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100% Cola - for a fee
Old 10-01-2011, 08:57 AM   #1
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100% Cola - for a fee

Greetings! I am retiring at end of November and am looking at my pension options. My plan offers COLA at 1 point less than CPI-W, i.e. if CPI-W is 3%, COLA is 2%. There is an option for 100% COLA, for a reduction in monthly payout, natch. Kicker is, I'm retiring at age 58, and neither the regulat COLA nor the 100% COLA would start until age 62. Kick #2 is that I would have to start the reduction in payout NOW for the 100% COLA to be in effect at age 62. I ran numbers, and it seems like the 100% COLA option would start to truly payoff (meaning break-even for reductions ages 58 - 61) at around age 70, in about 12 years. My gut is to say it's not worth it, but I'm interested in what others think / have experienced. Once the break even point is reached, that one percent sure can make a diff, but I'll be miffed by the reduction in my pension for those first 12 years.

Thanks!
(Sweet December, here I come!)
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Old 10-01-2011, 09:08 AM   #2
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Do you need this extra money now? If you can't get by without it there's not really much to discuss. What happens if you live 'til you're 95? How much will you real income decline by then? At 1% per year that's 1/3. Will you be able to line on 1/3 less at that age?
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Old 10-01-2011, 10:53 AM   #3
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Basically, you would be buying an insurance policy. You are insuring your income against a long life span. What is that worth to you? Could you do better by taking all the pension $$'s you can and investing the difference?

It might be worth paying a CPA for an hour of his/her time and have them calculate some options for you. Given the amount of money you are talking about, one hour's fee is not that much.
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Old 10-01-2011, 11:14 AM   #4
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Quote:
Originally Posted by Tree-dweller View Post
My gut is to say it's not worth it,...
You're not giving us actual figures, so this is just gut-to-gut, but my gut agrees with yours. After healthcare, the biggest worry some of us have about financing retirement is a large amount of inflation in the future. But you're protected against very large inflation rates already with your 1%-less-than-CPI COLA, so I doubt that 1% a year would be worth all that much to you.
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Old 10-01-2011, 11:23 AM   #5
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You didn't mention whether the cola pension was from public or private world. The reason I'm asking is if it's public usually the first thing they do is nibble at your pension by eliminating or reducing the cola part of pension. Many states have either done this or are attempting to. Usually they do not reduce the actual pension. My cola pension this year was reduced from CPI to 2%. So this year I went from a 3.5% to 2%. I just saying the rules of the game can change, and as of right now in today's climate concerning pensions the 2 things they are doing are reducing colas, and reducing pensions for new hires. A higher upfront pension in the hand might be better than an extra 1% cola in the bush!
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Old 10-01-2011, 12:01 PM   #6
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Your starting point should be.... what level of inflation adjusted income will you (and your spouse) need?

Identify your spending needs!

Then identify the resources you have available and how to meet your income needs for the rest of your life.
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Old 10-01-2011, 03:12 PM   #7
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If inflation was running 5%+, a 1% reduction wouldn't amount to much. At the 3% or less it has averaged the last couple of decades, a 1% reduction is 1/3 or more of your annual adjustment.

Guess it depends on if you think the inflation rate will increase significantly in future years.
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Old 10-01-2011, 10:02 PM   #8
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I don't think it is even close financially speaking since you are already 58 your expected life far exceeds the break even point for taking the COLA. I would take the reduced payout if it is as I expect in the 5-6 percent reduction range.
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Old 10-02-2011, 02:19 PM   #9
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I don't think it is even close financially speaking since you are already 58 your expected life far exceeds the break even point for taking the COLA. I would take the reduced payout if it is as I expect in the 5-6 percent reduction range.
The reduction in the monthly pension payment to have 100% COLA vs CPI-W minus 1% is about $150/month, approx a 3% reduction. Sounds like a good deal, doesn't it? Of course, it's only worth it if I live long past 70 and if CPI-W is at 3% or more for 12+ years. Crystal ball, anyone?
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