Is a Higher Pension Worth the Risk?

[Mountain_Mike]

A different reason to ER

I was talking to a person who ERed last May, and he had a reason to ER that I do not believe I’ve heard on this board, or anywhere else.

He is in the PERS system, and had 35 years of service. At his age, his pension would nearly equal 100% of his salary for as long as he lived…AND for his wife as long as she lived.

He said the push that made him ER was the fact that he’d seen too many people “die on the job.” If he were to die while still working, his wife would only get the contributions he had made into PERS—no lifetime pension.

I got to thinking, his situation isn’t that much different from mine. Using round numbers, if I were to die today, my wife would get my contributions--about $150,000 in cash. If I were to retire today, I (and my wife) would get $50,000 for life. This would make the pension worth about $1,250,000, right?

I had been planning to stick around for a couple years more, because the pension would go up to $60,000. But in light of the risk of losing (for my wife) the lifetime pension, isn’t it a more sure thing to take the $1.25M guaranteed pension value rather to risk losing $1.1M for the sake of holding out for another $10K per year? To me, it seems cheap “life insurance” to retire today!

Has anyone else considered this? Are my facts or logic flawed

 

[Scrooge]

Are my facts or logic flawed

Not that I am familiar with PERS systems, but the first question that comes to mind is whether his (or your) pension is fully COLAd?

 

[Texas Proud]

Are you sure about what you write It does not make sense... I would research this before making a decision..

I would bet that you spouse has the same options as you do... and I bet that the money in the account is NOT just what you put in, but includes an income component...

My sister did retire after 41 years teaching... but did so so she could get the spouse portion of SS... they passed a law and now you can not get it... she signed up last month and I think she gets her first check this coming month...

 

[dumpster56]

A different reason to ER

I was talking to a person who ERed last May, and he had a reason to ER that I do not believe I’ve heard on this board, or anywhere else.

He is in the PERS system, and had 35 years of service. At his age, his pension would nearly equal 100% of his salary for as long as he lived…AND for his wife as long as she lived.

He said the push that made him ER was the fact that he’d seen too many people “die on the job.” If he were to die while still working, his wife would only get the contributions he had made into PERS—no lifetime pension.

I got to thinking, his situation isn’t that much different from mine. Using round numbers, if I were to die today, my wife would get my contributions--about $150,000 in cash. If I were to retire today, I (and my wife) would get $50,000 for life. This would make the pension worth about $1,250,000, right?

I had been planning to stick around for a couple years more, because the pension would go up to $60,000. But in light of the risk of losing (for my wife) the lifetime pension, isn’t it a more sure thing to take the $1.25M guaranteed pension value rather to risk losing $1.1M for the sake of holding out for another $10K per year? To me, it seems cheap “life insurance” to retire today!

Has anyone else considered this? Are my facts or logic flawed

I did have the same thought. My situation is that if i ER this year my pension is 33,000 plus a cola after 24 months then every 12 months. If I died the wife continues to recieve 26,000 then the cola after the time alloted. I do have a good term policy of 300,000 because her medical bennies go poof away when I die, so she would have to buy them when I croak.

I figure if I ER as of jan or july 07 well I must since I sold the house in NJ and moved to NC already, the travel and living apart will get very old fast, at 51YO if I live say 40 more years that is 1.2 million+ dollars from the pension. That does not include the wifes small pension of 225 per month or SS.

The mortgage is only 40K on the new house so that is a minimal payment.

Who knows.

 

[haha]

Has anyone else considered this?  Are my facts or logic flawed

I know nothing about this situation you describe, but if it is as you say, you could see what a term insurance policy in the amount of $1,250,000 or whatever would cost you for the period that you would still be on the job. That way your wife, if not you, would win heads or tails.

Ha

 

[dumpster56]

Are you sure about what you write It does not make sense... I would research this before making a decision..

I would bet that you spouse has the same options as you do... and I bet that the money in the account is NOT just what you put in, but includes an income component...

My sister did retire after 41 years teaching... but did so so she could get the spouse portion of SS... they passed a law and now you can not get it... she signed up last month and I think she gets her first check this coming month...

