7% fully inflation protected annuity - worth it?

[donheff]

The recent annuity ROI posts got me thinking about an "investment" I did not make but that a few others on this board might be eligible to consider. The Federal Civil Service Retirement System allows employees to increase their annuity through voluntary contributions. I believe FERS does as well, but I don't know what the provisions are with that. An employee can dump as much as 10% of their aggregate Federal salary into the retirement system and increase their annuity $7 per $100 contribution, i.e., 7%. (This would be reduced if electing a survivor benefit and varies with the age of the survivor.) The annuity rate increases by $.20 for each year over 55 the person is when retirement commences.

So, someone retiring from the government at 55 could purchase a fully inflation protected annuity starting at 7% with virtually zero risk of failure. By comparison, Vanguard's inflation protected SPIA would be about 4.9% for a single 55 YO male. In retrospect I think I blew this one. That sounds like a pretty good deal to me.

Also, since the government is supposed to do everything on a well supported actuarial basis, do you suppose 7% (at age 55) reflects a "fair" price before profit for an inflation protected SPIA from a cost effective provider?

[Want2retire]

No, FERS doesn't permit that.

If you look at the TSP annuity calculators at The Official TSP Home Page, maintained by FRTIB; 2008-05-22, that will give you some idea of what kind of return you can expect from an annuity at age 55.

[Goonie]

My pension fund has about the same deal. The Illinois Municipal Retirement Fund (IMRF) allows an individual to put in extra money which IIRC, like the FCSRS, has the 10% limit, and IMRF also guarantees a 7% return, tax deferred. They keep your additional contributions separate from your normal contributions, then upon retirement you receive 2 separate pension payments per month.....the 1st being your normal pension, and the 2nd being from your additional contributions.

Unfortunately, I didn't find out about that deal until my last year of employment, while I was researching all of the details of the IMRF pension plan. At that point it was just a bit late to mess around with. I have, however, passed the info on to my former co-workers, and one of them is now taking advantage of the 7% guarantee.....the others are investing most of their extra income in the adult beverage industry.

[hellbender]

Originally Posted by donheff

So, someone retiring from the government at 55 could purchase a fully inflation protected annuity starting at 7% with virtually zero risk of failure. By comparison, Vanguard's inflation protected SPIA would be about 4.9% for a single 55 YO male. In retrospect I think I blew this one. That sounds like a pretty good deal to me.

The 7% annuity payable through participation in the Voluntary Contibutions Plan is NOT adjusted for inflation. Sorry.

[RockOn]

Originally Posted by hellbender

The 7% annuity payable through participation in the Voluntary Contibutions Plan is NOT adjusted for inflation. Sorry.

BIG difference

[donheff]

Originally Posted by hellbender

The 7% annuity payable through participation in the Voluntary Contibutions Plan is NOT adjusted for inflation. Sorry.

Originally Posted by RockOn

BIG difference

Big difference indeed. I read the provisions to indicate that the payments would result in a 7% of investment increase in your Federal pension, not a fixed annuity. Thanks for the correction.

[RockOn]

Originally Posted by donheff

Big difference indeed. I read the provisions to indicate that the payments would result in a 7% of investment increase in your Federal pension, not a fixed annuity. Thanks for the correction.

That's better isn't it. The pension is a COLA'd annuity with much less risk.