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The DBP Trap
Old 09-29-2004, 01:42 PM   #1
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The DBP Trap

(It's a long boring essay particularly if you're going to SWR someday) Given: I'm 49, still working.

Defined Benefit Plans (Local Government)

It's an entirely different animal. There really is no SWR (or you could say it just unchangeable in exchange for being totally safe), and it changes peoples perceptions of FIRE because of it. Since there never is that large pot of money to stare at, scrimp and save to achieve, there is no appreciation of what it took to get there. When I present my coworkers with the facts about ER as "I" perceive them, I tend to get suprised looks. Some are scared, some are in rapture, some give me lip service and go about their work till they die business, and some when they actually look at the numbers can't stand the fact that if they work just one more year they'll get a bit "more" dough and be closer to taking home either that 70-80% the banks try to sell us on, or better yet, why don't I work until my take home is 100 percent! And the person who's job I know fill (finally) kept working until she literally makes more now than when she worked here. Go figure. And she's not old enough to collect SS yet!

One of the problems is at least for SWR types, it's about having a goal to achieve a very large nestegg (in terms of absolute dollars) in order to be able to safely live on those bucks forever or thereabouts. One gets to watch this build over a lifetime of work, each year reveling in one's success and knowing one is that much closer to the "goal" whatever it might be, and sure it probably changed over one's lifetime, but the concept is there is a great appreciation that something was sacrificed to achieve a worthy goal, and darn it your going to ER now and enjoy the rest of your life.

For the DBP'ers it's a odd little chart with increments that try very hard to entice one into staying just a bit longer. Compounding this is the fact that the benefit is typically calculated based on highest salary. In a typical career this is going to be achieved at the very end, i.e. next year, not this year, and so on, unless one as literally reached the highest rung of the ladder. Add one more enticement via for those whose job classifications are pay "ranged" there is the issue of the virtually guarrenteed raise. In all the jobs where I work the salary ranges start 20 percent below the top of the range, so if one does a decent job, their are 4 years of 5 percent increases built-in, regardless of what the union is able to negotiate, which lately is of course nada.

So a DBP'er can have the best of ER intentions and then be drawn into the Stay-A-Bit-Longer-Trap. It's purely a math excercise in the end. The actuaries know you're going to die pretty soon anyway, so for every year you stay, they figure it's one more they won't have to pay your pension. Added to that it's another year you (in the background as most DBP'ers don't really notice this deduction) paid into the retirement system so their's more funds on the books for your future benefit. Using yours truely as an example, and I'll just use percentages to take the possibility of promotions and/or step raises out of the equations, my situation looks like this. (Thankyou EngrGal for getting me to think of it in this fashion from the previous "FI and now what?" thread.

50 - 32% 54 - 48% 58 - 68%
51 - 36% 55 - 53% 59 - 73%
52 - 40% 56 - 58% 60 - 78%
53 - 44% 57 - 63%

My coworkers look at the chart and most figure something along the lines of "Way-Cool, I can get out at 59 with nearly three-quarters, and I've heard that should be almost enough if I save some money in my Deffered Comp Account (457) along the way!" My take of the chart was always, "You mean we can actually retire at age 50 and get a inflation adjusted pension? How cool is that?"

When I point to ages a bit earlier on the chart I get shutdown for the most part, with a very few takers. "How could I live on that?" meaning "How could I maintain my lifestyle of conspicous consumption with fewer dollars on that pittance?. OK I understand, but again that's where the trap comes in. In the SWR world, there are practical limits to how much one can expect to accumulate over one's lifetime, and even then there are market forces that may work for or against you in the afterwork life to determine the standard of living you achieve.

For the DBP'er it's just so black and white, too many are tempted to work far too long for the big payoff, and never stop and smell the roses.
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Re: The DBP Trap
Old 09-29-2004, 01:44 PM   #2
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Re: The DBP Trap

When DW and I decided that working forever wasn't in our best interests 6 years ago, the numbers in the chart actually weren't as good as they are now, they've enhanced our retirement after the boom years by about a third. The Age 50 number was originally about 25%. We determined that if we could put some bucks away for 7 years to supplement 2x25%= 50% of roughly one of our salaries we could survive in ER with a little fun and travel money from whatever nestegg we could accumulate in the 7 year period. So you see in our case we were going to end up with a little SWR calc anyway, but for extras rather than essentials (we hoped). As things don't always quite work out as planned, DW is already ER'd a bit sooner than expected and therefore not contributing to afforementioned nestegg. And I've fallen into the DBP trap by being promoted into the likely highest position possible for someone with my resume, meaning I've picked postion 2, and age 51 on the chart. That maxes salary for the calculation and gives me one extra year to save some 457 dollars for the world-tour fund.