Texas,

Here in NJ if I die my wife gets only what I contributed PLUS 3 and 1/2 times my income. So 50,000 + 280,000 life insurance while I am still working.

If I take the ER then we get 33,000 a year with a COLA If I die then she gets 26,000 with a cola only 35,000 of life insurance from the system but I bought additional term insurance.

 

[Texas Proud]

Texas,

Here in NJ if I die my wife gets only what I contributed PLUS 3 and 1/2 times my income. So 50,000 + 280,000 life insurance while I am still working.

If I take the ER then we get 33,000 a year with a COLA If I die then she gets 26,000 with a cola only 35,000 of life insurance from the system but I bought additional term insurance.

WOW... what a way to screw the spouse!!! (hmmm, that did not come out like I had intended.. but will leave it in anyhow :)

Then I would go HaHa's route... buy the insurance policy.. you can get a 5 year term policy and call it a cost of getting the higher retirement you are seeking...

OR, (and this is what I kept telling my sister for over 7 years)... retire, start taking the money now (I would assume you can get 100% starting today).. and then go get another job and double dip.... there are many military people here that can explain how it works.. My sister only wanted to teach.. so it was a non-starter for her.

 

[Spanky]

Buy a life term policy for $1,250,000 and drop it after 2 years. The increase of $10K in pension for life simply outweights the cost of premium, I think.

 

[dumpster56]

Buy a life term policy for $1,250,000 and drop it after 2 years. The increase of $10K in pension for life simply outweights the cost of premium, I think.

Seems on point.

 

[Nords]

A different reason to ER
Has anyone else considered this?  Are my facts or logic flawed

Dead people don't post about their ER considerations, but a lot of ERs pull their ripcords after a co-worker (or cousin or close friend) croaks in their cubicle.

If you have a reasonable FIRECalc success rate with what you have now, and if you have a reasonable shot at affordable healthcare, then I'd say that anything encouraging an earlier ER can't be a bad thing. "Honey, it's costing you too much money for me to go to work! I'm worth more to you at home than I am in the office!!"

If the assets or the healthcare aren't there... well, regrettably that's the purpose of life insurance. And it seems like you have a need to insure this situation.

 

[Mountain_Mike]

Thanks everyone...you're right, I need to look at specific details more carefully. This subject just came up in a casual conversation.

I don't really need life insurance. I qualify for lifetime medical and dental benefits. House is almost paid for, wife works in a good paying job (and not as close to ER as I, which is part of the problem). An exuse to ER would be helpful. Nords, I like your line of reasoning, "Honey, it's costing you too much for me to go to the office..."

Good ideas here; keep 'em coming...

 

[mickeyd]

We don't know Mike's age so that may be an issue in making a decision, but if you can retire today with a pension that is 100% of salary and is also COLA'd, I would take it ASAP and not look back.

If it were not COLA'd I may have to do some stubby pencil work on it, but SS has not even been factored in nor have other investments, both tax-deferred as well as taxable.

 

[dumpster56]

Pension 100% of salary!

Whoa , mine is 50% - 11% of my final average three last highest years salary.

Yea us teachers have such a great deal. No wonder after I crunched the numbers MOVED and have the low mortgage and low taxes I have decided to hang on for a few more months to pay off the extras.

Oh well It really is all good!

 

[Mountain_Mike]

I didn't mean to imply that my pension would be 100% of my salary-- that is what the guy I was talking with said. I have checked, however, and my pension would be 100% at age 61 (40 years of service) but I'm not sticking around that long, I guarantee you.

 

[scrinch]

When you answer a risk-type question like this, you have to consider the chances of the alternative outcomes occuring as well as the value of each of those outcomes. Like when you buy a lottery ticket...if you neglect to consider how unlikely a happy outcome is and just look at the value of a winning ticket, the lottery looks like a good idea. But when you consider the odds of winning, then the expected value of the ticket you buy is much, much less than the $1 you pay for the ticket.

