Retiring Teacher

[renferme]

My sister is a school teacher in Florida. She called to ask me about the various retirement options that she has to consider.
First of all, she doesn't want to retire for about 5 years, but considerations and decisions may have to be made soon. Here they are:
1. Take the lump sum, say about $350,000
2. or take the monthly pension, about $2100 per month,
3. the ROP program (don't know what ROP stands for), but here's how it works.
She could begin taking the $2100/month now, except that the money is put into an account that she can't touch. In 5 years, she would get that money (about $126000), plus she would begin to receive the pension ($2100 per month).
During this 5 year period she would continue to work and receive her normal salary.
.
Seems to me that option number 3 is best. Of course, if she dies within 5 years, no one gets the money, not even her heirs. I asked her if she could live on 4% of $350,000 per year (about $1166 per month) and she said no. So, the pension of $2100/month is better than the lump sum (at least it seems better to me).
Of course, the financial planner for her school district wants that lump sum to invest for her ( and make money for himself ). He talked to her about buying an annuity with the lump sum. I told her NO! Do not buy an annuity.
.
SO what does everyone think ? ? ? ?
Regards,
Ray

 

[Gone4Good]

The lump sum seems like its calculated with a reasonably high discount rate of >7%. I haven't been annuity shopping, but I'd be surprised if your financial planner could replace $2,100 / month, guaranteed for life (I'm assuming that is what the pension is), with an initial $350,000 deposit. So "NO" to the lump sum, in my opinion.

Im not sure I understand the difference between choice 2 and 3. In choice 2 she gets 2,100 / month immediately ($126,000 over 5 years) and in choice 3 she gets the same money in 5 years? Is the only difference that in choice 3 she keeps working?

If that is the case and she wants to keep working then choice 3 seems like a clear winner. (I wouldn't worry about the heirs, but I'm selfish that way.)

 

[yakers]

Well it sounds like a "bonus"of $25K per year to keep working for 5 years, interesting proposition. I really don't like that much structure. As we get older we get less healthy and just tired. And what finally convinced my wife to retire (June 06) is getting "the class from hell".
But if she really wants to teach then that is a serious enough bonus. I assume that she has a defined benifit retirement program that will add some years on to her benifit calculation. Otherwise it is probably not worth it.

 

[bosco]

Door #3!!!

The annuity is a bad idea.

The lump sum, at the rate which it is calculated, would only pay off if market returns going forward over the next 10+ years are reasonable (we can hope, but questionable) and she lives long enough.

The pension, with bonus, seems like the best option, although I haven't run a NPW analysis.

Some of the answer depends on her other investments, if any. With an annuity she is vulnerable to inflation, and depending on what indexing if any, she may be vulnerable to inflation with the pension too. But she can't withdraw $2100/month from the $350,000 and expect it to hold up.

 

[Robert the Red]

This plan sounds similar to the Wisconsin state system my wife used to be in -- there are 2 piles of money, one is called the "employee's contribution" and one the "state's contribution"; they are equal.  Withdrawal of the lump sum gives only the EC and the SC is forfeited.

Since doubling the $350K would give an annuity of about the offered $2100 pension, I suspect that this is what is going on here.

If your sister is married, I'm pretty sure that Federal pension law requires that her spouse agree to any choice that might reduce his options in the future.  In particular, door #3 could potentially leave the spouse with nothing.  Of course, that could be covered with a life insurance policy.  This might cost about $1000/year for $700K coverage (from quickquote.com).  That might be the way to go to safely maximize the expected utility.

 

[renferme]

A little more info: No, my sister is not married. She still has an option to take a lesser pension and then a designated beneficiary (her daughter) would get 10 years of her pension after death. I do not recommend that she take a lesser pension for her daughter's sake.
Yes, I guess you could call it a "bonus" to keep working for up to 5 years. She would not have to work the entire 5 years. So, say for example, she worked 3 years - then she could retire and get $25,000 X 3 = $75,000 plus the $2100 per month pension.
.
What about this: she quits working now in 2 years (age 57), pockets the $350,000 and rolls it into an IRA. Then she does a 72t and takes home about $20,000 per year for 5 years.
Then, at age 62, she begins social security. And.... the value of the lump sum at that time (with any luck) should be valued at about $250,000 or more. ? ? ?

