Advice needed on withdrawal decision

[randall]

Retiring from teaching in 2 years (will be age 55 then). I will have a TRA (teachers retirement annuity) at that time-- with two options-- do I take $3000/month for 10 years followed by $1000/month for life, or do I take the other option of $2000/month for life?

I currently have about a million net worth (liquid mutual funds, 401k, home). I live a simple lifestyle (simple home I own--part of my net worth; single). My mother is in her 80s with advanced Alzheimers in a memory care facility and when she passes (I don't mean this to sound cold, just factoring it into my finances) I will inherit about $50k from her life insurance. My goals on retiring at 55 include moving somwhere warmer, low cost of living (like Prescott, Arizona), and buy a small home for around $200k.

I just am not sure which of the two TRA annuity options is the better choice?
randall

 

[Rich_by_the_Bay]

Randall, welcome to the forum, and congratulations on your retirement planning.

You might want to provide some context here to get the best response.

For example, do you have a family history of longevity (or, on the other side, important health issues yourself)? Are your other savings such that you really need to annuitize for life, or is this extra money? What is the beneficiary status, if any? Am I correct that there is no pure lump sum option?

Once that is sorted out it becomes an arithmetic question (future value, etc.) that lots of folks smarter than I am can help you with here.

 

[randall]

I do not have any serious health issues myself other than the usual dental issues (cavities, crown, sigh). No meds, no diseases, healthy. My parents are both alive in their early 80s but as I said my mother has advanced Alz.

I believe I could take a lump sum of around $100k before taxes for my TRA, but the annuity seems like a better benefit to me because I imagine taxes would sap a lot of that lump sum right off the top.

The annuity is extra money only in the sense of factoring it into my other savings that I explained ($800k in mutuals, 401k; plus another $200k in my home i own [no mortgage] which I figure would just be used to sell and then buy a home in e.g. Arizona).

So bottom line, when I retire in two years, my income would consist of that TRA annuity and any money I decide to withdraw from other [$800k+] savings.

 

[dex]

You have to run the numbers and include current taxes and what you expect to happen in the future.

36 12
10 20
360 240 600


24

30

720


I would lean towards taking the 3K/month as taxes are low now and your portfolio can grow if the pension covers your expenses. At 65 you can start SS just as your pension goes to 1K/mo again keeping your taxes low (which I'm guessing will increase in the future).

The 2K option looks good also. So you do need to run the numbers.

 

[ronin]

Couldn't the lump sum be rolled to an IRA to continue the tax deferral?

 

[randall]

Couldn't the lump sum be rolled to an IRA to continue the tax deferral?

I don't know, anybody know if that is possible? I thought there were maximums of just a few thousand dollar a year that I can contribute to a traditional or Roth IRA? Do laws allow one to roll over a lump sum retirement account like my TRA into something tax deferred?

 

[ronin]

No limit on a rollover, different from an annual contribution. Should be allowed, check with HR. I did it with a retirement supplement account from my state teachers retirement system.

 

[LARS]

I haven't run the numbers, but you should.

The result will, of course, be highly skewed by how long you live. On the surface, I would go for the steady $2,000 per month given you're mid-fifties, in good health, and your parents are both in their 80's.

 

[Sue J]

I would lean towards taking the 3K/month as taxes are low now and your portfolio can grow if the pension covers your expenses. At 65 you can start SS just as your pension goes to 1K/mo again keeping your taxes low (which I'm guessing will increase in the future).

The 2K option looks good also. So you do need to run the numbers.

If the original poster is getting a teachers pension, do they have enough SS credits to get SS at 65? And wouldn't it being largely reduced by WEP (Windfall Elimination Provision)?

If it was me I'd go for the $2000/mo but I'm very conservative.

 

[ronin]

For 30 yrs, using the monthly payments you have stated and a 5% discount rate the $3k/$1k option has a NPV of $374,844 and the straight $2k options has a PV of $372,563. So there is not much difference between the 2 out 30 yrs. So, you'd need to know your actual life expectancy otherwise it's a coin toss. FYI, a lower discount rate favors the former and a higher rate the later.

 

[Katsmeow]

When you take a lump sum you can typically roll it over to an IRA. We just did that with my DH's retirement.

That said, if your basic pension is $2,000 a month then a lump sum of only $100,000 doesn't seem right. Are you sure about the $100,000?

I remember a few years ago I made an assumption as to what DH's lump sum would be if he retired (I knew what his pension would be). I was off by a lot. The actual lump sum was much higher than we had guessed (leading to his retiring about 5 years earlier than he had originally thought he could).

Can you start taking the $2000 a month (or $3000 if you choose that) immediately on retirement? My guess is that the $2000 is a better deal for most people but I haven't actually run the numbers.

 

[chinaco]

Randall, Welcome.


One important question: Does the TR Annuity have a COLA?

Next: How is it calculated? Is it based on years of service x average of 3 highest years of salary x some factor?


You should do some what-if analysis for various levels of projected inflation. Along with your income needs at different ages. I would suggest that you use conservative numbers and estimates.

If you are not sure how to approach it, go to your library and get a book on it. There are many good books available about how to plan.

If you are risk averse and like the idea of receiving a payment... you can always take some of your other assets and buy an annuity to supplement the TR annuity (whichever option you choose to receive).... now or in the future.



One way to do some rudimentary analysis on non-cola annuities is to get some quotes for buying an annuity to see what it would cost. using Immediate Annuities - Instant Annuity Quote Calculator.

This will give you an idea about the relative worth/cost of the contract today.

A quote on a single life annuity of $2k/mo (no cola) for a 55 year old male is about $383k.


A lump sum of $100k does not seem to be the best deal in terms of value. Your breakeven on $2k/mo annuity is 50 months.

You should double check the lump sum amount... $100k does not seem to be a fair deal.

 

[ronin]

Teacher pensions, in CA at least, are not based on the cash value of your account. It is a function of the formula using yrs of service, age, and final salary (highest single yr or 3 yr avg depending on length of service). The lump sum does not include the state's nor the employer's contribution. So it is not surprising for the annuity to be a far superior deal.