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Buying into my state's defined benefit plan...
Old 11-04-2014, 03:15 PM   #1
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Buying into my state's defined benefit plan...

I just got some firm numbers from my ex-employer (state of Massachusetts) on what I need to do to use money from my defined contribution retirement account to buy into their defined benefit plan. They want $183k and for that I will get a lifetime pension starting at age 55 of $19.6k a year. 70% of the pension is inflation index linked. I am a healthy 53 year old male........this looks like an amazing deal......what do you think?
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Old 11-04-2014, 04:32 PM   #2
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WOW!

The best you can get from a private immediate annuity with no inflation adjustment is about 10k a year at age 55 with $183,000.

No wonder states get into trouble...
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Old 11-04-2014, 04:51 PM   #3
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Shazam!!

I bet you can't wait to get this locked down.

We will also be purchasing an annuity with defined contribution money. Starting age 50 $200,000 for $12,000/yr with COLA



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Old 11-04-2014, 04:59 PM   #4
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Originally Posted by RetireAge50 View Post
Shazam!!

I bet you can't wait to get this locked down.

We will also be purchasing an annuity with defined contribution money. Starting age 50 $200,000 for $12,000/yr with COLA



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I forgot something buried on the back page....they want all their contributions and any gains back too. That's an additional 77k......so it comes out to $260k to get the 19.5k starting at 55 with 70% of that index inked....still quite good, but not as amazing as before I read the fine print.
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Old 11-04-2014, 05:23 PM   #5
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If that pension were to become encumbered in some way, how would it affect your total retirement income?

If the COLA was eliminated, how would that affect your retirement income?

What rate of return from equities would you need for a similar cash flow, assuming a conservative lifespan?
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Old 11-04-2014, 07:15 PM   #6
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If that pension were to become encumbered in some way, how would it affect your total retirement income?
I'll be putting 25% of my retirement savings into it, but I'd still have sufficient other pensions, rental income and SS to cover my expenses without even using the 75% left.

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If the COLA was eliminated, how would that affect your retirement income?
it would be a small hit but not terrible

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What rate of return from equities would you need for a similar cash flow, assuming a conservative lifespan?
A 7% annual return would give me the same index linked amount as the pension for 30 years assuming I also get 7% return from my principal from age 53 to 55 when the pension starts.
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Old 11-04-2014, 07:26 PM   #7
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How well is the states pension system being managed? Is it fully or near fully funded?
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Old 11-04-2014, 07:41 PM   #8
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How well is the states pension system being managed? Is it fully or near fully funded?
Reforms have already been made....funding is improving with legislation passed to increase the amount the state contributes....the pension is 70% funded with a goal of being fully funded in 2036.
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Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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Old 11-05-2014, 10:28 AM   #9
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Seems like a no-brainer.

Diversifies your risk, financially a great deal and inflation-linked. Also gives an additional longevity insurance, and no volatility.

19.5 / (260 * 1.04 inflation correction two years) = indeed a bit over 7%.

70% of that is a real return of 7%. 30% of that is a nominal return of 7%, so say 4% real. So if I'm doing this correctly, you can also consider having this offer a real return of 6.1%.

A 6% real return without downwards volatility .. wish I could buy in

Only thing you have to check indeed is the credit worthiness of the counterpart.
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Old 11-05-2014, 11:10 AM   #10
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Only thing you have to check indeed is the credit worthiness of the counterpart.
Its the state of Massachusetts.....they get poor grades in some surveys....but there's a lot of politics in those. Basically MA has a very inexpensive plan because most of it is paid for by the employees. They have always honored their commitments to retirees and are increasing the state's contributions to get the funding above it's current 70% level with a goal to be fully funded by 2036. I can retire at 55 and use my 3 highest years of pay to calculate my pensions, but people hired after me can't retire until 60 and use a broader average salary in the pension calculation.
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Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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Old 11-05-2014, 04:04 PM   #11
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My local pension is run through NC; I had a similar opportunity. It cost me ~$250,000 to "buy" 10 years time; this was other government time for which I would not get any benefit (since I had removed contributions from that nuthouse when I left). At retirement, that was worth about $27k a year for me, supposedly COLA'd but not really, there's been none for 5 years. I figure there won't be any, and it works fine. I'm not really sure how the price would have changed over time; I bought it over a couple of years and was done probably 5 years before I retired, I know it depended on salary. However, the real benefit was that I could retire at 60 (with "25") and not take any penalty, if I was 60 with 15 it would have been a significant penalty as well as not getting the 10 years. NC not the best but generally rates well on the comparisons. Wouldn't mind moving to avoid the 7% income tax, especially before MRW at 70-1/2.
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Old 11-05-2014, 04:38 PM   #12
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My local pension is run through NC; I had a similar opportunity. It cost me ~$250,000 to "buy" 10 years time; this was other government time for which I would not get any benefit (since I had removed contributions from that nuthouse when I left). At retirement, that was worth about $27k a year for me, supposedly COLA'd but not really, there's been none for 5 years. I figure there won't be any, and it works fine. I'm not really sure how the price would have changed over time; I bought it over a couple of years and was done probably 5 years before I retired, I know it depended on salary. However, the real benefit was that I could retire at 60 (with "25") and not take any penalty, if I was 60 with 15 it would have been a significant penalty as well as not getting the 10 years. NC not the best but generally rates well on the comparisons. Wouldn't mind moving to avoid the 7% income tax, especially before MRW at 70-1/2.
Yeah the MA COLA is only on the first $13k which is pretty terrible, but because I only have 10 years of service my pension is pretty small at $19k (if I start taking it at 55) so the portion that is COLAed for me is pretty high. It's nice that the pension whether it comes from the DB plan or my current DC plan is MA state tax free...I'm definitely leaning towards buyingin....it's hard to pass up a lifetime 70% COLAed pension even if the future might be a bit uncertain.....still MA is a rich state and the legislators are sensitive to the public sector unions. The numbers are calculated as of Oct 31st 2014 and I have until May 1st 2015 to make my decision......
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Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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Old 11-05-2014, 07:01 PM   #13
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I was fortunate to be able to buy 4 years of service for a bit under a 100k and it netted me approximately 15k more a year with 2% cola.... But in reality financially speaking this was a cost not a gain as I would have had to work these years if I had not bought them. So in essence the 100k was spent to not have to work 4 years... The money is now officially wasted as I am on year 5 of retirement.


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