Buying 2 years more pension or not?

[wkoukios]

Hello everyone, I have been browsing around this forum and have picked up many tips from all of you.

Here is my multiple faceted dilemma. I have the ability to purchase 2 additional years of pension benefits for aprox $80,000.

The benefit increase from the 2 additional years will increase the pension $5000 a year for life and transfers 100% to spouse.

This pension also has a 3% increase every year.

I am torn. This is with the Illinois, so it could be defaulted on in the future and I am out 80k. The 3% cola is at risk too.

Thanks for any input!

 

[utrecht]

How old are you, or will you be when the pension starts?

 

[samclem]

Well, I can see why Illinois govt pensions are in trouble!
Being able to buy $5000 per year in benefits for life--incl the life of the spouse--with a 3% COLA is very . . um, "generous." It would be a fantastic deal if the money is actually paid out.

I'd be looking at the "what ifs" if Illinois can't pay. What have other states done? I would >guess< that any reductions would be phased-in, and that those with a small pension check would be hurt less than thse with a larger check. Or there would be a cap (similar to the PBGT cap). So, if you have a small pension, maybe it would be worth the gamble.

 

[wkoukios]

I am 53 and will retire next year. The ability to purchase 2 years is because I can purchase up to 2 years active duty military service. Thanks

 

[heeyy_joe]

Consider your pillow, then decide.

 

[Mulligan]

You haven't mentioned which pension system it is. Even in Illinois some are in better shape than others. I would go to your pension website and find the funding level of the pension. I spent a little under a 100k 6-7 years ago to buy 4 years of pension next door to you in MO. But are funding ratio is pretty strong at 85%. No way would I consider buying years in a distressed funded system. 80% is generally considered safe by the experts I have read. You see something that reads significantly below that, it should cause some serious reflection before purchasing.


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[manerac]

Can someone explain how to find out the funding ratio of a private pension fund? Is it simply the ratio of two lines on IRS form 5500?

 

[Chuckanut]

I bought 5 years of extra service when I retired. The cost was about $65k, IIRC, and it bought me about $380 a month more in benefits.

That was before Detroit.

If I had to do it today, given the Detroit precedent, I might not do it, or split the difference by buying 2-3 years and investing the rest.

But, Illinois's pension system is in much worse shape than my state's system according to what I have read. So..... Be very careful.

 

[greydog17]

Take a look at this site to estimate and compare what your money will buy today in the annuity market; https://www.immediateannuities.com/


Using your age 53 and assuming your wife is same age, $80k will buy a monthly income of $333 beginning in 1 yr w/o COLA. Your option paying $416 w/ 3% COLA looks good in comparison, provided you can get past the funding concerns.

 

[ripper1]

While Illinois is in trouble with their pensions that doesn't mean people are not going to be made whole. The system is in trouble because legislators decided to take pension holidays and not fund them for years. Instead used that money on pet projects and various services where people ordinarily would be paying an increased tax for. Illinois has had an artificially low flat tax for years and now the chicken has come home to roost. Illinois has a pension reform bill (SB1) presently awaiting the Illinois Supreme Court. Already was ruled unconstitutional by lower court. Attorney general Lisa Madigan will argue the state can use its soveriegn police powers to urge the Supremes to uphold the law because the state is in such dire straits. A couple of things stand out that hurt her argument. First being the corporate welfare that goes on this state where two thirds of major corporations effectively pay 0 in state taxes. Some of them actually collect their employees income taxes. Also they just reduced the state income tax from 5% to 3.75%. Seems like a lot of revenue for a state to leave on the table when they are hurting so much

 

[Mulligan]

Valid points Ripper and will not dispute them. But just my view and as one as a pensioner, you start to realize you become totally dependent on other peoples actions to safe guard your own financial well being. Pensions were thought of as automatic and gold not too long ago and I certainly would never have thought of my pension as being "at risk". But the climate and attitudes towards pensions are changing rather quickly. Are these arguments in the courts seen as eternal safeguards or just "Custard's last stand"? I do not know, but it certainly has given me pause as for all practical purposes I live on a "one legged" retirement stool.


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[ripper1]

Valid points Ripper and will not dispute them. But just my view and as one as a pensioner, you start to realize you become totally dependent on other peoples actions to safe guard your own financial well being. Pensions were thought of as automatic and gold not too long ago and I certainly would never have thought of my pension as being "at risk". But the climate and attitudes towards pensions are changing rather quickly. Are these arguments in the courts seen as eternal safeguards or just "Custard's last stand"? I do not know, but it certainly has given me pause as for all practical purposes I live on a "one legged" retirement stool.


