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Tell me if this makes sense
Old 10-24-2007, 04:45 PM   #1
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Tell me if this makes sense

Reference this post for my situation
Hypothetical withdrawal rate scenario

This all starts in 7 years.

I have $55000 pension
Wife will have the same pension but it starts 4 years later.
We will have ~$1.7M in 401k, IRA, taxable accounts..ect

As stated in the referenced post, I will withdraw ~$120K the 1st 4 years and then less as my wifes pension kicks in.

Total income in retirement estimated at ~$175000

***********************************************
Heres the part I want you to look at as I just thought of it. We have a clause in our pension that allows you to defer pension payments. The dererred payments go into an account that draws interest. The interest is currently guaranteed 10%. Yes, 10%. It will always be 8-10% and can change only .25% any given year. Its based on how well the pension fund is doing and its obviously doing well if its paying 10% interest in this interest rate environment.

Some people go into the deferred retirement program and keep working. Their pension benefits dont accrue higher but they still get paid by the city and their pension checks go into the DROP account.

D=delayed
R=retirement
O= ??
P=program.

I dont plan to do that as we dont need to, but what I thought what might be beneficial is this:

Upon retirement, instead of drawing the $55K and withdrawing $120K from investments I would draw the entire $175K from investments and let the pension checks grow in the DROP account. After the 4 years, my wifes pension kicks in and we would let that go into her DROP account as well.

We would live off of our investments until they run out entirely all the while allowing the DROP accounts to grow at 10%. From that point on, we would have guaranteed 10% income which I assume would result in higher income long term?

Some numbers and assumptions:

Assuming constant 8% returns in the stock market, the $1.7M would run out in approx 18 years. In that time the DROP accounts will grow to about $4.3M.

Withdrawals from a $4.3M account that guarantees 10% interest is MASSIVE in comparison to my $175000 yearly draw (and I still get the 2 $55K pensions).

Now I know there are alot of assumtions and projections in here, namely the constant 8% returns stated for the 18 years, but the main question is does the principal of letting the pension checks go into the DROP accounts untouched for as long as possible while living off of the other investments until they run out entirely make sense?

The problem I see is that Im giving up possible bigger gains in the stock market if it returned 12-15% during an extended stretch for the safety of guaranteed 8-10% returns for life.

If the market was totally flat from the day I retire, our $1.7M would still last about 10 years. In 10 years the DROP account grows to about $1.35M so i could draw $135000 on top of the 2 $55K pensions which is till more than the $175000 and this is just about worst case scenario (the stock market is flat for 10 years).

It cant be this simple. What am I missing?
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Old 10-24-2007, 06:56 PM   #2
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What is your confidence in the pension fund solvency? Even for Social Security, my thought is to take it while it is there.
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Old 10-24-2007, 07:07 PM   #3
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Quote:
Originally Posted by utrecht View Post
It cant be this simple. What am I missing?
Like Donald Rumsfeld once said, "There are known knowns, and known unknowns, and there are unknown unknowns."

This sounds like gobbledygook, but I beleive there is actuially a lot of wisdom here.

So what are you missing? Maybe nothing; maybe some unknown unknowns.

Ha
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Old 10-24-2007, 07:10 PM   #4
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Im no expert in pension funds but everything Ive read about it is very very strong. Its the Dallas Police and Fire Pension . It has $4B in assets, is 89% funded and will be 100% funded within 15 years.
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Old 10-24-2007, 07:11 PM   #5
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Im here to ask the experts here about the unknown unknowns. I already know the known knowns.
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Old 10-24-2007, 07:13 PM   #6
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Im here to ask the experts here about the unknown unknowns. I already know the known knowns.
The interesting thing about unknown unknowns is that nobody knows them; not even experts.

Ha
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Old 10-24-2007, 08:06 PM   #7
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OK, how about this: Anyone know of a government pension fund that went bust? Ever?

Serious question. I know Ive never heard of it happening.
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Old 10-24-2007, 08:34 PM   #8
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....more likely to give substantially less to younger workers and more taxes for the public....If you look at some of the stories of the IL pension system, their leg. apparently raided it and left it underfunded...so you could say that it is going to be broke and dependent on future taxes...these state play all kinds of games moving money around...
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Old 10-24-2007, 08:43 PM   #9
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I dont know the exact wording of the law but in the past year a new law was put before the voters of Texas which would make it impossible for the fund to be "raided" by anyone (in this case the City of Dallas which has the squirlliest City Council around. You may have seen recently that several of them just got indicted by the Feds). The law passed 96-4%.

