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Buying into State pension plan.
Old 11-19-2013, 09:12 PM   #1
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Buying into State pension plan.

When I started working for the state I had the choice of a defined contribution or defined benefit plan. The contributions to each plan are the same, but the DC plan has 100% immediate vesting and the DB plan has 10 year vesting. As I started the job in my early 40s and wasn't sure if I'd even stay ten years I went with the flexibility of the DC plan.

Fast forward 10 years and I am going to retire on just after my 10 year anniversary so that I vest in some health care and insurance benefits. However, the state has just announced that they are allowing DC plan participants to buy into the DB plan......why I don't know, maybe someone very powerful in state government lost a load in the 2008 crash....its bizarre.

Anyway the cost to buy back is the return of all state contributions with any gain attributed to the and all of my contributions compounded annually at 8.25%. Well my 10 year average return is 6.2% thanks to fees, the crash and having a 60% equity index and 40% bond index allocation.

I have $75k in the DC plan from employer contributions that will all be returned to the state and $175k due to my contributions and I estimate it'll take $193k to buy into the plan. I have the extra to do that. I'm 52.5 now and if I give the state $75k+$193k the at 55 I'll get a $19.5k/year pension with a COLA calculated on the first $13k. Should I do it?
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Old 11-19-2013, 09:26 PM   #2
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That sounds like a pretty good deal, particularly if you were considering covering some of your basic expense using SPIA's. I haven't done any what-if's using immediateannuities.com but I'm sure you will.
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Old 11-19-2013, 09:36 PM   #3
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I have $75k in the DC plan from employer contributions that will all be returned to the state and $175k due to my contributions and I estimate it'll take $193k to buy into the plan. I have the extra to do that. I'm 52.5 now and if I give the state $75k+$193k the at 55 I'll get a $19.5k/year pension with a COLA calculated on the first $13k. Should I do it?
If I'm reading this correctly, you would need to pay $193-$175 = $18k extra on top of what is already in the plan. If so, it is a great deal.
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Old 11-19-2013, 09:36 PM   #4
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How well is your state pension funded? If it is like Illinois I would think twice. If it is well funded it might be a good idea. I would check out several sources.
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Old 11-19-2013, 10:19 PM   #5
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Seems like a good deal. Only concern is loss of funds if die early. As a comparison, our state allows teachers to return DC for pension also. Its terms for $293,000 is $17,580 with full cola and guaranteed at least all your money back.
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Old 11-19-2013, 10:19 PM   #6
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That sounds like a pretty good deal, particularly if you were considering covering some of your basic expense using SPIA's. I haven't done any what-if's using immediateannuities.com but I'm sure you will.
The state is MA and there was pension reform last year, but active employees were grandfathered in.

Looks like I have the following options:

1. Pay $268k now (age 52.5) and get $19.5k/year pension at age 55 with a COLA on the first $13k. That base COLA number has increased over the years so I expect it to slowly go up;

2. ....or if I were to get 6% return and let the $268k compound until 55 I'd have $310k. If I could maintain 6% annual growth it would provide the same income as the pension (assuming 3% COLA on the first $13k every year) from age 55 to 84, when the balance would be zero;

3. If I used the $310k to buy an annuity at 55, at today's rates I'd get $18k/year, but no COLA at all.
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Old 11-20-2013, 08:24 AM   #7
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Originally Posted by nun View Post
1. Pay $268k now (age 52.5) and get $19.5k/year pension at age 55 with a COLA on the first $13k. That base COLA number has increased over the years so I expect it to slowly go up;

2. ....or if I were to get 6% return and let the $268k compound until 55 I'd have $310k. If I could maintain 6% annual growth it would provide the same income as the pension (assuming 3% COLA on the first $13k every year) from age 55 to 84, when the balance would be zero;

3. If I used the $310k to buy an annuity at 55, at today's rates I'd get $18k/year, but no COLA at all.
I don't see where option #3 is ever better than option #1 (at least with current rates), so it seems like it can be eliminated for now. You put more money in, get less out and have no COLA at all.
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Old 11-20-2013, 10:15 AM   #8
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I don't see where option #3 is ever better than option #1 (at least with current rates), so it seems like it can be eliminated for now. You put more money in, get less out and have no COLA at all.
Option 3 is a non starter, but I included it for completeness. It isn't really more expensive than the state pension as I'm compounding the $268k that I would pay today to get the state pension. In 2.5 years by 6% so it would grow to $310k by the time I'm 55 when I'd buy the SPiA.
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Old 11-20-2013, 10:32 AM   #9
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2. ....or if I were to get 6% return and let the $268k compound until 55 I'd have $310k. If I could maintain 6% annual growth it would provide the same income as the pension (assuming 3% COLA on the first $13k every year) from age 55 to 84, when the balance would be zero;
Do you feel lucky? Tough choice. I have pensions covering my basic expenses and it does feel nice and stable. I have detailed records on the last 15 years of my investments and have averaged 6.35% / year. I would be very happy with those returns going forward, so I would feel that giving up 0.35% returns for the stability of the pension income would be worth it.