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Thanks, Mully. Well, as a LBYM type I certainly have other legs to hold up my stool. It is just a shame we have come to this because others stole the money.

 

[SJ1_]

Hello everyone, I have been browsing around this forum and have picked up many tips from all of you.

Here is my multiple faceted dilemma. I have the ability to purchase 2 additional years of pension benefits for aprox $80,000.

The benefit increase from the 2 additional years will increase the pension $5000 a year for life and transfers 100% to spouse.

This pension also has a 3% increase every year.

I am torn. This is with the Illinois, so it could be defaulted on in the future and I am out 80k. The 3% cola is at risk too.

Thanks for any input!

I had the same chance and decided against it because I did not want
to put any more money in one place.

 

[Mulligan]

Thanks, Mully. Well, as a LBYM type I certainly have other legs to hold up my stool. It is just a shame we have come to this because others stole the money.

That is certainly true Ripper. In my situation though, all money has been contributed from both sides and it's questionable how it all will shake out 30 years down the road as it is based on the dreaded 8% yearly assumed return.
Looking back, I could kick myself for not saving more, but as I was rolling through the years I thought "they already are taking nearly 15% and matching the same amount and when I retire I will make as much as I was working and it's COLA'd who needs to save?"
Well the past 5 years I have saved more (and some side gigs) than I had my entire working career as a buffer down the road.... Give me 10 more years and I can survive a big haircut if it ever would happen. The trouble is if things went bad which lever are they gonna pull? Lower the multiplier? Hit the newbies and extend years of service? Raise retirement age? End Cola's? Cut existing pension? I do not know which lever they would pull, so I am assuming it's mine. It's not like I am hoarding every penny I get, but I am being vigilant, as I don't want to be looking for a job at 70. Heck I barely wanted to work in my 40's.


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[Greencheese]

While Illinois is in trouble with their pensions that doesn't mean people are not going to be made whole. The system is in trouble because legislators decided to take pension holidays and not fund them for years. Instead used that money on pet projects and various services where people ordinarily would be paying an increased tax for. Illinois has had an artificially low flat tax for years and now the chicken has come home to roost. Illinois has a pension reform bill (SB1) presently awaiting the Illinois Supreme Court. Already was ruled unconstitutional by lower court. Attorney general Lisa Madigan will argue the state can use its soveriegn police powers to urge the Supremes to uphold the law because the state is in such dire straits. A couple of things stand out that hurt her argument. First being the corporate welfare that goes on this state where two thirds of major corporations effectively pay 0 in state taxes. Some of them actually collect their employees income taxes. Also they just reduced the state income tax from 5% to 3.75%. Seems like a lot of revenue for a state to leave on the table when they are hurting so much

I think its highly unlikely Illinois pensioners will ever get what's promised them. The state is experiencing population decline and slower job growth than states around it. Factor in how much weight Cook County/Chicago pull for the state economy and THOSE pension funds are also a mess. On top of that there is a general hostility towards Illinois government retirees because of the benefits packages and the fact that every time a solution is passed it gets ruled unconstitutional. The state can't keep and jobs now, what makes individuals think the state is going to have better luck doing that when taxes go up to pay for retirees benefits. At least with a school or road I see what my dollars built, not when its the retirement for some person I've never met who lives in Florida 6 months out of the year.

 

[Mulligan]

Greencheese brings up another valid point of government pensions. Even though some may be adequately funded there is also an element of political risk. Already twice our local legislatures have discussed the concept of folding all the state pensions under one fund under the guise of "efficiency and less expenses for greater return". But nobody in our system was falling for that ruse as they were wanting to move those other independent systems that are underfunded and try to use the $40 Billion sitting in our trust as a way to rob Peter to pay Paul. It has been successfully beaten back so far.


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[Chuckanut]

At least with a school or road I see what my dollars built, not when its the retirement for some person I've never met who lives in Florida 6 months out of the year.

A poor excuse for picking a working person's pocket. Somebody had to teach the children in those schools as well as plan, police and maintain those roads.

Well the past 5 years I have saved more (and some side gigs) than I had my entire working career as a buffer down the road.... Give me 10 more years and I can survive a big haircut if it ever would happen. The trouble is if things went bad which lever are they gonna pull? Lower the multiplier? Hit the newbies and extend years of service? Raise retirement age? End Cola's? Cut existing pension?

