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Financial timing of retirement
Old 11-15-2009, 03:19 PM   #1
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Financial timing of retirement

I was modeling retirement options for DH and we were talking about what point would most financially advantageous for him to retire (I realize retirement is not based only on this but want to be clear on this factor).

He can take either a non-COLA pension or lump sum. He can take pension with various survivor options up to 100%. Since his COLA pension exceed the guaranteed amount of PBGC and that would only give me a 50% survivor annuity he is inclined to take the lump sum. (I am 7 years younger than him). I took the lump sum and went to immediateannuities.com and ran it and it is very close to his single life pension so seems little reason not to go for the lump sum.

He is 62 and there is no early retirement penalty if he retires before 62, except he doesn't get whatever growth that would occur through 3 years of work.

If he retired before the end of the year, his current lump sum would be $909k. However, that is based upon a GATT rate of 4.27%. The GATT rate for 2010 will be 4.19%. The lower the rate the higher the lump sum. Also if he retired before 1/1/2010 he would not get a bonus for 2009 which is very likely to be around 25 to 30% of his base pay.

If I model a 3% salary increase for him in 2010 and a bonus that is about 27% of his base pay for 2009, then the lump sum a year from now would be $991k. Given that it is extremely likely that he will get the bonus in early 2010, there seems to be a clear financial benefit to retiring no earlier than a year from now.

However, if you start projecting out to 2012 (when he is 65) things get murkier. If the interest rate stayed 4.19% and he received 3% pay increases but no bonuses the lump sum would be only $935k.

The bonus situation is always up in the air. There are two different types of bonuses he can receive. For example this year (for 2008) he received one of them (it was about 30% of his base pay for 2008) but not the other one. Right now it is likely he will get both them for 2009 (paid in 2010) but together they will probably be 30%. Going forward past this year it is always possible that they could be 0 in future years or, at the very least, well below the 30% range. The thing is that if he retires before the end of the year he doesn't get the bonus for that year.

So, I modeled him retiring in 2012 with 3% raises and bonus of about 13% per year but since I doubt the 4.19% GATT rate will be that low in 2012 I calculated it at 4.6%. That results in a lump sum of $885k which is $100k lower than it would likely be if he retired in 2010. But then if I use bonus at 27% of salary for 3 years and raise of 3% and interest rate of 5.2% then the lump sum is $960k.

Of course if he retired in 2010 and not 2012 he would lose 2 years of salary and bonus (current base salary is about 110k) but he would get the lump sum of what will likely be between $950k and $991k (depending on size of bonus) and would have 2 years of investment returns on that money.

Whereas if he stays until 2012 he would have 2 more years of salary and bonus but the lump sum would be less depending upon the GATT rate at time of retirement.

The advantage is that he will know before the end of the year what the GATT rate will be for the following year, but he won't know what it will be for 2 years later. And, you only know the GATT rate for the following year near the end of the year which then makes it hard to want to leave before the end of the year and give up the bonus for that year.

He does get subsidized retiree medical if he retires (that would not cover me or the kids but we can get coverage through my employer although not as good and more expensive). If I leave my employer the kids and I would have no coverage other than COBRA or the private market or the state's high risk pool.

Any thoughts?
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Old 11-15-2009, 04:12 PM   #2
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Originally Posted by Katsmeow View Post
If he retired before the end of the year, his current lump sum would be $909k. However, that is based upon a GATT rate of 4.27%. The GATT rate for 2010 will be 4.19%. The lower the rate the higher the lump sum. Also if he retired before 1/1/2010 he would not get a bonus for 2009 which is very likely to be around 25 to 30% of his base pay.

If I model a 3% salary increase for him in 2010 and a bonus that is about 27% of his base pay for 2009, then the lump sum a year from now would be $991k. Given that it is extremely likely that he will get the bonus in early 2010, there seems to be a clear financial benefit to retiring no earlier than a year from now.
If, as it seems, he gets $82K in retirement money plus salary plus (maybe) bonus for another year of work, that's pretty good. An additional point is that withdrawals start a year later as well. On the other hand, it's one less year of living the good life life in retirement.

While it risks succumbing to "one more year" syndrome, why not consider staying for 2010. You can always run your model next year with actual 2011 numbers.
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Old 11-15-2009, 05:59 PM   #3
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Besides the financial facts, how does he feel about work? Is it an economic interest for him or an intellectual one?

You can model the financial impacts 57 ways, but what you can't model is the psychological impacts of working/not working. In the end, the financial impacts will be less meaningful than time spent pursuing other interests, if indeed, the psychological impacts of not working are the kernel of the retirement question.