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Old 11-20-2013, 11:05 AM   #10
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Originally Posted by nun View Post

I'm 52.5 now and if I give the state $75k+$193k the at 55 I'll get a $19.5k/year pension with a COLA calculated on the first $13k. Should I do it?
Interesting way to do a partial COLA, rather than limit the percentage increase, they limit the amount the increase can be applied to. I guess the purpose is to lock in an inflation adjusted base for the retiree, while not leaving the state on the hook for unlimited future inflation increases on the entire pension.
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Old 11-20-2013, 11:43 AM   #11
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Interesting way to do a partial COLA, rather than limit the percentage increase, they limit the amount the increase can be applied to. I guess the purpose is to lock in an inflation adjusted base for the retiree, while not leaving the state on the hook for unlimited future inflation increases on the entire pension.
Once the entire pension got a COLA, but that was a long time ago. The COLA number will be determined by price index numbers, but being able to determine what fraction of the pension that applies too give the state some control over costs.

The $13k number is half of the average $26k pension that MA state workers get.
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Old 11-20-2013, 11:48 AM   #12
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Do you feel lucky? Tough choice. I have pensions covering my basic expenses and it does feel nice and stable. I have detailed records on the last 15 years of my investments and have averaged 6.35% / year. I would be very happy with those returns going forward, so I would feel that giving up 0.35% returns for the stability of the pension income would be worth it.
I'm going to do the buy in (but it's hard to write a check for $268k) and I'll treat the pension as a fixed income AA and go 80 to 100% equities with the rest of my portfolio. The $19.5k pension and $15k rental income will give me $34.5k income from 55 onwards with some inflation adjustment built in. As I also have US and UK SS coming as well I think I can be agressive with the rest of my portfolio
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Old 11-20-2013, 04:51 PM   #13
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Have you looked into the tax consequences of buying in? I assume your pension benefit will be taxable and buying in with post tax $$ might affect your taxes.
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Old 11-20-2013, 06:26 PM   #14
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Have you looked into the tax consequences of buying in? I assume your pension benefit will be taxable and buying in with post tax $$ might affect your taxes.
Not yet. Obviously most money will be a direct rollover from the DC plan so it will be pre tax dollars. I don't know exactly what other assets the state will accept to make up any shortfall, but they might also allow rollovers from the 403b plan and maybe the 457 too. If after tax dollars were used that should be factored in as an after tax portion of the principal.......I wonder if it would be possible to pay the entire amount from after tax dollars so you'd just have a nice tax free basis?
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Old 11-20-2013, 06:36 PM   #15
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Not yet. Obviously most money will be a direct rollover from the DC plan so it will be pre tax dollars. I don't know exactly what other assets the state will accept to make up any shortfall, but they might also allow rollovers from the 403b plan and maybe the 457 too. If after tax dollars were used that should be factored in as an after tax portion of the principal.......I wonder if it would be possible to pay the entire amount from after tax dollars so you'd just have a nice tax free basis?
I am trying to do crude math with my situation, but I believe the contributed after tax dollars are prorated out over an assumed lifespan. I would imagine the cola would be taxable. I spent about 85k or so to buy 4 years of service. 20 some thousand of it I used after tax money. About $1000 of my yearly 75k pension is considered return of my own taxed money each year and is segregated out on my W-2 (or whatever the pension version is called) in a separate box. My pension grows yearly through the cola, but the approx. $1000 amount stays constant each year and never increases.
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Old 11-21-2013, 12:19 PM   #16
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I am trying to do crude math with my situation, but I believe the contributed after tax dollars are prorated out over an assumed lifespan. I would imagine the cola would be taxable. I spent about 85k or so to buy 4 years of service. 20 some thousand of it I used after tax money. About $1000 of my yearly 75k pension is considered return of my own taxed money each year and is segregated out on my W-2 (or whatever the pension version is called) in a separate box. My pension grows yearly through the cola, but the approx. $1000 amount stays constant each year and never increases.
I'll use tax deferred dollars from other accounts to make up any shortfall (if it's allowed) to keep things simple.

Paying $268k to buy a fixed deferred annuity that will pay me $19.5k at 55 with a some COLA is a good deal. Writing the check will still be a little difficult as I'll be giving up control of about 25% of my investments, but I'll just think of it as moving money to a new fixed income investment and adjust my portfolio appropriately.
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Old 11-21-2013, 01:08 PM   #17
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I'll use tax deferred dollars from other accounts to make up any shortfall (if it's allowed) to keep things simple. Paying $268k to buy a fixed deferred annuity that will pay me $19.5k at 55 with a some COLA is a good deal. Writing the check will still be a little difficult as I'll be giving up control of about 25% of my investments, but I'll just think of it as moving money to a new fixed income investment and adjust my portfolio appropriately.
Yes, I bet it will be very hard to write that check! I was fortunate enough to be able to purchase my 4 years several years before the big recession. I was able to buy four 2.35% multiplier years, so I got about 10k added on to my pension with 2% annual cola for about 85k. It is certainly not available now.
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Old 11-21-2013, 04:35 PM   #18
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Can you partially fund it, or is it all or nothing. I'd fund up to the COLA pension coverage and invest the rest.
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Old 11-21-2013, 05:46 PM   #19
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Can you partially fund it, or is it all or nothing. I'd fund up to the COLA pension coverage and invest the rest.
Nope, no partial funding. If you have done better than 8.25% you can keep the excess in the DC plan though.
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