Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Pension vs Lump Sum....nice choice to have had.
Old 02-03-2016, 09:43 AM   #1
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Pension vs Lump Sum....nice choice to have had.

My state is allowing a one time transfer of contributions made to the DC state pension plan to the DB state pension plan. It was initiated by the teachers union as many of their members lost a lot of money in the 2007 recession. It's controversial because of the "moral hazard" involved and the choice between DB and DC plans was supposed to be a one time deal, but the legislators gave into lobbying. I'm against the transfer in principle, but did it anyway because I think it's a good deal......what do you think? Here are the final numbers.

I'm a 54.5 year old single male and took $279k from a TIAA-Traditional account earning 4% a year and bought a $19.6k annual pension that will start when I'm 55....in 6 months time. There is a COLA on the first $13.0k which has averaged 3% for the last 20 years with the COLAed amount also getting regular increases, the last one being in 2011 when it went from $12k to $13k. If I die early a designated beneficiary also gets a lump sum payout of the "actuarially calculated balance" of my pension account.
__________________

__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-03-2016, 02:34 PM   #2
Thinks s/he gets paid by the post
 
Join Date: Jun 2014
Posts: 1,458
I think it is a great deal.
__________________

__________________
Teacher Terry is offline   Reply With Quote
Old 02-03-2016, 03:25 PM   #3
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
You have a very sweet deal there:

Using our ubiquitous self-funded pension 25X factor for Cola'd and 16X factor for non-Cola'd pensions, I get that you should have paid around (13X25 + (19.6-13)X16 ==> $430k.

The only (small) issue is that you don't "own" the funds anymore. You take on a little more risk that the state may possible be insolvent over the long haul and does a "Detroit" on you.
__________________
MasterBlaster is offline   Reply With Quote
Old 02-03-2016, 03:39 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Chuckanut's Avatar
 
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 6,328
Quote:
Originally Posted by nun View Post
My state is allowing a one time transfer of contributions made to the DC state pension plan to the DB state pension plan. It was initiated by the teachers union as many of their members lost a lot of money in the 2007 recession.
emphasis added.

I don't understand this. The market recovered very nicely from those days and went on to new highs. Only lately have we seen a significant pull back and the amount and duration of that is yet to be determined.
__________________
The worst decisions are usually made in times of anger and impatience.
Chuckanut is offline   Reply With Quote
Old 02-03-2016, 03:45 PM   #5
Thinks s/he gets paid by the post
Big_Hitter's Avatar
 
Join Date: May 2013
Location: In the fairway
Posts: 4,094
Quote:
Originally Posted by MasterBlaster View Post
Using our ubiquitous self-funded pension 25X factor for Cola'd and 16X factor for non-Cola'd pensions
made up annuity factors are always better than real annuity factors

but seriously, who gave you those factors?
__________________
Swing hard, look up
Big_Hitter is offline   Reply With Quote
Old 02-03-2016, 03:49 PM   #6
Full time employment: Posting here.
 
Join Date: Apr 2015
Posts: 903
Quote:
Originally Posted by Chuckanut View Post
emphasis added.

I don't understand this. The market recovered very nicely from those days and went on to new highs. Only lately have we seen a significant pull back and the amount and duration of that is yet to be determined.
Some people are just not made to handle volatility. Chances are they pulled out of stocks at the worst time and never got back in stocks.
__________________
hnzw_rui is offline   Reply With Quote
Old 02-03-2016, 03:50 PM   #7
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
Quote:
Originally Posted by Big_Hitter View Post
made up annuity factors are always better than real annuity factors

but seriously, who gave you those factors?
The 25X factor for (Cola'd self funded-pensions) is just the inverse of our ever-loved 4% nest-egg SWR. The 16X non-Cola'd factor gets posted occasionally on this forum and in the financial Porn Press. It's one of those "ballpark" numbers that I seem to remember.

They are just ballpark guides, to be used with all of the caveats for nest-egg decumulation strategies. Take them for what they are - "ballpark" numbers.


So using these factors you can do your financial planning in 3 minutes on the back of the water-bill. Those extraordinary spreadsheets we all play with are (really) no better at predicting how much we need, and how much we can spend.
__________________
MasterBlaster is offline   Reply With Quote
Old 02-03-2016, 04:03 PM   #8
Thinks s/he gets paid by the post
Big_Hitter's Avatar
 
Join Date: May 2013
Location: In the fairway
Posts: 4,094
Ah, got it. the COLA factor is heavily dependent on the COLA assumption, so if we have a 6% interest rate and a 2% COLA the net rate is 1.06/1.02-1 or 3.92%.


