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Need opinion on company retirement option
Old 02-17-2010, 12:09 PM   #1
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Need opinion on company retirement option

My company provides a reduced benfit pension for those that choose to retire early. I will be taking advantage of that in the next year or so (happy 55 bday to me next week!!).

There are several different options available for the non COLA pension and I would like some opinions on one of those options.

I can elect to have my pension "levelized". The company will provide extra money from 55 to 62 at which time the amount of the pension will be reduced by the amount of SS that is available.

Example
Straight pension at 55 is 31000 per year until death.
Levelized pension at 55 is 43000 per year until 62.
At 62 the pension is 23000 per year until death.



Although the above number are approximate, they are pretty close. I have run some spreedsheet calculations and the "break even" point is around 69 years old. I come out with more total dollars prior to 69 and fewer total dollars after 69.

So, the question is...which would you choose, straight pension and look forward to the SS income raise at 62 or the levelized option

Most of my co-workers have taken the levelized option as recommended by their finanical planners. Take the most now, seems to be the prevailing choice. My concern is that this option is based on what the SS is estimated to be at 62, not what it actually will be or could be further into the future. The pension amount is not adjusted in the future if SS should be reduced by new taxes, elegibility for SS benfit moved to 64, or any number of other things that the government may do.

Any and all comments are encouraged and appreciated. This one's taken up a lot of my meager mental capacity....

Thanks
Bandit
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Old 02-17-2010, 12:17 PM   #2
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Example
Straight pension at 55 is 31000 per year until death.
Levelized pension at 55 is 43000 per year until 62.
At 62 the pension is 23000 per year until death.

Although the above number are approximate, they are pretty close. I have run some spreedsheet calculations and the "break even" point is around 69 years old. I come out with more total dollars prior to 69 and fewer total dollars after 69.
IMO, it sounds like you mostly answered your own question -- if the break-even point is 69, if you are healthy and you don't have a family history of dying fairly young, I'd say bet on the side of living longer than 69 (i.e. whichever option has you coming out ahead if you live past age 69). For a healthy 55 year old the life expectancy is likely to be closer to 80.

Having said that, have you accounted for inflation here (since this isn't COLA'd)? A dollar you receive at 55 is likely to be worth a lot more than a dollar you receive at 70, so you may want to assume some inflation rate (maybe 3-4%) in order to discount each dollar you receive farther and farther into the future.
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Old 02-17-2010, 12:20 PM   #3
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Well I suppose that as long as you get at least $12k/year (in todays dollars) or so out of SS then you will have about the same cash flow.

How do you feel about the stability of SS and their ability to pay ?

How do you feel about the stability of your pension annuity ? Look at the airlines and their legacy pensions. Look at Delco - they went bankrupt and their retirees got only what the PBGC covered (big reduction).
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Old 02-17-2010, 12:22 PM   #4
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IMHO, if your family has great longevity genes and you can support yourself without the pension, don't do the leveling thingie.
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Old 02-17-2010, 12:26 PM   #5
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When I retired from MegaMotors three years ago at age 54, my thinking was get as much as soon as possible. You really don't know what the future brings. As such, I took the higher payout to age 62 with no survivor benefit (covered in another way). When I am eligible for SS I'll use the same logic. YMMV
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Old 02-17-2010, 12:35 PM   #6
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Congratulations on the 55 retirement! I retired at 55 ten years ago and it has been great!

When I retired I opted to take lump sum on pension and rollover to IRA because had enuf already taxed to get to the 59 1/2 marker. Things have changed in ten years, but I would be inclined to take the levelize option to preserve your already taxed savings before 59 1/2 and your IRA type savings after. If you want guaranteed income stream with COLA I use both already taxed savings and pension before starting SS. At 55 will (hopefully!) not change too much for you and it is the best "annuity" going.
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Old 02-17-2010, 01:08 PM   #7
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Well I suppose that as long as you get at least $12k/year (in todays dollars) or so out of SS then you will have about the same cash flow.

How do you feel about the stability of SS and their ability to pay ?

How do you feel about the stability of your pension annuity ? Look at the airlines and their legacy pensions. Look at Delco - they went bankrupt and their retirees got only what the PBGC covered (big reduction).
I am concerned about SS...I think the program will continue but that we will see some combination of: moving the retirement age out, reduction of benifit based on "other" income, SS and Medicare taxes applied to "other" income, etc.

My company is a regulated utility so I feel pretty good about the pension. If things did go south the PBGC payout would be close.
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Old 02-17-2010, 01:09 PM   #8
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What happens if you decide to begin SS benefits at a different date? Say at age 70? It seems that for folks who can afford it, delaying SS is one of the best deals going.
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Old 02-17-2010, 01:12 PM   #9
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It seems that for folks who can afford it, delaying SS is one of the best deals going.
That is true with the present set of rules. However the rules are likely to change.