 

[SteveR]

Here is a rough 72t distribution from age 57-61. The basis was $350,000 using the Fixed annuitization method' method at 4.91%.

Your Age/Distribution/Year / Month/Balance
57 ------ $23,136 / $1,928 $344,049
58 -------$23,136 / $1,928 $337,805
59 -------$23,136 / $1,928 $331,255
60 -------$23,136 / $1,928 $324,384
61 -------$23,136 / $1,928 $317,175

after age 62 she could still take distributions but at any amount she wants to cover the difference between her 72t distribution and her SS amount. The balance would still grow in the IRA and she would not be forced into a specific amount to a SEPP at age 70.5

 

[JohnP]

First lets do a little googling - Florida Dept of Retirement has a DROP program (Deferred Retirement Options Program)  http://www.frs.state.fl.us/frs/drop/drop.htm that you should look into.

Then, I'd recommend that she limit her discussions with that so-called "...financial planner for her school district..." who seems to be more likely just another 403b variable annuity salesperson who are given free reign to wander the school looking for victims.  There must be a Human Resources person in the district whose job it is to advise retirees.

Door #1 is especially appropriate if she had a major illness and needed to support a young family.  Door #2 is her baseline - typically, the longer she works the higher her  pension amount.  I think that the only reason one would go for DROP is if she were maxed out in terms of the DB retirement amount and also still wanted to work.

Then remember that she likely hasn't been contributing to SS while she is a teacher and so if she has 40 quarters under SS she is still subject to the Windfall Elimination Program making big reductions in any SS.

I'd go for either 2 or 3

JohnP


 

 

[yakers]

Check and see if your sister would even get Social Security. Usually, if there is a govt pension then SS is eliminated or severely reduced. You need 30 years, not 10, under SS to keep SS and another govt/non-SS pension.

 

[yakers]

Then, I'd recommend that she limit her discussions with that so-called "...financial planner for her school district..." who seems to be more likely just another 403b variable annuity salesperson who are given free reign to wander the school looking for victims.  There must be a Human Resources person in the district whose job it is to advise retirees.

Need a thread on this sometime. These 403b "advisors" are sharks just pedaling packages. In my wife's school system (LAUSD) there is NO ONE in HR who is interested or knowledgeble on 403b's. No one. We found one "advisor" we could work with and he was dropped.
Get a fee only independent financial planner, it may be worth it for her. Then you are not telling your sister, a real pro is.

 

[renferme]

[
John P says:

Then remember that she likely hasn't been contributing to SS while she is a teacher and so if she has 40 quarters under SS she is still subject to the Windfall Elimination Program making big reductions in any SS.
--------------------------------------------------------------------------------------------'

Could you explain in a little more detail. What is the Windfall Elimination Program?

 

[Patrick]

3.   the ROP program (don't know what ROP stands for), but here's how it works.
She could begin taking the $2100/month now, except that the money is put into an account that she can't touch.   In 5 years, she would get that money (about $126000), plus she would begin to receive the pension ($2100 per month).
During this 5 year period she would continue to work and receive her normal salary.
.
Seems to me that option number 3 is best.   Of course, if she dies within 5 years, no one gets the money, not even her heirs. 

We tried to get the Deferred Retirement Option Program (DROP) on here, but couldn't get it past the legislature because of supposed "unkown costs" to the system.  Anyway, I would have done it in a heartbeat if it had been available.  I would have gotten my regular salary, plus the lump sum at the end.  What we would have to have given up (and you may want to have your sister check this on her program too) is the additional retirement benefit we would have been eligible for had we not chosen DROP.  The benefit is frozen as of the date we would have entered DROP.  I.E., if over the 5 years I would have been entitled to 12.5% more $$ in benefit, I would not receive that.  The plan looks at it like you are retired, even though you are still working.  Plus, I would have received the other bennies of working: employer-paid insurance, sick leave, annual leave, deferred comp matching, etc.  I would suggest that your sister definitely check into the provisions of her plan - in most of them the heirs will get the accumulated lump sum if the participant dies before retirement.

 

[JohnP]

bennevis - When one signs on for SS they are asked if they have a pension from a job which didn't pay social security taxes.  In that case, SS will determine your SS benefit with a significantly reduced benefit formula even though you may have worked other jobs where you did pay SS taxes.   Basically, SS limits benefits in this case to less than half of what you may think you would get from the yearly Estimates mailed from SS.

yakers is correct in saying that (in this case) you need 30 years under an SS tax paying job to get full SS benefits.  You need more than 21 years under SS to get more than half the conventional SS benefits increasing to full payments if you have 30 years of SS tax paying work.

