Katsmeow
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Jul 11, 2009
- Messages
- 5,308
I was modeling retirement options for DH and we were talking about what point would most financially advantageous for him to retire (I realize retirement is not based only on this but want to be clear on this factor).
He can take either a non-COLA pension or lump sum. He can take pension with various survivor options up to 100%. Since his COLA pension exceed the guaranteed amount of PBGC and that would only give me a 50% survivor annuity he is inclined to take the lump sum. (I am 7 years younger than him). I took the lump sum and went to immediateannuities.com and ran it and it is very close to his single life pension so seems little reason not to go for the lump sum.
He is 62 and there is no early retirement penalty if he retires before 62, except he doesn't get whatever growth that would occur through 3 years of work.
If he retired before the end of the year, his current lump sum would be $909k. However, that is based upon a GATT rate of 4.27%. The GATT rate for 2010 will be 4.19%. The lower the rate the higher the lump sum. Also if he retired before 1/1/2010 he would not get a bonus for 2009 which is very likely to be around 25 to 30% of his base pay.
If I model a 3% salary increase for him in 2010 and a bonus that is about 27% of his base pay for 2009, then the lump sum a year from now would be $991k. Given that it is extremely likely that he will get the bonus in early 2010, there seems to be a clear financial benefit to retiring no earlier than a year from now.
However, if you start projecting out to 2012 (when he is 65) things get murkier. If the interest rate stayed 4.19% and he received 3% pay increases but no bonuses the lump sum would be only $935k.
The bonus situation is always up in the air. There are two different types of bonuses he can receive. For example this year (for 2008) he received one of them (it was about 30% of his base pay for 2008) but not the other one. Right now it is likely he will get both them for 2009 (paid in 2010) but together they will probably be 30%. Going forward past this year it is always possible that they could be 0 in future years or, at the very least, well below the 30% range. The thing is that if he retires before the end of the year he doesn't get the bonus for that year.
So, I modeled him retiring in 2012 with 3% raises and bonus of about 13% per year but since I doubt the 4.19% GATT rate will be that low in 2012 I calculated it at 4.6%. That results in a lump sum of $885k which is $100k lower than it would likely be if he retired in 2010. But then if I use bonus at 27% of salary for 3 years and raise of 3% and interest rate of 5.2% then the lump sum is $960k.
Of course if he retired in 2010 and not 2012 he would lose 2 years of salary and bonus (current base salary is about 110k) but he would get the lump sum of what will likely be between $950k and $991k (depending on size of bonus) and would have 2 years of investment returns on that money.
Whereas if he stays until 2012 he would have 2 more years of salary and bonus but the lump sum would be less depending upon the GATT rate at time of retirement.
The advantage is that he will know before the end of the year what the GATT rate will be for the following year, but he won't know what it will be for 2 years later. And, you only know the GATT rate for the following year near the end of the year which then makes it hard to want to leave before the end of the year and give up the bonus for that year.
He does get subsidized retiree medical if he retires (that would not cover me or the kids but we can get coverage through my employer although not as good and more expensive). If I leave my employer the kids and I would have no coverage other than COBRA or the private market or the state's high risk pool.
Any thoughts?
He can take either a non-COLA pension or lump sum. He can take pension with various survivor options up to 100%. Since his COLA pension exceed the guaranteed amount of PBGC and that would only give me a 50% survivor annuity he is inclined to take the lump sum. (I am 7 years younger than him). I took the lump sum and went to immediateannuities.com and ran it and it is very close to his single life pension so seems little reason not to go for the lump sum.
He is 62 and there is no early retirement penalty if he retires before 62, except he doesn't get whatever growth that would occur through 3 years of work.
If he retired before the end of the year, his current lump sum would be $909k. However, that is based upon a GATT rate of 4.27%. The GATT rate for 2010 will be 4.19%. The lower the rate the higher the lump sum. Also if he retired before 1/1/2010 he would not get a bonus for 2009 which is very likely to be around 25 to 30% of his base pay.
If I model a 3% salary increase for him in 2010 and a bonus that is about 27% of his base pay for 2009, then the lump sum a year from now would be $991k. Given that it is extremely likely that he will get the bonus in early 2010, there seems to be a clear financial benefit to retiring no earlier than a year from now.
However, if you start projecting out to 2012 (when he is 65) things get murkier. If the interest rate stayed 4.19% and he received 3% pay increases but no bonuses the lump sum would be only $935k.
The bonus situation is always up in the air. There are two different types of bonuses he can receive. For example this year (for 2008) he received one of them (it was about 30% of his base pay for 2008) but not the other one. Right now it is likely he will get both them for 2009 (paid in 2010) but together they will probably be 30%. Going forward past this year it is always possible that they could be 0 in future years or, at the very least, well below the 30% range. The thing is that if he retires before the end of the year he doesn't get the bonus for that year.
So, I modeled him retiring in 2012 with 3% raises and bonus of about 13% per year but since I doubt the 4.19% GATT rate will be that low in 2012 I calculated it at 4.6%. That results in a lump sum of $885k which is $100k lower than it would likely be if he retired in 2010. But then if I use bonus at 27% of salary for 3 years and raise of 3% and interest rate of 5.2% then the lump sum is $960k.
Of course if he retired in 2010 and not 2012 he would lose 2 years of salary and bonus (current base salary is about 110k) but he would get the lump sum of what will likely be between $950k and $991k (depending on size of bonus) and would have 2 years of investment returns on that money.
Whereas if he stays until 2012 he would have 2 more years of salary and bonus but the lump sum would be less depending upon the GATT rate at time of retirement.
The advantage is that he will know before the end of the year what the GATT rate will be for the following year, but he won't know what it will be for 2 years later. And, you only know the GATT rate for the following year near the end of the year which then makes it hard to want to leave before the end of the year and give up the bonus for that year.
He does get subsidized retiree medical if he retires (that would not cover me or the kids but we can get coverage through my employer although not as good and more expensive). If I leave my employer the kids and I would have no coverage other than COBRA or the private market or the state's high risk pool.
Any thoughts?