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Question on Pension Options
Old 04-12-2016, 02:21 PM   #1
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Question on Pension Options

Long time reader, first time poster.

I am currently being offered the following pension options. I'm retiring from a city job after 20 years. My options are as follows:

$82,100.53 yearly (6,841.71 monthly)

Or

$61,995.41 yearly ($5,166.28 monthly) with a disbursement made to me to of $236,930.00 that needs to be rolled into a 401K to avoid penalty and taxes.

I am 42 years old with a 457 with approximately $275,000 additionally.

If I leave the excess in the pension system and die, the money is gone.

I am single with no dependents.

Appreciate any advice

Chappy


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Old 04-12-2016, 02:52 PM   #2
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I would take the higher monthly pension, especially if it has a COLA.

If you take the partial lump sum and roll it into an IRA, you can't access that money for 13-18 years. Since you have no dependents, it doesn't matter if you leave money on the table by dying young.
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Old 04-12-2016, 03:07 PM   #3
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Relevant questions are before a good opinion could be offered:
1) Is there a cola on the pension
2) How much is needed per year in retirement
3) In what state is the city located and what is the state of their pension plan

Without knowing that the math of the situation makes it overwhelming to take the pension and the implied 9% payout even with no cola.
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Old 04-12-2016, 03:10 PM   #4
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Is the pension available immediately after you retire ?

If that's the case, you can use "ballpark" numbers of 16X for a pension lump sump without annuity increase with inflation. And use 25X for a pension lump sump with annuity increase with inflation. So subtracting the $61995 option from the $82100 option I get a difference of $20105. My ballpark calculator then tells me the lump sum should be worth $321680 without inflation provisions, and $502625 with inflation provisions.

So based on my "ballpark" numbers, I believe that the $82100 per year option is the better choice.

An $82k pension is a pretty sweet deal, especially at 42 years old. Are you a police officer or fireman ? You could potentially live another 50 years or so, you'll need something else to do. Have you thought about that ?
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Old 04-12-2016, 03:20 PM   #5
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so $1700 a month now or $237K - what is the COLA on the 1700?
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Old 04-12-2016, 03:21 PM   #6
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A few questions;

Do you want to leave anything to relatives after you pass ?

Can the rollover be put into an IRA ? If so you could tap it using a 72T to avoid the 10% penalty.

What are your annual living expenses ?

Do you plan to work, full or part time ?

My first knee jerk advice would be to rollover the lump sum.
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Old 04-12-2016, 03:22 PM   #7
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My first knee jerk advice would be to rollover the lump sum.
except that the IRR on that deal looks close to 8.5% ignoring the cola...this is a huge decision

Chappy....nice pension! My advice to you would be to engage the services of a fee-based CFP, CFA or pension actuary and have them calculate a present value for each decision.
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Old 04-12-2016, 03:29 PM   #8
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Quote:
Originally Posted by MasterBlaster View Post
Is the pension available immediately after you retire ?

If that's the case, you can use "ballpark" numbers of 16X for a pension lump sump without annuity increase with inflation. And use 25X for a pension lump sump with annuity increase with inflation. So subtracting the $61995 option from the $82100 option I get a difference of $20105. My ballpark calculator then tells me the lump sum should be worth $321680 without inflation provisions, and $502625 with inflation provisions.

So based on my "ballpark" numbers, I believe that the $82100 per year option is the better choice.

An $82k pension is a pretty sweet deal, especially at 42 years old. Are you a police officer or fireman ? You could potentially live another 50 years or so, you'll need something else to do. Have you thought about that ?


if it's a deferred pension we have a totally different story


For an immediate annuity, since he's only 42 so the 16x and 25x need to be increased a bit....but good analysis!
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Old 04-12-2016, 03:35 PM   #9
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If you increase the 16X and 25X factors for a very early retiree, it just makes the case more favorable for the $82100 per year pension option. The story doesn't change. Unless, as you posted, the annuity is a delayed pension option. In that case when it's available could make a big difference.
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Old 04-12-2016, 03:39 PM   #10
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Quote:
Originally Posted by MasterBlaster View Post
If you increase the 16X and 25X factors for a very early retiree, it just makes the case more favorable for the $82100 per year pension option. The story doesn't change. Unless, as you posted, the annuity is a delayed pension option. In that case when it's available could make a big difference.
Agreed
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Old 04-12-2016, 03:46 PM   #11
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Thanks all.