How much more do you need to feel safe?
If you have enough money now plus a buffer to feel financially safe, then the question is what is needed to feel psychologically safe and comfortable?

For me personally, I had enough money plus a buffer. At that point I had to ask myself who I was continuing to earn money for: for myself? my heirs? some favorite charity? When I found that the answer was none of those, I picked a date that qualified me for the bonus and made the announcement several months ahead.

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Old 11-15-2009, 09:19 PM   #4
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I think he could go either way on retirement. He clearly thinks it is worth waiting until next year. The issue is really whether to retire next year or to work until 65 or even 66 (when he would plan to draw SS).

He doesn't hate his job, it is not stressful for him, he has good benefits and working conditions. So from that standpoint he wouldn't mind working until full retirement age. On the other hand, if working until then doesn't get him much more economic benefits then he doesn't love his job enough to want to work anyway.

The difficulty that I find in modeling this financially is that if interest rates go up then 3 years from now his lump sum could end up being less than what he could get next year. Would that be offset enough by the salary and bonus he earned in the meantime?
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Rate check
Old 11-16-2009, 07:26 AM   #5
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Rate check

I would check the pension calculation for the lump sum very closely to make sure you are usingb the correct rate. Many lump sum calcualtions do not use the Gatt percentage. Currently most use a 30 year treasury and corporate bond rate blend. Find more below. Note the PPA of 06 made the change being worked in over five years. This causes many individuals to not gain a lump sum increase from now until 2013 even if they work.


Valuing lump sums
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Old 11-16-2009, 07:48 AM   #6
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Does he need to wait until the end of the year? Can't he stay until January or February, wait for the bonus and the GATT change and then retire?
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Old 11-16-2009, 07:59 AM   #7
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............................................
The difficulty that I find in modeling this financially is that if interest rates go up then 3 years from now his lump sum could end up being less than what he could get next year. Would that be offset enough by the salary and bonus he earned in the meantime?
As others have said, calculations reach a point where the unknowns of future financial events overwhelm the rest of the model. Other unknowns are the long term health of all concerned. And how do you put a dollar value on a year of low stress retirement?

Of course, I see this through my own filter, but I feel like my own early retirement was like years added to my life, which are impossible to value. So don't be afraid to put in a gut factor to the calculations. Ultimately the only ones that need to approve are you and your DH.
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Old 11-16-2009, 11:48 AM   #8
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I would check the pension calculation for the lump sum very closely to make sure you are usingb the correct rate.

Valuing lump sums
I am aware of the change you are talking about. The rate I am using is simply what the Company on its web page says the rate is that it used to come up with its current lump sum (4.29 for 2009). It then gives what the rate will be for 2010 (4.17). If you mouse over that number it is says it is GATT rate although it is possible that they may mean the blended rate. In any event, I am relying on the calculations that the company web site gives (I am not doing my own calculations).
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Old 11-16-2009, 11:49 AM   #9
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Does he need to wait until the end of the year? Can't he stay until January or February, wait for the bonus and the GATT change and then retire?
He could. At this point he doesn't feel a pressing need to retired next year so really thinking more about future years. Will probably reassess around mid-2010.
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Old 11-16-2009, 12:07 PM   #10
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You might want to consider a pension-max permanent life insurance policy if he is in good health instead of looking at a survivorship option on the annuity. That way he gets the full annuity value while living and you get a lump sum value instead of future annuity value. There's some factors that would come into play, but it may be worth looking into for you. If the cost of the life insurance policy is less than the difference in survivorship vs. life-only annuity benefit, it may make more sense.
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Old 11-16-2009, 02:16 PM   #11
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You might want to consider a pension-max permanent life insurance policy if he is in good health instead of looking at a survivorship option on the annuity. That way he gets the full annuity value while living and you get a lump sum value instead of future annuity value. There's some factors that would come into play, but it may be worth looking into for you. If the cost of the life insurance policy is less than the difference in survivorship vs. life-only annuity benefit, it may make more sense.
So, what amount of this "pension-max permanent life insurance" would be appropriate? I'm assuming an amount that could be annuitized to equal what the ongoing survival spouse's annuity would have been.
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Old 11-16-2009, 02:52 PM   #12
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So, what amount of this "pension-max permanent life insurance" would be appropriate? I'm assuming an amount that could be annuitized to equal what the ongoing survival spouse's annuity would have been.
You are correct. The number would depend on the age of the surviving spouse, difference in annuity payment for life-pay vs. survivorship, and how much income the surviving spouse would want/need to be received for life. Depending on the insurance company, the death benefit and premium can always be reduced later if desired. Sometimes it works, sometimes it doesn't. The biggest factor is the insured's health as the premium difference between someone in perfect health and someone in standard health can be huge.
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