Current expenses are running about 45% of gross for me, I'm in the ballpark as far as downsizing and I expect to increase my 457 withholding if I can just kick this need to accumulate axes as represented by my sig. 32 and counting. They do keep their value well, but hardly a great investment. Fun as heck to create music though, something I'll be doing much more of in my FIRE life.

So based on the previous thread my chart has no particular "Sweetspot" like EngrGal's, just the assurance that I'll meet my untimely demise sooner if I stay later. I vote to leave the workplace sooner (July '06) and see if I can cheat the actuarial tables and live to a ripe old age. For me it's about being free to pursue my other interests, hobbies, and pastimes, and being with in close proximity of my DW as much as possible 7/24. That is SO much more important to me than seeing how many dollars I can suck out of my employer my staying extra years, or having a slightly better income in trade for another few rounds of office politics.

The irony for me is when DW and I made up our 7 year plan, our work situations were not good, work was becoming well, "work", where before it had been a challenging, vibrant, mental excercise that chewed up time and left us with great satifaction. Things really soured, and more for her than me, now she's completely and unequivacibly out of the workforce forever, and my situation is pretty darn good. I think I'll be able to work these last <2 years without too many worries, I've got a good crew, and I'm hopefully setting them up for success. Plus, they'll all know more about FIRE than any unit in the history of the universe, it's my favorite subject, just ask 'em they'll tell ya. wink wink

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Re: The DBP Trap
Old 09-29-2004, 02:48 PM   #3
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Re: The DBP Trap

I don't understand this DB plan since it doesn't seem to take into account years of service.... if it really works how you described, why doesn't everyone go work for a year with your local government, get a pension, then "retire"? Or even better, retire for 10 years, return to work again, then retire a second time?

I'm just speculating here, but is that a table that shows the actuarial reduction amounts if you take your pension early? in that case, at age 50 you would get 35% of your pension amount.... unless your pension is 100% of your AFC... in which case, I want to work where you work


Edit: I just wanted to say that your pension is MUCH better than the one we have in WA state... the earliest you can retire here is 55, and that carries a HEFTY reduction in your benefits.... you would get 37%*(1% * Years * AFC).... which comes out to be a few hundred bucks for even the highest paid workers.....totaly worthless.
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Re: The DBP Trap
Old 09-29-2004, 03:22 PM   #4
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Re: The DBP Trap

Quote:
I don't understand this DB plan since it doesn't seem to take into account years of service....
Oops! Left that part out. Yes years of service directly effect the benefit amount. In our case, you need a minimum of 5 years of service. The Calc is commonly reffered to as 2%/55 meaning at age 55 you would receive 2 percent of your max salary (best 12 months) times the number of years you worked. Everything else is based on that assumption, i.e. if you opt out before age 55 you'd get less than 2% per year, and if you stay longer you'd get more than 2% per year.

Oddly enough we do have people that retire for a while, and then DO come back, "buy back" the intervening years, and re-retire later. Some mortage their houses to the hilt to do it, and after the enhancement I mentioned a few years ago, some did it and made out like bandits afterwards. In the long run...

Marshac, right now I have 21 years of service, 22 at age 50 and so on
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Re: The DBP Trap
Old 09-30-2004, 08:08 AM   #5
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Re: The DBP Trap

So if one were to retire at 50, they would get 32% of those benefits? That's still not bad... WA state has "Plan 2" which gives 2% like yours, but the actuaries aren't nearly as nice.

The ONLY good thing about our DB system is that if you have 20 years of service, you get an extra 3% every year until you tap the pension... at least that way you're keeping up with inflation (maybe) until you use it... if I manage to stay in the system until for another 18 years (I will be 43), I'll try delaying tapping the DB for as long as possible since I would not only be getting the 3%/year, but my benefit wouldn't be reduced as much... as you mentioned though, there is no real "sweet spot" in the chart, and a $300 benefit with 20 years at age 55 is laughable.