So what is the risk of you dying in the next two years? Maybe 3%? Then the expected cost/loss to your wife's retirement is 3% x $1,100,000 = $33,000. What's the chance of you surviving and receiving the additional $10,000/yr for life? That would be the remaining 97%. So the expected value (to your retirement benefits) of continuing to work would be 97% x $10,000 x 30 years (let's forget discounting the cash flow) = $291,000. So if your numbers are correct, the expected value of working is an order of magnitude greater than the expected value of RE. That's not to say that lightning couldn't strike, it is just a look at the risked economics of the decsion. Now that you recognize the economic risk of dying in the next couple of years, if you can't live with the 3% risk of your wife losing that $1,100,000, then buy the insurance policy.

 

[Texas Proud]

When you answer a risk-type question like this, you have to consider the chances of the alternative outcomes occuring as well as the value of each of those outcomes. Like when you buy a lottery ticket...if you neglect to consider how unlikely a happy outcome is and just look at the value of a winning ticket, the lottery looks like a good idea. But when you consider the odds of winning, then the expected value of the ticket you buy is much, much less than the $1 you pay for the ticket.

sorry for the hijack.... but, it can be OVER the $1... if the cash you receive is higher than the odds of winning.. previously, the odd to win in Texas was 16 million to one.. if the pot was "$32 mill".. that would be about 16 today.. so a push... any more than it is worth over the $1...

But as one guy told me.. you can't even do the math one something like this.. it is so oversized winning.. and if you happen to be the ONE... well, you see..

You also forget the entertainment value of that $1.. more so than the $8 that I pay for a movie..

 

[scrinch]

Yeah, I buy lottery tickets too when the pot is high...both because the expected value and the entertainment value are higher. And I often don't check to see if I won for several days after the drawing because, until I check, I haven't lost and can still dream about what I'm going to do with all that money! :

Well, it's cheap entertainment, not really an investment...like playing the slots at Vegas, but with the proceeds going to public schools.

 

[mathjak107]

only lottery i ever won was the draft lottery back in the 70's

 

[Texas Proud]

only lottery i ever won was the draft lottery back in the 70's

But that one was rigged... and if you 'won' you lost..

 

[youbet]

only lottery i ever won was the draft lottery back in the 70's

Hee hee......    ......  My lottery number was "25."  Thanks for reminding me!    

 

[mathjak107]

16 HERE

 

[astromeria]

My ex got #2...
after being near the end of the alphabet and therefore last for nearly everything up to then

Babbling...
His application for conscientious objector status was rejected (normal for his draft board), and he appealed, but never heard back. Sweated it out to age 26, just before the War ended. He would've been a miserable recruit--intellectual, delicately built, nearsighted, and somewhat effeminate in manner (he got hit on by gay guys occasionally). I wonder if his own platoon would have done away with him due to suspicions of less than manly desires, or if he would've lost his mind and/or ended up on the hard stuff and ODd like one of his close friends. Oddly enough, at his parents' urging, he had applied to West Point in high school, but was rejected based on the physical--can't straighten one elbow completely. Bet they would've send him to 'Nam, however One of his brothers (who is gay), served in the pre-War Army (early 60s) and became a serious alcoholic. Life is very hard on some people.

On a more pleasant note, I've won two raffles. Consisdering that I've only entered maybe half a dozen raffles in my life, I'd have to say I'm lucky! For sme reason, I haven't been motivated to enter any lotteries though (except for asking my husband to buy a ticket once). I may be the only person in America who would have to ask the clerk how to buy a lottery ticket!

 

[setab]

First, an answer to the question. No, waiting around for a few more thousand dollars is not worth it in my opinion. I left early for many reasons; your concern is one of the major ones. As one of the authors recommended on this forum said, you may not ever get another chance to be the person you really want to be. That described me exactly, so now I am six months into reconnecting with that person, and I could not be happier. Finances are still a little tight, but evening out. It helps a lot to realize that excessive consumption and spending are the enemies and that "enough" is a lot less than you thought it was. Now to the secondary considerations. My lottery number was 329, yet I ended up working for the Army for 27+ years as a civilian. At least I didn't get shot at!

setab