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Pension Scenario-What would you do?
Old 03-06-2014, 01:58 PM   #1
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Pension Scenario-What would you do?

In 3 years, can trade $200,000 for $12,000/yr for life. This amount will have full COLA's. Also the pension will pay out lump sum to beneficiary the $200,000 minus any payouts.

Seems like no brainier, what do you think? Also, the initial $200,000 is currently in stock funds so may go up or down and the pension adjusted accordingly. Should I sell some stock and put it in safer investments (stable value).

Thanks for the feedback.
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Old 03-06-2014, 02:08 PM   #2
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$1k/month is about typical for a $200k SPIA for a 60 year old. You don't say how old you are so its hard to judge if it's good or not. What is unusual is the guaranteed COLA. Are you sure that is included? If it is, it sounds like a good deal.
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Old 03-06-2014, 02:10 PM   #3
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Off the top of my head that sounds very good for a COLA'd pension. Of course, consider the safety of the pension funding, particularly if they are offering deals like this.

If you like risk and think the your stocks won't drop much in three years, you could leave the $200k in stocks. At three years out, I might take at least 50% of that out of equities and into whatever looks good in the short term. A stable value fund might be really good. Then do the same thing the next two years or so if things are still looking good. Then I can feel half-good about whatever the result is in three years.
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Old 03-06-2014, 02:12 PM   #4
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Sorry, for 49 year old (teacher optional annuity purchase).
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Old 03-06-2014, 02:15 PM   #5
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Is this an immediate payout out or delayed until retirement age? If it pays at 49+3 = 52 years old it sounds like an unbeatable deal. I would love to be offered that deal.
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Old 03-06-2014, 02:17 PM   #6
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Yes immediate payout at age 49 (46+3)
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Old 03-06-2014, 02:43 PM   #7
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Quote:
Originally Posted by RetireAge50 View Post
In 3 years, can trade $200,000 for $12,000/yr for life. This amount will have full COLA's. Also the pension will pay out lump sum to beneficiary the $200,000 minus any payouts.

Seems like no brainier, what do you think? Also, the initial $200,000 is currently in stock funds so may go up or down and the pension adjusted accordingly. Should I sell some stock and put it in safer investments (stable value).

Thanks for the feedback.
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Originally Posted by fosterscik View Post
$1k/month is about typical for a $200k SPIA for a 60 year old. You don't say how old you are so its hard to judge if it's good or not. What is unusual is the guaranteed COLA. Are you sure that is included? If it is, it sounds like a good deal.
According to Immediate Annuities - Income Annuity Quote Calculator - ImmediateAnnuities.com, a lifetime SPIA for a 49 yo Male in WA providing $1K/mo with NO COLA is currently $230K. So $1K/month WITH a COLA is a screaming deal for $200K.

It's harder to find COLA'd SPIA quotes, but they're far more expensive for the same initial payout (or much lower initial payouts). Last time I saw one a SPIA without inflation protection offered an initial payout (and fixed thereafter) that was 51% higher than the first year payout for a SPIA with inflation protection purchased for the same initial cost. That would mean a first year payout of $7,950 inflation adjusted thereafter vs your $12,000 fixed for life.

Huge difference, and reportedly they are getting scarcer, IOW underwriters have been dropping them for new annuity purchasers. And even the ones that are offered are with a fixed rate of annual increase (ie, 3%) - not floating with CPI or any other metric as "COLA'd" often implies.

But don't take my word for it, I'd get my own quotes to verify.

However, the 'pension currently in stock funds' that you evidently control sounds like something other than a typical pension, so I'm confused re: the basic question.
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Old 03-06-2014, 03:12 PM   #8
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Sorry for the confusion, to clarify, currently the funds are in stock mutual funds in a 401(a) account. We can anytime direct any or all of this to stable value, bonds, or stocks. When we retire in 3 years we can just leave it in the 401(a), transfer to IRA, or take the annuity described above.
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Old 03-07-2014, 12:55 PM   #9
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I would place it in the stable value account for the 2 years and jump on the annuity.
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Old 03-07-2014, 01:11 PM   #10
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That sounds like an excellent deal for an immediate annuity with inflation rider. I would lean yes but make sure you are comfortable with default risk.
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Old 03-12-2014, 04:37 AM   #11
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To the OP : I would take the offer.
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Old 03-12-2014, 07:56 AM   #12
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Who "guarantees" the annuity? Is it your state, a private company or is it a teacher retirement fund run by the state's teacher union?

Anything that sounds too good to be true usually is.
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Old 03-12-2014, 09:48 AM   #13
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The contract is with the State of Washington. Can optionally choose from list of private insurers but not as favorable of terms.

Never thought I would consider an annuity so never gave it much thought. Always thought I could do better investing on my own. However, now that I am older and look at this particular deal it seems likely I will do it.

Thanks for the feedback everyone, I appreciate it.
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unbelievable annuity
Old 03-13-2014, 04:16 PM   #14
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unbelievable annuity

I suspect that behind the curtain you will find that it is not really a true annuity. If the contract is with the State, it is likely a form of defined benefit pension, one that you buy into with a lump sum instead of over time. It can be unbelievable because like all DBPs, it is a combination of investment and legal ponzi. That's why the "insurance company" deals are not as good.

Just an opinion on my part, I have no first hand knowledge.
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Old 03-13-2014, 04:28 PM   #15
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I think it depends on what the OP has in other investable assets. If they have a few hundred grand other than the $200,000 then i'd take the $12,000/yr for life.
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Old 03-13-2014, 04:40 PM   #16
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I think the OP referred to this as a pension.

I have a few questions:

Is it really a full COLA? Most of these plans have a cap on the amount of the COLA adjustment.

Are you buying additional years of service to get this pension money? Again, that is usually capped at 5 years maximum.

Looking at the published WA teachers pension system, I don't see how this is happening.

What am I missing?
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Old 03-13-2014, 05:49 PM   #17
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The COLA is a fixed 3% each year. The funds are separate from the regular defined benefit pension. We put money into this every paycheck into self directed funds. Then when we quit working can take the accumulated lump sum or convert to a TAP annuity.

Google DRS Tap Annuity and the plan guide is the first link if interested.
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Old 03-13-2014, 07:24 PM   #18
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The COLA is a fixed 3% each year. The funds are separate from the regular defined benefit pension. We put money into this every paycheck into self directed funds. Then when we quit working can take the accumulated lump sum or convert to a TAP annuity.

Google DRS Tap Annuity and the plan guide is the first link if interested.
Thanks. I see why I was confused. It is part of Plan 3 the latest hybrid retirement system that is replacing the older 100% defined benefit plan. They seem to be giving you a way to take the DC part of the plan and use it to purchase an annuity if that is what you choose to do. But, as you mentioned, it is not part of the DB pension system. Interesting.....
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