How would you feel if you spent much of your stash getting to 70 just to be told that your SS income will now be capped at your FRA benefit.
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Old 02-17-2010, 01:45 PM   #10
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What happens if you decide to begin SS benefits at a different date? Say at age 70? It seems that for folks who can afford it, delaying SS is one of the best deals going.
As of now -- and I'm assuming the loophole will be gone by the time I'm 62 -- if you can afford to pay back everything you have received from SS between the ages of 62 and 70, you can "reset" as if you delayed until age 70. Best of both worlds, really, if you can swing it (and assuming this loophole continues to exist).
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Old 02-17-2010, 02:02 PM   #11
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Is there anything about the current loophole that is a disadvantage for SS?
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Old 02-17-2010, 02:12 PM   #12
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Is there anything about the current loophole that is a disadvantage for SS?
I can't find one, assuming you have no trouble scraping up the cash to pay it back. Assuming the option remains intact and you don't promptly kick the bucket, anyway.

There are two risks, though:

1 -- that you will take it at 62 intending to use the payback option, only to have it taken away before you could do it (though I suspect anyone already taking SS would be grandfathered in to being allowed to do it);

2 -- you pay back everything at 70 and die at 71.

The payback option is nice, but for me the most compelling reason to start SS at 62 is because you would almost certainly be grandfathered out of any "reform" that will make it a worse deal in the future IF you are already collecting.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

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Old 02-17-2010, 02:26 PM   #13
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I'm thinking of it from Social Security's point of view. I can see there might be a disadvantage to the individual who starts collecting early, pays it all back at 70, and then passes away before the break-even date (late 70s, right?). But for the government, I don't see how the loophole is a disadvantage--it seems they'll pay out almost the same or come out ahead if the individual passes away before breaking even.
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Old 02-17-2010, 02:28 PM   #14
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I'm thinking of it from Social Security's point of view. I can see there might be a disadvantage to the individual who starts collecting early, pays it all back at 70, and then passes away before the break-even date (late 70s, right?). But for the government, I don't see how the loophole is a disadvantage--it seems they'll pay out almost the same or come out ahead if the individual passes away before breaking even.
Well, for one thing, I suspect they base it actuarially over all people, whereas those most likely to do it are probably fairly affluent, healthy and have "good genes" for longevity. So the folks for whom it's most likely to pay off are the ones doing it, and they may not die when SS actuarially expects.

The biggest problem for SS is that they pay out the money, lose use of it for up to 8 years (if you pay it back at 70) and you don't have to pay interest on the money you return. In short, Uncle Sam has floated an interest-free loan for up to 8 years AND significantly increased your "annuity."
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Old 02-17-2010, 02:50 PM   #15
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I get that, Zig, but it seems all SS is really out is the foregone taxes on the earnings of 8 years of payments (and those taxes wouldn't get paid to SS anyway). To me, SS isn't really out the use of the moneys paid at 62 because it's obligated to pay that out then if the individual wants it.

Some of the affluent people who took this early payout 8 years ago no doubt have not been able to come up with the lump sum to reimburse it, perhaps finding themselves not so affluent as the age of 70 grew closer, some of those who do plan to pay it back won't live it to 70, and as you mentioned, some of them won't live to the break even point after 70. Saving SS more $$.

I just was thinking the loophole really doesn't have much of a downside for the agency, so perhaps it is likely to stay in place. Unless it becomes a "look what rich people can afford to do" campaign issue for someone.
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Old 02-17-2010, 07:23 PM   #16
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.....So, the question is...which would you choose, straight pension and look forward to the SS income raise at 62 or the levelized option .....
My coworkers and I had the same options available when we retired early, although our pensions are cola'd. I chose the standard option of eual payments for life plus the cola, and my buddy in another department chose the 'levelized' option of a boosted pension 'til 62, then it lowers to a rate which, along with SS added in, would keep monthly income approximately the same (at least in theory).

My thinking was, that as long as SS is still fairly intact, at 62 I'd get a 'bonus' check every month for life (hopefully). And if SS isn't fairly intact when I hit 62, it really wouldn't make any difference in the standard of living that I have now.

My buddy's reasoning was that, since he has a family history of not living to ripe old ages, he'd rather grab all he can get here and now, and deal with the monthly pension cut when the time comes...if he's still alive.
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Old 02-17-2010, 07:41 PM   #17
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Personally, I would take the straight pension for a couple of reasons. First, without a family history of dying young, you could live many years beyond the age of 69. Consider 89 or 99. Second, SS isn't what it used to be. There is no trust fund anymore and the unfunded liability is huge. I can only imagine lower and lower benefits in the future. I wouldn't trust it for the next 40 or more years to provide a steady income. Third, if the lower income up front is difficult to handle, you can still work to supplement and build a small nest egg if necessary. Imagine at 62 your income drops in half and your not up to working because of age or illness. You're stuck. I'd opt for the the relative security of the straight pension. Just my .02.
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