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Would you buy into state's DB plan
Old 04-03-2014, 09:19 PM   #1
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Would you buy into state's DB plan

I have the chance to use my DC retirement money to buy into my state employee's DB pension plan.

I'm ERed at 52.5 and have $250k in taxable accounts and $750k in tax deferred retirement accounts. I can give the state $250k now and at age 55 they will get a single life $19k a year pension. The first $13k is COLAed (that COLA base gets periodic increases) and this year's COLA was 3%. If I assume 5% return my $250k would grow to $282k by the time I'm 55 giving a payout rate of $19k/$282K = 6.7%.

If I was to buy into the pension I'd think of it as part of my fixed income allocation and adjust my AA accordingly. Would you spend 25% of your capital to buy this annuity?.....PS I'm pretty healthy and have no dependents.
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Old 04-04-2014, 05:52 AM   #2
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What state is it?
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Old 04-04-2014, 07:44 AM   #3
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Originally Posted by jon-nyc View Post
What state is it?
Massachusetts
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Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
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Old 04-04-2014, 08:06 AM   #4
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I'll face a similar situation when I pass the 5 year point working for the state. Mine would be about half the investment and pension. An additional factor for me making the purchase is the requirement to have 10 years state service to retire, so the service time purchase would allow a quicker full ER.

From my perspective, we are betting against the actuaries. If you think you will live much longer than the average then it should be a positive secure payout. One key consideration is the funding level of your state pensions since that could cause an unexpected drop in value. Massachusetts is only funded at 66%:
http://images.mscomm.morningstar.com...Report2013.pdf
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Old 04-04-2014, 08:49 AM   #5
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Originally Posted by Tekward View Post
I'll face a similar situation when I pass the 5 year point working for the state. Mine would be about half the investment and pension. An additional factor for me making the purchase is the requirement to have 10 years state service to retire, so the service time purchase would allow a quicker full ER.

From my perspective, we are betting against the actuaries. If you think you will live much longer than the average then it should be a positive secure payout. One key consideration is the funding level of your state pensions since that could cause an unexpected drop in value. Massachusetts is only funded at 66%:
http://images.mscomm.morningstar.com...Report2013.pdf
I already have the 10 years of service to vest in the retirement benefits. The MA state employee's pension (the one I would buy into) is actually 74% funded. Also I think trajectory of the pension funding is upwards and the strength of the MA economy does not make me worry about a 25% under funding.

As with any annuity you don't buy it to necessarily maximize return, but to stabilize your income. It will also allow me to go almost 100% equities with the rest of my money as $19k pension along with $14k rent covers my expenses.
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Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
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Old 04-04-2014, 11:02 AM   #6
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I can't tell you what to do but I will tell you what I did and why.

I purchased additional service years when I retired. From what you have posted, I paid about 10% more per $1000 than you did, but all of it is covered by a capped COLA adjustment. So, if inflation remains low, I am made whole. If inflation goes into run-away levels, I will lose some ground.

Why did I buy the extra pension dollars? Several reasons.

1. I wanted to have three sources of retirement funds with each contributing about 1/3 to my retirement income - pension, Social Security and personal investments. I should be able to live OK on two of the three sources, though trips to Paris for a weekend lunch will probably be out. My pension was at about the 22% level, while my personal investments were significantly above 40%. So, I lowered my personal investments contribution by a few % points, but raised my pension percentage to about 28%. Social Security will be pretty close to 32%. As you can see my personal money is still the biggest chunk of my income.

2. I wanted long term care insurance, but the current plans are expensive and there is nothing that keeps the insurers from pricing me out of the market as I get closer to an age when I may need it. So, I view my extra pension money, along with extra SS money from starting SS at 70, as my form of long term care insurance. Both are COLA'd to some extent. Not perfect, but less risky, IMHO, than buying an insurance policy in today's market. And, if I never need the money for LTC, I can spend it!

3. My state's pension plans, while not 100% funded are still in very good shape and the current trend seems to be to fully fund current obligations. The state has also made several reforms in pension rules that minimize things like spiking pensions and other misuses. They are also working to control a few of the 'golden handshake' pensions left over from 30+ years ago. This is not an Illinois type of situation.

4. Having two sources of steady income gives me the liberty to invest a little more aggressively and even to spend a little more in my earlier retirement years while I am still healthy enough to enjoy travel, wine, women and song.

All this was done before the pension ruling in the Detroit bankruptcy case. Since my plan still leaves me with my personal investments providing the biggest chunk of my retirement income by far, I would probably do the same thing again. However, given the Detroit ruling, I would not be tempted today to bring my percentage income from personal investments any lower so as to boost my pension.
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Old 04-04-2014, 11:08 AM   #7
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You would be using tax deferred funds for this, correct? If you don't buy the additional pension, what percentage of your estimated total budget is covered by pension and other annuity-like income?
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Old 04-04-2014, 11:15 AM   #8
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Thanks Chuckanut, you reinforce some of my thinking.

MA has just been through some pension reforms and has committed to fuller funding of pensions......and has actually deposited money into the fund over the last couple of years.

I'm already fairly well placed for "fixed" sources of income....I get $14k rent and at 62 (in 10 years time) I will get a $5k company pension, and at 66 I'll get $20k US SS and $20k UK state pension....so do I really need another $19k pension at 55. It's nice that it starts so early as it would take pressure of my taxable accounts before 59.5, but is it sensible to use my capital to buy even more fixed income?
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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
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Old 04-04-2014, 11:24 AM   #9
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You would be using tax deferred funds for this, correct? If you don't buy the additional pension, what percentage of your estimated total budget is covered by pension and other annuity-like income?
Yes I would take my deferred funds in my DC account and buy into the DB plan.

Right now, 52.5, rental income covers 30% of my budget and I have no income from annuities. If I take the state pension at 55 the rent and the pension will cover 70% of my income needs. At 66 I'll get US SS and UK SS checks and adding those in I'll fund 130% of my future budget assuming 3% inflation.
So even without the state pension, after 66 pensions and fixed income sources cover almost all my income needs. The progression looks like this

52.5 $14.4k rent
55 $19k MA state pension? if I take it
62 $5k company pension
66 $20k US SS, $20k UK state pension

so at 66 I should have at least $78.4k from fixed income sources.
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“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
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Old 04-04-2014, 03:11 PM   #10
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Interesting. It looks like you don't need the additional annuity income. If you are filing single you will probably be subject to a high tax rate with few options to reduce it, as it is all annuity. Can you convert that $250K to after tax before the pensions begin?
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