The pension is available immediately.

I am Law Enforcement officer. 20 year retirement is pretty common for LEO.

I have already set up an appointment with a FA who specializes in this type of pension and will discuss the options. He is a retired LEO.

Eligible for COLA at age 55 since I will be retired 10 years. COLA here is currently 1% for a maximum annual increase of $180. If I understand it correctly.

Thanks for the input and appreciate the feedback.


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Old 04-12-2016, 03:46 PM   #12
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Welcome to the forum Chappy!

The pension falls into the almost too good to believe category. I would seriously consider taking the cash. Its the old "bird in the hand..." saying. Governments have been known to over promise in terms of pensions. At least make very sure yours is well funded.
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Old 04-12-2016, 03:51 PM   #13
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I have already set up an appointment with a FA who specializes in this type of pension and will discuss the options. He is a retired LEO.
The FA will want you to roll the lump sum into his high-fee products. Good for him, maybe not so good for you !

Quote:
Eligible for COLA at age 55 since I will be retired 10 years. COLA here is currently 1% for a maximum annual increase of $180. If I understand it correctly.
So to be clear, if you retire now does the COLA starts when you Are 55 ? Or do you have to work until you are 55 years old to qualify for a COLA pension?

Is the 1% COLA a cap every year, or is it just this years (or last years) COLA based on the recent (low) CPI measurements ?
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Old 04-12-2016, 03:58 PM   #14
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I'm eligible to receive the COLA at age 55. the COLA is applied to the first 18K and the minimum is 1% and the maximum Is 3%.

The solvency of the pension is good.

No real concerns regarding the pension since it's well funded.




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Old 04-12-2016, 04:32 PM   #15
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So it's a mini COLA if only 18k of the 82k has a COLA adjustment.

What are your spending needs? Are they less than the pension? If so, I'd take the pension as is - and save/invest any excess you have each month. This can later be used when inflation reduces the real value of our pension, to supplement your pension.

Leave your 457 to grow.

You're in an enviable situation of having a nice pension from a well funded system. Mazel tov!

Take advise from your FA friend with a grain of salt. Many products have high fees - that benefit the FA (commissions) but not you. Do not let your friendship persuade you into buying anything you don't fully understand. Stay FAR AWAY from annuities - you already have the best annuity - a pension.
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Old 04-12-2016, 04:43 PM   #16
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Take advise from your FA friend with a grain of salt. Many products have high fees - that benefit the FA (commissions) but not you. Do not let your friendship persuade you into buying anything you don't fully understand. Stay FAR AWAY from annuities - you already have the best annuity - a pension.
What Rodi said in spades. Not a bad idea to at least get a second opinion from a fee only FA.

I'm sure we all would be interested in what your retired LEO FA suggests. Feel free to keep us informed if you care to. Last but not least thank you for being in public service and keeping us safe.
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Old 04-12-2016, 04:44 PM   #17
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I would take the full pension. You have a nice arrangement.
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Old 04-12-2016, 04:46 PM   #18
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Originally Posted by frayne View Post
What Rodi said in spades. Not a bad idea to at least get a second opinion from a fee only FA.

I'm sure we all would be interested in what your retired LEO FA suggests. Feel free to keep us informed if you care to. Last but not least thank you for being in public service and keeping us safe.
Yes to each and every sentence.
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Old 04-12-2016, 04:56 PM   #19
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My meeting is next Thursday and I will keep you guys informed. The FA was my Official Company Instructor, 20 years ago and his advice is highly respected. He is fee based and from my understanding, doesn't sell any products. He offers this particular service to retiring MOS ( members of the service).


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Old 04-12-2016, 05:48 PM   #20
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Do you have sufficient liquidity? If so, I'd take the full pension. That gives you an extra $20K annually so that allows for front-loading of spending while you're young and healthy with fairly low worries if your funds will last. As others have said, leave the 457 to grow. That can be your DIY inflation adjustment fund.
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