Newbie - Looking for advice over lump sum payouts

[jaysmith2323]

I'll try to be short to summarize my situation. I am 36 years old, married with 2 kids. I have worked for the same employer for 15 years and the current retirement structure will allow me to retire at 20 years and age 45. You can retire anytime after 10 years of service but it effects the annual payout. The annual payment (at 20 years) would be 50% of my salary for the rest of my life and a health insurance plan for myself and spouse (although it costs $$ per month). My wife and I are strongly considering relocating which would require me to break service early and find a new job. Doing so would leave me two options: lock in the retirement with only 15 years in which would pay me roughly 37.5% of my salary (about $27,000 per year) for the rest of my life but I would not begin collecting until age 45 (9 years). The other option is to take a lump sum payout (about $100,000 minus taxes, fees). This option would allow me to pay off my house and eliminate $1,500 a month in a mortgage payment (most of which is interest).

One thiing that has caused me a great deal of concern is that I am a state employee and the legislation is trying hard to change our retirement structure. These changes range from changing the years needed to retirement, lowering the annual payouts, and numerous other things. They have also begun to add 'fees' to current state retirees so I guess no one is safe. The writing on the wall is not good - changes are coming and I don't get warm and fuzzies over it.

I am struggling with this and would love some advice!

Thanks

Jason

 

[Arnie]

Welcome. Already being a user of ESPlanner myself, the first thing that comes to my mind is to suggest you run the numbers through it or something similar to see what scenario is best for you in terms of impact on your consumable dollars over your lifetime. I'm sure others will have other ideas - probably some that don't involve buying software.

 

[MasterBlaster]

jaysmith2323:

This isn't a trivial exercise. You need to assume a discounted rate of return and a mortality model. You can go here and play around with their calculator: https://www.pensionbenefits.com/calc...item=cash_flow

The concept is to translate a pension annuity stream into a net present value which can be compared to other options.

There are some rules of thumb though. For a non-cola pension, multilpy the (ANNUAL = monthly X 12) pension payment by 16X to get a net present value. For a COLA'd pension use 25X.

 

[ATC Guy]

Nobody knows what the future would hold. Looking at what we know of right now however, I would say waiting for the 37.5% payment sounds best. If you take $100,000 and subtract taxes (I'm assuming income tax) that brings it down to about $80K from federal tax alone. Not sure if the state will tax it. Best case scenario you have 80K. Now if you plan on paying off your motgage saving $1,500/month immediately. This adds up to $18,000/year only for the remaining term on the mortgage. You are essentially trading a forever pension of $27,000 for a short term monthly savings of $18,000. Yes you will have to wait for it, but once you hit 45, you will have the option to FIRE ith your current savings plus your guaranteed pension.

I understand your concerns about the risk of your pension and you will need to take that into account when making a decision. You know more than I do about the current situation in your state and what the most current news is on that. If it looks like the tide will change in your favor for the lump sum, go that route.

 

[Mulligan]

You are wise in thinking this through. Some thoughts to maybe ponder. 1) If you take lump sum, and pay off house, are you content in starting your retirement plan all over again at your current age with a new employer? 2) Any way you can get better infomation on the status of your pension? 3) 9 years of inflation will devalue that $27,000 pension, and even then your just 45. 4) Are you wanting to make a career change (in an unhappy or unstable job)?
Most pension reform for government workers has only been nibbling around the edges; cola reductions and reduced payouts for incoming workers, usually leaving current workers already well in to the system alone. Are you sure you maybe be reacting only on fear of the unknown? Good Luck on your decision as it is a major one!

 

[jaysmith2323]

You are wise in thinking this through. Some thoughts to maybe ponder. 1) If you take lump sum, and pay off house, are you content in starting your retirement plan all over again at your current age with a new employer? 2) Any way you can get better infomation on the status of your pension? 3) 9 years of inflation will devalue that $27,000 pension, and even then your just 45. 4) Are you wanting to make a career change (in an unhappy or unstable job)?
Most pension reform for government workers has only been nibbling around the edges; cola reductions and reduced payouts for incoming workers, usually leaving current workers already well in to the system alone. Are you sure you maybe be reacting only on fear of the unknown? Good Luck on your decision as it is a major one!

1.) I have 15 years left on my mortgage so paying that off will save me a sustantial amount of $$ and would have a significant impact on my quality of life now, but clearly may effect me later. I am willing to start a new retirement plan but I would need to make this change ASAP - I am not getting any younger.

2.) No concrete news until July 1st.

3.) Inflation is a concern as is the money I will save if I eliminate my mortgage.

4.) I am absolutely looking to make a career change. I am unhappy and burnt out in my current role (law enforcement) - looking to use my MBA to change gears.

 

[LauAnn]

Any chance that if the state does cut the retirement benefit it would be on a 'grandfathered' basis? i.e. it would impact only new hires rather than those currently employed?

In any event, my first reaction was "What a sweet deal -- 50% of salary after 20 years!"

I've been at the same place for 32 years, and my retirement benefit is a far, far, far, cry from this.

 

[Mulligan]

1.) I have 15 years left on my mortgage so paying that off will save me a sustantial amount of $$ and would have a significant impact on my quality of life now, but clearly may effect me later. I am willing to start a new retirement plan but I would need to make this change ASAP - I am not getting any younger.

2.) No concrete news until July 1st.

3.) Inflation is a concern as is the money I will save if I eliminate my mortgage.

4.) I am absolutely looking to make a career change. I am unhappy and burnt out in my current role (law enforcement) - looking to use my MBA to change gears.

When one becomes unhappy in their career, that makes it harder to hang on to increase the pension. I experienced the same thing except Im about ten years older than you. Like most things in life I chose the middle path. That being working 3 years past the minimum retirement, but 2 years short of the full 30 year term. I really wanted to jump at 25, but staying three more years raised my pension about 15K. Enough of a difference where I can make it without working ok,if I chose to. Looking back I'm very glad I held out those years. Dont regret not staying for the other two even though that clipped me for about 10k loss in retirement salary.
I know my opinion is wanting you to think hard about maximizing your pension because this might be your best, last shot at a good...... But that is just me, and based on my personal experience.