Age <30 Years 30+ Years
55 37% 70%
56 40% 73%
57 43% 76%
58 49% 79%
59 55% 82%
60 61% 85%
61 67% 88%
62 73% 91%
63 82% 94%
64 91% 97%
65 100% 100%
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Re: The DBP Trap
Old 09-30-2004, 09:58 AM   #6
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Re: The DBP Trap

Quote:
When DW and I decided that working forever wasn't in our best interests 6 years ago, the numbers in the chart actually weren't as good as they are now, they've enhanced our retirement after the boom years by about a third.
Oh my, that sounds like the San Diego meltdown situation. Whenever somebody offers you a deal that's too good to be true, take the money and run!
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Re: The DBP Trap
Old 09-30-2004, 01:48 PM   #7
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Re: The DBP Trap

Quote:
So if one were to retire at 50, they would get 32% of those benefits? That's still not bad... WA state has "Plan 2" which gives 2% like yours, but the actuaries aren't nearly as nice.

The ONLY good thing about our DB system is that if you have 20 years of service, you get an extra 3% every year until you tap the pension... at least that way you're keeping up with inflation (maybe) until you use it... if I manage to stay in the system until for another 18 years (I will be 43), I'll try delaying tapping the DB for as long as possible since I would not only be getting the 3%/year, but my benefit wouldn't be reduced as much... as you mentioned though, there is no real "sweet spot" in the chart, and a $300 benefit with 20 years at age 55 is laughable.



Age <30 Years 30+ Years
55 37% 70%
56 40% 73%
57 43% 76%
58 49% 79%
59 55% 82%
60 61% 85%
61 67% 88%
62 73% 91%
63 82% 94%
64 91% 97%
65 100% 100%

Ok, so now you've got to explain between the lines so I can understand you plan. If I take the chart literally, it would appear that someone with 29 years i.e. <30 gets skewered compared to his over 30 years bretheren, but more importantly is their a minimum age to "get" a pension at all. My chart started at 50 because if you leave service before then you just have to wait until you are 50 for the pension to begin or be a fool and cash out and get no pension ever.

Marshac I want to see your chart for ages 50 to 54...

Also our minimum years of service if I didn't spell that out is 5 years to earn any pension although it would be pretty mild.

There is no real incentive for me to wait because of inflation as the pension is inflation indexed, so when inflation kicks in again, I'm covered up to 3 percent a year, with years the exceed that carrying over and redeemable in years down the road when inflation slows down again. Last year on the magic day that lots of retirees like to pick, the day just before the COLA, they got a whopping 1% increase in their pension calc by picking March 31. Isn't neat the the "magic" day is April Fools!

Did I mention they also alot $370 divided by 20 for each year of service up to 20 for a Health Plan. That's a nice bonus as the Kasier Permanente Plan here for Retiree plus spouse costs $350 per month, and anyone with 20 years or more of service gets the entire $370 cafe over and above the pension. One can use the excess to buy most of Dental and Vision. Keeps Health costs out of your expense ledger.

You know Marchac, I'm never going to worry about you too much. I was so young and stupid at your age and you're young, smart, and so very aware of the possibilities of FIRE. And if all goes well and the creek don't rise you've got an extra decade to save a couple extra bucks for a rainy day.

JonnyM - 20 months to go, tick tick tick 8) 8) 8)
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Re: The DBP Trap
Old 09-30-2004, 02:29 PM   #8
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Re: The DBP Trap

You're observations are correct... if you leave with 29 years of service, you get hosed big time on the actuarial table

We don't have any charts from 50-54 since the min age to begin a pension is 55 here. You don't have to work until age 55, but you can't start it until you hit 55. You also need at least 10 years of service before you're entitled to receive any sort of benefits. The state isn’t done shafting you yet...it gets better...If you don’t retire DIRECTLY from state service (draw a pension as soon as you leave), you are no longer eligible for health benefits of any sort...So the fact that your plan provides a $ amount for your years of service is pretty cool.

