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pension annuity - credited service buyback
Old 10-31-2010, 07:29 PM   #1
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pension annuity - credited service buyback

I don't post very often, but truly enjoy reading everyone's opinions and differing perspectives. I would also like to say that I am blessed to be in the situation I find myself. So here goes.
I can retire in about 8 months at age 51, with a pension from a solid company. I know, I know..... Anyway, retiring without the buyback wil provide 57% of my current income.
I have an option to buy back additional service and retire in March of next year. The buyback would cost around $130,000 and would provide 70% of my current income. The money for the buyback would come from 401k with no tax hit and no management fee. The annuity is not COLA. We would have another $150,000 in 401k to help deal with inflation. Would not touch that until age 59 1/2. We have some money in stocks to bridge the inflation gap between now and 59 1/2.
We could live happily ever after with either option, but I am leaning heavily toward the buy back. The pension annuity is joint, 20 year certain on both options.
As I see it, I am pulling $130,000 from stock market investment to purchase additional monthy income for life. The $130,000 buyback is purchasing twice the annuity I could get on the street (immediateannuity.com).
So what do ya'll think ? Thanks in advance for you comments.
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Old 10-31-2010, 07:41 PM   #2
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What does FireCalc say when you compare the scenarios?
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Old 10-31-2010, 07:46 PM   #3
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You shopped it as if purchasing an annuity and the payout is double what you could get on the market. That is a good sign it's a fair price for the increased pension you're buying. Do you need any more annuities?
Some things to consider:
Will 57% of current income cover 100% of your expenses?
Does your spouse have a pension?
When will you draw SS?
When will spouse draw SS?
Will 1 or 2 pensions + 2 SS cover 100% of your expenses?
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Old 10-31-2010, 07:47 PM   #4
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Without trying to work out any figures, just intuitively, the buy back sounds like a good deal.
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Old 10-31-2010, 09:16 PM   #5
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How "solid" is the company and pension ?

There's a risk difference between the comparable annuity and the pension - the pension surely being more risky - so it should be discounted vs. the annuity - the question is how much.
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Old 11-01-2010, 06:50 AM   #6
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Quote:
Originally Posted by thump View Post
The $130,000 buyback is purchasing twice the annuity I could get on the street (immediateannuity.com).
So what do ya'll think ?
Twice what you could get commercially? Sounds like a no-brainer to me. You will not be able to safely draw out that income stream if you keep the $130K invested.
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Old 11-01-2010, 07:06 AM   #7
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Sounds like a home run on the buyback. But you should look carefully at the strength of the pension fund. A few questions:

- would the higher payout still be within the max amount guaranteed by the PBGC?
- is the pension currently underfunded? If so, by how much?
- who is the pension fund sponsor (your employer)? Since you will not want to disclose here, what is their bond rating for Moody's and S&P? How large are they? What line of business are they in?

If you can get comfy with the credit risk, this looks extremely attractive.
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Old 11-04-2010, 11:40 AM   #8
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thank you for all the comments... I am running numbers using a couple of financial models, but have not used the firecalc model yet. The latest wrinkle is the 10% penalty for early withdrawals (prior to age 59 1/2). Since I am looking at the annuity, I should quality for the exemption --item number 3 on tax topic 558 Tax on Early Distributions. Now I am hearing rumors that my employer may want to contract me back as a contractor after retiring. Would that eliminate this exemption, since I have not actually stopped service with this employeer ? Or does the retirement constitute a stoppage of service with the employeer ? Has anyone else had to deal with such an issue ?
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Old 11-04-2010, 04:20 PM   #9
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Not a tax pro, I don't believe retirement alone is enough. I believe you need some kind of separation of service to show separation of service (6 months? 1 year?). If you have pre-arranged a contract job BEFORE you retire I think that would flunk the IRS test.
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Old 11-04-2010, 05:35 PM   #10
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Quote:
Originally Posted by thump View Post
thank you for all the comments... I am running numbers using a couple of financial models, but have not used the firecalc model yet. The latest wrinkle is the 10% penalty for early withdrawals (prior to age 59 1/2). Since I am looking at the annuity, I should quality for the exemption --item number 3 on tax topic 558 Tax on Early Distributions. Now I am hearing rumors that my employer may want to contract me back as a contractor after retiring. Would that eliminate this exemption, since I have not actually stopped service with this employeer ? Or does the retirement constitute a stoppage of service with the employeer ? Has anyone else had to deal with such an issue ?

+1 on Brewer's comments.

If your pension buyback is twice the payout of the annuity quote... it sounds like a good opportunity.

The disparity is probably due to the fact that your pension payout is calculated using your salary x factor x years of service. The annuity quote is calculated using inordinately low interest rates.


You are thinking it through.... which is smart!

The positive side of it seems obvious. Consider if there are any downside issues... not just about the pension, but with your overall situation. It sounds like you will still have some money left for emergencies and such...
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