the annual rate of increase on the pension above 1.5%, but I thought that would overstate the amount of money available in the early years of the scenario, which would then adversely affect accuracy in the later years.
I've run a number of scenarios using "Flexible Retirement Planner" (I found this group via a link from their support forums). Replicating the figures I gave to the financial planner on FRP as closely as I was able to, and using a "no COLA" pension for the full length of the scenario, gave about the same probability of success as she reported to me. (The "no COLA option is roughly equivalent to the FP's projection--she raised the needed income 1%/year faster than inflation, and that was OK with me since medical expenses go up faster than the general inflation rate.) I also tried several pairs of scenarios with and without the 65% guarantee on the later years of the scenario. That single change often raised the percentage of successful scenarios as much as 20 percentage points, compared to a "no COLA" pension for the entire length of retirement. I'm not surprised that the guarantee makes a difference, but I am kind of surprised at how much difference it made, and I'm wondering how much confidence I should place in my own calculations (and the Flexible Retirement Planner site's) vs a CFP's.
Has anyone else run into this situation? Did your financial planner (if you used one) have a way to include in any projections the guarantee that the pension wouldn't shrink beyond a certain point, and if so, how? Is there a way to model my pension accurately in a software program that will only accept a single COLA? My planner is fee-only, so I don't want to keep dinking around trying this idea and that, at umpteen dollars an hour.
Karen