I will definately be looking further into this in the next few years before making any firm decisions though.
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Old 10-24-2007, 09:08 PM   #10
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My old boss had a saying that went like;

You don't know what you don't know.

And another one;

Everything is alright as long as everything is alright.

Take the pension.
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Old 10-24-2007, 10:28 PM   #11
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Forgeting about all the unknowable unknowns for a second.

I like your plan right up to the point where you exhaust your personal saving. I simply wouldn't be comfortable trusting all of my retirement needs to any organization, much less one subject to the whims of politicians and taxpayers.

Frankly the deal sounds too good and at some point I wouldn't be surprised to see it changed.

I am trying to figure out the catch the only one that I wonder is what about survivor benefits. Say you leave your pension of $55K in for 4 years and your drop account grows to $250K (for round numbers) can you take the 250K immediately or are there restrictions? What happens when you die who gets the money?

If the money in your DROP account is considered your money and is allowed to compound tax free at rate between 8-10% then go for it. Although at the point where you guys are down to say 1-1.5 million in assets I started drawing one or both pensions.

If there aren't any catches I feel sorry for the Dallas tax payers.
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Old 10-24-2007, 11:12 PM   #12
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I would NOT use all my personal saving on the hopes that a pension plan will be there later. Now chances are it will, but why take that chance?

You should be able to live quite well taking the pension now.

Besides you have 1.7 million and very large pensions, take the pension now, and the wifes in 4 years and run!
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Old 10-25-2007, 09:05 AM   #13
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There are no restrictions to withdrawals. I can take out money as needed, leave it alone, o take it all out in lump sum at any time. If I die, my estate gets the entire balance in the DROP account and my wife gets 50% of my pension check for life.

Yes, it can be allowed to compound tax free until its withdrawn. Maybe I will take the best of both worlds and let the DROP account build for several years and then start withdrawing from the DROP account and the 401k at some point to keep from depleting the 401k entirely just in case a doomday scenario that I dont foresee does happen

The taxpayers arent footing the bill. The City of Dallas contributes a portion of my salary to the pension but that amount has never changed even as our pension benefits have increased dramatically and the DROP system was put in place 8 years ago. The benefits are increasing because the pension fund is well run and has had very nice returns. Also, there is much more money coming in than going out. Alot of cops die early and never collect anywhere near all of the benefits they wouldve if they wouldve taken care of themselves and lived to 75-90 years old. They work work work in a high stress environeent (and eat horribly). With the new DROP system alot of them stay here as long as they can to let their DROP accounts build to over $1M (because they have no other savings), then when they finally retire they live for a year or 2 and then die and dont even collect anywhere near what they contributed.
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Old 10-25-2007, 02:54 PM   #14
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Quote:
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There are no restrictions to withdrawals. I can take out money as needed, leave it alone, o take it all out in lump sum at any time. If I die, my estate gets the entire balance in the DROP account and my wife gets 50% of my pension check for life.

Yes, it can be allowed to compound tax free until its withdrawn. Maybe I will take the best of both worlds and let the DROP account build for several years and then start withdrawing from the DROP account and the 401k at some point to keep from depleting the 401k entirely just in case a doomday scenario that I dont foresee does happen

This is a very nice deal then and given that variable 8-10% return that decreases slowly (I believe you said the rate can't drop more than .25%/year) is something I'd kill for. At current inflation rates its 7.5% real return and rougly 2x the risk free T-bill rate.

Quote:
The taxpayers arent footing the bill. The City of Dallas contributes a portion of my salary to the pension but that amount has never changed even as our pension benefits have increased dramatically and the DROP system was put in place 8 years ago. The benefits are increasing because the pension fund is well run and has had very nice returns. Also, there is much more money coming in than going out. Alot of cops die early and never collect anywhere near all of the benefits they wouldve if they wouldve taken care of themselves and lived to 75-90 years old. They work work work in a high stress environeent (and eat horribly). With the new DROP system alot of them stay here as long as they can to let their DROP accounts build to over $1M (because they have no other savings), then when they finally retire they live for a year or 2 and then die and dont even collect anywhere near what they contributed.
A couple of points cops dying young is sad, and this would effect the basic pension rate. Although, I bet that is really the result of good negotiation by Police and/or City Employee union.