I have always thought that our state retirement system is so poor that they should ditch the whole defined benefit portion and go with a 100% defined contribution system.... some sort of 401k matching would be MUCH more attractive to me than some cruddy pension.
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Re: The DBP Trap
Old 10-01-2004, 06:28 AM   #9
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Re: The DBP Trap

Johnny M.,

Interesting thread. Yeah, work another year and the retirement kitty goes up. But the same thing happens with the 401k and IRA savings... My pension is smaller, increases more slowly, and isn't available as early as yours is - so I notice the deferred savings bump up in my spreadsheet more so than the pension bump up. If your real return on the deferred savings is 5%, your SWR goes up 5% (assuming really long payout periods) as compared to the previous year. I have between 12 and 15 years to go so the I'm not about to torture myself with "the decision" quandaries yet.

Thanks for sharing,

Chris
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Re: The DBP Trap
Old 10-01-2004, 10:39 AM   #10
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Re: The DBP Trap

I retired on a dbp at age 58 when I was offered a 2 year service credit incentive. Because dbp 's are based on years of service, age, and income (highest single year in my case) the incentive was always there to wait just one more year. I'm glad the service credit was offered and that I took it - otherwise I'd still be working - even though my work was ok, compared to er and the perspective I now have after being retired just 3 months, I view what I did as pure drudgery.

My next decision will be to decide on whether or not to purchase five more years of service credit through CALPERS.
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Re: The DBP Trap
Old 10-02-2004, 06:48 PM   #11
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Re: The DBP Trap

Quote:
I retired on a dbp at age 58 when I was offered a 2 year service credit incentive. Because dbp 's are based on years of service, age, and income (highest single year in my case) the incentive was always there to wait just one more year. I'm glad the service credit was offered and that I took it - otherwise I'd still be working - even though my work was ok, compared to er and the perspective I now have after being retired just 3 months, I view what I did as pure drudgery.

My next decision will be to decide on whether or not to purchase five more years of service credit through CALPERS.

It's great to hear of a true-life success story. I fear that those offers will be few and far between in the future as more and more boomers retire and the aging workforce begins to slowly and surely shrink. There won't be so much incentive to downsize.

As to the buyback, I've heard the rumours of same, and have done some research, I don't think it's an option here yet, I used a Military calculator to come up with a very rough estimate anyway. It looked extremely favorable. Something on the order of a 5 year payback! If my Locality gets progressive and allows employees to use their 457 money to buy years of service, I'll be the first one to sign up, regardless of the terms.

It's just too wondrous a method to lock in sure returns with no risk and not have to play the SWR game for the rest of my life, like so many on these boards seem to be forced to do. Let us know when you get some data to digest, sounds like a fun position to be in, if the numbers crunch like I think they are going to for you rivverrat.
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Re: The DBP Trap
Old 11-20-2004, 05:32 AM   #12
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Re: The DBP Trap

I think the DBP trap is just another excuse for fear of taking the plunge. It will always be the case that delaying ER or just R for that matter will build your nestegg...the question is at what cost.

When you start talking about ER at 50, you are in a position of counting down the few good years you have left. Even if you are in excellent health, 50 and 35 are worlds apart.

It has been said that youth is wasted on the young and retirement is wasted on the old. :-/
My point, I guess, is to get out while you can...particularly if you are unhappy in your job. Then, find something part time that you really enjoy if you just can't get over the idea of having to depend on your nestegg alone.

I am 52, at 55 I will have 30 years with the FedGov and will get a DBP pension of about $40K w/health ins. I will also have ~$300K cash. But those are not the important numbers: The important numbers have to do with expenses.

In that regard, I am doing what I can to hold the line at under $28K, so I'm good. But my position would be futile if my expenses were at 100% of net!

At 55, although not old and in relatively good health, I do not, regardless, feel like a spring chicken. If I am blessed with 10 more good years, I want to spend them enjoying what I enjoy: Not working just to add 1.8% to the kitty and at the expense of one of those good years I'm praying for. It is simply not a good bargain in my mind.
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Re: The DBP Trap
Old 11-20-2004, 07:59 AM   #13
 
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Re: The DBP Trap

Good post consejo! I agree that 50 and 35 are
"worlds apart", and now I'm looking back from 60.
Anyway, your point about "fear" of pulling the trigger,
i.e. "How much is enough?" "Can I really do it?"...............
When I jumped ship I was at the top of my game
income-wise, and so I gave up a LOT of money
(income). But, what I gained has proven to be infinitely more valuable.

John Galt
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