You can find more info at www.ssa.gov/pubs/10045.html

JohnP

 

[Mr._johngalt]

bennevis - When one signs on for SS they are asked if they have a pension from a job which didn't pay social security taxes.  In that case, SS will determine your SS benefit with a significantly reduced benefit formula even though you may have worked other jobs where you did pay SS taxes.   Basically, SS limits benefits in this case to less than half of what you may think you would get from the yearly Estimates mailed from SS.

yakers is correct in saying that (in this case) you need 30 years under an SS tax paying job to get full SS benefits.  You need more than 21 years under SS to get more than half the conventional SS benefits increasing to full payments if you have 30 years of SS tax paying work.

You can find more info at www.ssa.gov/pubs/10045.html

JohnP

I think I lucked out here. I got the 30 years in (to get full
benefits), but if had my epiphany earlier, I might have up and quit
which might have impacted my SS check. Now, that SS check looks
like most of our income after DW hangs it up. Of course, in another
5 years, she can draw too. Not too sure if she will have the
necessary 30 years though.

JG

 

[renferme]

JohnP:
here's what I found out about my sister paying into social security:

"To provide for retirement, County employees are entitled to benefits from the Florida Retirement System (FRS). Employees are also covered by Social Security with a County contribution equal to the individual's contribution up to the maximum defined by Social Security."

.

 

[JohnP]

bennevis

Great news on your clarification of your sister's SS situation - that paragraph indicates that she has been paying into SS and the state has been also paying their component to her SS; therefore her future SS is in place when she is eligible. 

That still leaves the door #1 vs door #2 vs door #3 questions.  It sounds like she doesn't have a nestegg since the Lump sum options remain in the discussions.  A nestegg can be tempting - I still tend toward door #2 since school systems often bump-up the pension % increase/year after retirement eligibility just to retain teachers longer.  With Door #2 her pension increases (unless she is maxed out) and she has her normal income stream that could be used to fund a nestegg.  Door #3 doesn't seem to increase her pension amount but would give her a nestegg, if that is desireable.

I still think that door # 2 or 3 are preferable to the lump sum (and gyrations) since both lead to a nice income from the pension and a conventional SS level when eligible.  A successful retirement awaits!

Stay away from the annuities, if possible, though.

Best regards
JohnP

 

[haha]

I think I lucked out here.  I got the 30 years in (to get full
benefits), but if had my epiphany earlier, I might have up and quit
which might have impacted my SS check.  Now, that SS check looks
like most of our income after DW hangs it up.  Of course, in another
5 years, she can draw too.  Not too sure if she will have the
necessary 30 years though.

JG

She won't need 30 years.One qualifies with 40 creditable quarters.

Ha

 

[Mr._johngalt]

She won't need 30 years.One qualifies with 40 creditable quarters.

Ha

Yeah, but don't you need the 30 years to maximize the benefits?

JG

 

[REWahoo]

Yeah, but don't you need the 30 years to maximize the benefits?

JG

This is what SS says about calculating benefits:

"Social Security benefits are based on earnings averaged over most of a worker's lifetime. Your actual earnings are first adjusted or "indexed" to account for changes in average wages since the year the earnings were received. Then we calculate your average monthly indexed earnings during the 35 years in which you earned the most."

A guy of your intellect can find all sorts of information here: http://www.ssa.gov/

 

[Mr._johngalt]

This is what SS says about calculating benefits:

"Social Security benefits are based on earnings averaged over most of a worker's lifetime. Your actual earnings are first adjusted or "indexed" to account for changes in average wages since the year the earnings were received. Then we calculate your average monthly indexed earnings during the 35 years in which you earned the most."

A guy of your intellect can find all sorts of information here: http://www.ssa.gov/

Yeah, but it's more fun to ask you guys

JG

 

[MJ]

A guy of your intellect can find all sorts of information here: http://www.ssa.gov/

You know JG uses his intellect and persuasive powers to get other people's fingers to do his walking.

 

[Dreamer]

He was talking about the years needed so that windfall elimination provision would not reduce her social security benefit, if she had not paid into social security for that pension.

Dreamer