However, the way you describe the DROP system the low life expectancy of cops would have no effect on the returns. So if officer delays his retirement and deposit his pension check in the DROP system he gets 10% interest when he dies the money gets distributes to his estate. The other plan members don't benefits from his early demise.

I highly doubt that taxpayers aren't contributing a great deal to this pension plan. Simply because there is no private pension plan that I am aware of that offers this type benefits. Most guarrantee investment contracts are in the 5-6% for private pensions.

You are probably right that recently the DROP plan has had good returns, and so currently it isn't subsidize by the taxpayers. However, if the market dropped 30% this year. There is no way the plan would have these type of returns and John Q. Public would have to kick in the difference.

One of the good things about being a Policeman or Fireman is that public recognizes that these are essential and dangerous services, and tends not to get too upset when they are rewarded with very generous pension plans.
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Old 10-26-2007, 07:19 AM   #15
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How do the citizens "kick in the difference" if the market drops 30% this year? If the market was bad for several years, the DROP interest rate would drop since its based in the avg returns of the previous XX years, but the citizens never kick in more money.

The City contributes a portion of our salaries into the pension fund and that amount never changes no matter what happens.

I guess it would be possible that if there was an extended bear market and the pension fund suffered massive losses that the pension fund could lower benefits but again, Im positive that this wouldnt affect the citizens since they cant be required to contribute more money. I do believe that the citys contributions go down somewhat when the pension fund is fully funded. This DOES affect the citizens a little bit because the fund is required to be fully funded by XX year in the future and since we are way ahead of schedule, the fund keeps raising benefits for us as to not get fully funded too early. Sweet, huh?
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Old 10-26-2007, 07:22 AM   #16
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Does anyone think that spending the 401k and IRA money first as to let the DROP account compound at risk free 8-10% is a bad idea because Im losing out of possible large stock market gains if the market was to rise 13-18% for some extended period?

Or does it makes more sense to follow this line of thinking:

"The stock market will make you rich but guaranteed 8-10% will KEEP you rich"?
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Old 10-26-2007, 08:12 AM   #17
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I guess we know why government employees do not pay into
the social security system that normal workers do. Not sure
if this is true with state employees.

Do you need a driver or anything I may be looking for work some
day.
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Old 10-26-2007, 12:07 PM   #18
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I dont pay into Social Security now but did pay in for the 8 years or so that I worked before becoming a police officer, including 4 years in the Army, and I'll get just about nothing in return for that from SS.

I may need a deck hand for my future sailboat. I'll let you know
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Old 10-26-2007, 01:10 PM   #19
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OK, how about this: Anyone know of a government pension fund that went bust? Ever?

Serious question. I know Ive never heard of it happening.
I know of several that are growing crises. I will find a link later and post it here for info on several governmental pension funds.

Also, I know Oregon's public worker retirement fund was in crisis in 2003. Employer contribution rates were shyrocketing to pay benefits. So, the state legislature reformed the benefit's previously promised. Some people who retired in 2000-2004, before any reform legislation was passed, had their pension benefits (this is AFTER they retired) reduced. Over a dozen, maybe closer to 2 dozen, lawsuits resulted. The suits have upheld about half the reforms, so "contract" in pension land doesn't mean what one might have thought it meant.

The Texas plan you mention and the "guaranteed" 10% into perpetuity sounds pretty rich to me. I'd have to read up on the plan some more.

As soon as I find the link I mentioned I'll post for your reading pleasure.

Texas P&F plan may be a perfectly good, viable plan. If so, you proposed scheme to let this pot of tax-deferred money grow, and draw down your personal accounts could work. I would draw down your taxable accounts first.
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Old 10-26-2007, 01:53 PM   #20
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Im no expert in pension funds but everything Ive read about it is very very strong. Its the Dallas Police and Fire Pension . It has $4B in assets, is 89% funded and will be 100% funded within 15 years.
Here is the link I promised. Perhaps from this article there may be other links to your specific plan.

Governing: Pensions/October 2007
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