Just for 'fun' I ran FireCalk with the following alterations:

1.) Social Security is reduced by 25% (this seems to be the max reduction that has been mentioned.)

2.) My pension is cut by 20%. I picked this number because at the depths of the last economic collapse the pension was 80% funded. I'm not sure that makes much sense.

3.) The pension COLA (capped at 3% a year) is eliminated.

FWIW, I can still survive fairly well. That's mostly due to delaying SS until I am 70. But, there will be no weekend flights to Paris to have dinner at a 3 star Micheline restaurant.

 

[Mulligan]

A poor excuse for picking a working person's pocket. Somebody had to teach the children in those schools as well as plan, police and maintain those roads.



Just for 'fun' I ran FireCalk with the following alterations:

1.) Social Security is reduced by 25% (this seems to be the max reduction that has been mentioned.)

2.) My pension is cut by 20%. I picked this number because at the depths of the last economic collapse the pension was 80% funded. I'm not sure that makes much sense.

3.) The pension COLA (capped at 3% a year) is eliminated.

FWIW, I can still survive fairly well. That's mostly due to delaying SS until I am 70. But, there will be no weekend flights to Paris to have dinner at a 3 star Micheline restaurant.

I am glad my standard of living isn't extravagant either. The one thing worse than being poor is being rich prior to becoming poor! I can't even count on SS, as the WEP whacked it to the max based on my pension. I think I am eligible for about $102 at age 62 in today's dollars. Delaying it until 70 doesn't appear to be a life saver for me.


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[ripper1]

I think its highly unlikely Illinois pensioners will ever get what's promised them. The state is experiencing population decline and slower job growth than states around it. Factor in how much weight Cook County/Chicago pull for the state economy and THOSE pension funds are also a mess. On top of that there is a general hostility towards Illinois government retirees because of the benefits packages and the fact that every time a solution is passed it gets ruled unconstitutional. The state can't keep and jobs now, what makes individuals think the state is going to have better luck doing that when taxes go up to pay for retirees benefits. At least with a school or road I see what my dollars built, not when its the retirement for some person I've never met who lives in Florida 6 months out of the year.

First of all don't believe everything you read about public employees having gold plated pensions and living in Florida and being perpetually in shorts. The vast majority of public employees live on a modest pension and do not get social security. So this is their only lifeline for most. Also the unions did agree to a pension reform package and Madigan never called the bill to the floor. You say your retirement year is 2042. It seems to me you are a little GREEN to be making statements about something you may know little about.

 

[unno2002]

Tossing alternative numbers… in 2013 we bought a small rental for $77,500, which is bringing in $805/month. After expenses it is putting in our pocket (ignoring tax write off's) a consistent $583/month. ($6996 per year) This is a 9% "annuity", from an appreciating asset that can be left to the spouse, kids, etc.

 

[highlow65]

Better deal in Massachusetts 4 years military for 10% of first years pay for each year you buy back, and this was back in the eighties when I made very little. No interest and can pay with deferred comp money which was never taxed. A sweet deal!

 

[wkoukios]

Thanks for all the great input. We are not likely to make the purchase. For many reasons, the biggest being Illinois is bankrupt and it's future is in doubt with all the people of means leaving. I see so few Illinois Lic plates on the cars in the driveways of luxury homes. Even if they have not moved away physically, they file taxes in places like Florida. Second homes soon become main residences when taxes are punitive. The wealthy vote with their feet and this vote is having a good turnout.
I looked up the latest funding ratio for the firefighter pension I am in and its at 50%. Thanks again everyone!

 

[wkoukios]

Better deal in Massachusetts 4 years military for 10% of first years pay for each year you buy back, and this was back in the eighties when I made very little. No interest and can pay with deferred comp money which was never taxed. A sweet deal!

The deal in Illinois is similar except for one BIG difference. The applicant must pay 7% compounded interest per year until at current years of service. With 25 years, compounding is not my friend!

 

[Teacher Terry]

When we were faced with the same choice we decided against it because even though our pension fund was healthy it would take 15 years for me to break even with the decision.

 

[Big_Hitter]

Can someone explain how to find out the funding ratio of a private pension fund? Is it simply the ratio of two lines on IRS form 5500?

there are several measures of funded status

one measure is on the 5500 schedule sb, another is filed with the sec on the 10-k another comes out in your annual funding notice