For a 55 year old a life annuity factor of 25 correlates to something like a 1% net interest rate


The life annuity factor of 16 correlates to something between 4 and 5%.
__________________
Swing hard, look up
Big_Hitter is offline   Reply With Quote
Old 02-03-2016, 07:08 PM   #9
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by Chuckanut View Post
emphasis added.

I don't understand this. The market recovered very nicely from those days and went on to new highs. Only lately have we seen a significant pull back and the amount and duration of that is yet to be determined.
It's taken a long time for the legislation to pass and as we all know people do dumb things when stock markets fall. The legislation was first proposed back in 2010 when people had probably sold at a loss and didn't want to take risks anymore. The state calculated the buy in amount for each person by compounding all the contributions to the DC plan at 8% a year. I stayed invested through the crash dong the "Boglehead thing" and had more than enough money in my DC account for the buy in, so I still have a small DC balance. Lots of people did not have enough because they had used TIAA-Traditional or had made poor investing decisions and they had to use other funds from 403b, 457 or even IRAs.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 02-03-2016, 08:54 PM   #10
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by MasterBlaster View Post
You have a very sweet deal there: Using our ubiquitous self-funded pension 25X factor for Cola'd and 16X factor for non-Cola'd pensions, I get that you should have paid around (13X25 + (19.6-13)X16 ==> $430k. The only (small) issue is that you don't "own" the funds anymore. You take on a little more risk that the state may possible be insolvent over the long haul and does a "Detroit" on you.
The IRR, assuming I live to 83, is 7%. I ran it through FireCalc and there's only a 30% chance that a 60/40 portfolio would do better if we accept that future returns will be similar to the historical ones. I'm not concerned about payment of the pension as the state has passed some recent reforms and is paying in larger amounts itself to get the funding up from 70% with a goal of full funding by 2030.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 02-04-2016, 06:34 AM   #11
Thinks s/he gets paid by the post
 
Join Date: Mar 2011
Posts: 3,701
Quote:
Originally Posted by Teacher Terry View Post
I think it is a great deal.
IIRC, like me, Nun is from Massachusetts.

If I may be cynical realistic for a moment, I'd say that anything being set up between the state teachers union and the legislature is going to be a no-brainer good deal. (And likely a moral hazard as well)
__________________
Living well is the best revenge!
Retired @ 52 in 2005
marko is online now   Reply With Quote
Old 02-04-2016, 07:56 AM   #12
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by marko View Post
IIRC, like me, Nun is from Massachusetts.

If I may be cynical realistic for a moment, I'd say that anything being set up between the state teachers union and the legislature is going to be a no-brainer good deal. (And likely a moral hazard as well)
The fact of the buy in is really the only exceptional part of the deal. The DB pension is the same that other state retirees get and the average annual return of the DB pension fund (8%) was used as the interest rate to calculate the buy in. So when people started contributing to the DC plan and how they managed their money meant for many that they had less than an annual 8% return and had a shortfall in the DC plan amount. Also the MA state pension plan is a fantastic deal for MA and a relatively bad one for the employees as the state contributes 4% and the employees put in 11%. It actually saves the state money as it opts out of SS (MA retirees don't get SS checks) and hence MA avoids having to pay 6.2% FICA saving 2.2%.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 02-04-2016, 11:42 AM   #13
Thinks s/he gets paid by the post
 
Join Date: Mar 2011
Posts: 3,701
Quote:
Originally Posted by nun View Post
Also the MA state pension plan is a fantastic deal for MA and a relatively bad one for the employees as the state contributes 4% and the employees put in 11%.
Still wish I had taken friends' advice 40 years ago and either got on the "T", "the courts" or registry. Buddies that did all retired at 45 or 48 with a full pension. One RE'd with full pension at 38 due to "stress"....yeah, that's what it was....stress.
__________________
Living well is the best revenge!
Retired @ 52 in 2005
marko is online now   Reply With Quote
Old 02-04-2016, 11:59 AM   #14
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by marko View Post
Still wish I had taken friends' advice 40 years ago and either got on the "T", "the courts" or registry. Buddies that did all retired at 45 or 48 with a full pension. One RE'd with full pension at 38 due to "stress"....yeah, that's what it was....stress.
There was certainly cases of abuse. But the reforms of a couple of years ago closed the loopholes and raised the minimum retirement age for most workers to age 60. Most state employees work hard and as I said the pension is mostly funded from their own salary. The average MA state pension is $28k and there's no SS in addition to that. So MA is vigorous in encouraging state workers to save extra money to 403b or 457 plans....but those don't get any match from the state. If MA were to ever default on the DB pension or replace it with a fully DC plan then it would have to start paying into SS again and that would cost them an extra 2.4% of the state employee wage bill.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 02-04-2016, 01:14 PM   #15
Thinks s/he gets paid by the post
 
Join Date: Jun 2014
Posts: 1,458
I retired from a state that does not pay into SS either. WE also had to pay some of the costs of the pension. In fact SS will take most of the SS that I earned at other jobs which does not seem right to me.
__________________
Teacher Terry is offline   Reply With Quote
Old 02-04-2016, 03:33 PM   #16
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by Teacher Terry View Post
I retired from a state that does not pay into SS either. WE also had to pay some of the costs of the pension. In fact SS will take most of the SS that I earned at other jobs which does not seem right to me.
I assume you mean WEP will reduce your SS. There are maximum amounts for WEP and I don't think you can lose more than 50% of your SS because of it.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 02-04-2016, 04:19 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Chuckanut's Avatar
 
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 6,328
Quote:
Originally Posted by nun View Post
I assume you mean WEP will reduce your SS. There are maximum amounts for WEP and I don't think you can lose more than 50% of your SS because of it.
I retired from a state that does participate in the SS system. I had to contribute to my pension.

WEP is often misunderstood. The best explanation of it I have heard is from Tom Margeneau:

Quote:
government pension offset law simply treats them in the same way that all other working people have always been treated. In other words, if a woman who worked at a job that was covered by Social Security gets a Social Security retirement pension, that pension has always offset any spousal benefits she might have been due. Before the GPO law went into effect, people getting a non-Social Security pension were the only working people in this country who could get their own retirement pension AND a full dependent's benefit from Social Security.
http://www.creators.com/lifestylefea...y-offsets.html
__________________
The worst decisions are usually made in times of anger and impatience.
Chuckanut is offline   Reply With Quote
Old 02-04-2016, 04:33 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by Chuckanut View Post
I retired from a state that does participate in the SS system. I had to contribute to my pension.

WEP is often misunderstood. The best explanation of it I have heard is from Tom Margeneau:



http://www.creators.com/lifestylefea...y-offsets.html
Why did you say that "WEP is often misunderstood" but then present a quote explaining "GPO," a very, very different thing?

I guess you're right. WEP is often misunderstood. Some people confuse it with GPO. I think we know one!

Also, just as an FYI, the explanation of GPO by Tom Margeneau is flawed.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 02-04-2016, 05:53 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Chuckanut's Avatar
 
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 6,328
Quote:
Originally Posted by youbet View Post
Why did you say that "WEP is often misunderstood" but then present a quote explaining "GPO," a very, very different thing?

I guess you're right. WEP is often misunderstood. Some people confuse it with GPO. I think we know one!

Also, just as an FYI, the explanation of GPO by Tom Margeneau is flawed.
You are correct. The article starts first with WEP (which deals with the amount of SS the earner will get paid) and then switches to GPO (which deals with the amount of SS a spouse gets paid) . I failed to notice the switch. My bad.

How is Margeneau's article flawed? I am curious since I know a lot of people who think they are being 'ripped off' by these rules especial GPO.
__________________
The worst decisions are usually made in times of anger and impatience.
Chuckanut is offline   Reply With Quote
Old 02-04-2016, 08:49 PM   #20
Recycles dryer sheets
 
Join Date: Jul 2013
Posts: 189
I had heard of the SS offset (wep) but never looked into it because it doesn't affect me. After reading Tom Margeneau it makes sense. They are combining your non SS pension and SS and then scales your SS. Social Security replaces a higher % of income for lower income folks. Makes perfect sense to me.
__________________

__________________
alaska55 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Employer pension or lump sum rollover of pension? PawPrint53 FIRE and Money 21 06-01-2012 01:37 PM
Lump sum to invest, DCA in or go lump? Olav23 FIRE and Money 4 03-03-2007 04:22 PM
Pension: Lump Sum or Monthly Payment ? Helena FIRE and Money 12 09-07-2006 10:00 AM
Take a lump sum or pension payout Rollie FIRE and Money 45 06-11-2006 07:54 PM
Annuity vs Lump Sum Pension moguls FIRE and Money 5 05-26-2003 03:09 PM

 

 
All times are GMT -6. The time now is 09:07 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.