LAYM, Spent It All

[yakers]

Further to the thread on Living Above Your Means, there was a small note in the November AARP Bulletin to the effect that "54% of workers who took their pension in a lump sum in 2003 have spent it all".

LAYM, just not a good idea.

I suspect that leaves social security, community support, lotto tickets and crime as sources of support.

 

[paradiseken]

I guess I'm one of the 46%. I took the lump and rolled it into an IRA.

 

[Donzo]

That is flat out sad. I wonder what they spent it on/how large it was on average? Hopefully purchased an RV (or a trailer) so they will have somewhere to live!

This really backs up all the articles discussing how the boomers plan on working past traditional retirement age

 

[Martha]

It would be nice to know more about the amounts involved. I know a woman whose husband died and she cashed in his pension. The total was about $25,000. She lived on that for a couple of years while trying to get covered by social security disability.

I imagine that there is a fair chance that a number of these pensions were pretty small.

 

[larry]

As on Oprah yesterday, filmmaker left $100k for homeless man in dumpster. He spent all the money and went into debt. He got married and his wife left him when the money ran out. Now he wishes he was never given the money.

He lacked the skills needed to deal with the money and the producers offered him financial guidance but he never asked for help. This probably defines the majority of people in the AARP study.

 

[Outtahere]

Larry I watched that Oprah show too. I want to watch that special, there were a lot of things they vaguely mentioned like alcohol addiction and his problem with authority figures. The Oprah show almost made me think he was going to turn things around and be a success story but sadly that's not the case. At one point when she was grilling him about the things he should have done my dh said "She doesn't give anyone any slack does she," IMHO she should have been tougher.

I think a lot of people are like that guy with a windfall whether it's a pension they can cash out, lottery winning or inheritance.

 

[tryan]

I wonder if paying off the mortgage is considered "spending". Seems to me this would more an "investment".

Oh yeah, a fool and his money will soon be parted.

 

[mickeyd]

"54% of workers who took their pension in a lump sum in 2003 have spent it all".

Yea, but look at all of the nice 2004 pick-up trucks in their driveways.... 8)

 

[Shredder]

I used to work with a guy who retired at 56yr old. He took a buy out of only 150,000 paid off his boat (40 ft trawler type) sold his house and lived for 4 yr on his boat. He started with paid off boat and <200G's. I talked to him last year. He sold the boat, bought a small house in a Sun City type complex. And told me he and or his wife would have to work to pay the bills, or have any extra. He did not seem happy, he had to take less for the boat after trying to sell it for two years. His wife promised one year on the boat and was really sick of it after 4. Seems like a steep price to pay to live out a dream. I did not hope to retire and sit on a stack of money, but still, moderation.......Shredder

 

[dmpi]

I used to work with a guy who retired at 56yr old. He took a buy out of only 150,000 paid off his boat (40 ft trawler type) sold his house and lived for 4 yr on his boat. He started with paid off boat and <200G's. I talked to him last year. He sold the boat, bought a small house in a Sun City type complex. And told me he and or his wife would have to work to pay the bills, or have any extra. He did not seem happy, he had to take less for the boat after trying to sell it for two years. His wife promised one year on the boat and was really sick of it after 4. Seems like a steep price to pay to live out a dream. I did not hope to retire and sit on a stack of money, but still, moderation.......Shredder

The boat owner's two happiest days: The day he buys a boat. The day he sells it.

 

[haha]

Further to the thread on Living Above Your Means, there was a small note in the November AARP Bulletin to the effect that "54% of workers who took their pension in a lump sum in 2003 have spent it all".

LAYM, just not a good idea.

I suspect that leaves social security, community support, lotto tickets and crime as sources of support.

Our favorite topic - how stupid, feckless, and just plain low class immoral all those yucky people who are not wealthy rentiers like ourselves are.

Ha

 

[Martha]

Bad day Ha?

Nevertheless, good point.

 

[Leonidas]

The CFP who works for my pension system recently published an article about members who were going through the lump sum portion of their pensions. I can't link to the article because the site is password protected, but here's a couple of interesting quotes: (note: The term DROP refers to Deferred Retirement Option Program, which is a qualified retirement account - the balance depends on the individuals contribution rate and length in the program - which can be withdrawn w/out penalty if the member works to age 50, or age 59 1/2 if he/she retired early - think lump sum)

Too many people still don't understand what DROP really is. What is its true purpose? The DROP's primary purpose is to provide a lifetime of supplemental income during your retirement years. As a DROP balance grows, it may eventually be able to pay for other wants and needs. But the first and most important priority is to provide retirement income. DROP offers one of those rare opportunities to secure your financial future. Imagine being able to maintain your entire current income, even after you stop working! That is exactly what DROP is capable of providing, if given a chance.

Why do so many people fail to experience DROP's true potential? They underestimate their retirement income needs. They also underestimate how much money it will take to replace their income. This lack of information results in unfortunate situations time and time again. An Officer leaves the Department and quickly spends most of the DROP money on big-ticket items (such as real estate). He assumes his expenses will be minimal, once he's paid off all of his debt. With low expenses, the pension check is expected to cover most of the bills. Unfortunately, as soon as the City phase down checks stop, reality sets in. Before long, he's looking for another job to help make ends meet (if he is young enough). The pension check by itself is not quite enough for many people. The other common scenario follows a slightly different pattern. Wanting to keep the DROP balance intact, the “retiree” instead takes on a big mortgage to buy the new house, and the new travel trailer is purchased on credit as well. He (or she) reasons that if cash flow becomes a problem down the road, he'll just pay everything off with DROP money. With everything paid off, he can easily live on the pension check. Sure enough, shortly after phase down the monthly bills dwarf available income. So, the DROP account is drained to pay everything off. Now he's down to a pension check and little or no savings. He won't need a CPA to figure out he's coming up a little short each month. Hello job market.

Because of the size of the DROP balances, people sometimes have a false sense of security, and in extreme cases, visions of grandeur. Retirees sometimes see the DROP as an unexpected windfall, and treat it as such. Consider the plight of the typical lottery winner. We've all heard the stories. A few short years after being blessed with riches, they are often broke, and they wish the whole thing had never happened. One thing is very clear. People desperately need financial information and advice. Do someone a favor this week, and explain to that person why they should consider preserving their DROP rather than spend it. It's difficult for most people to understand these things, if no one has ever taken the time to explain it.

The article goes on to explain SWR, and it caused so much email and telephone comments that he had to come back a couple of weeks later and explain how to determine what SWR to use.

 

[haha]

Bad day Ha?

Nevertheless, good point.

I admit it. Periodically I get annoyed at some discourse here, the same way I got annoyed at rich kids at college explaining how messed up and lazy the proles were.

Meanwhile, said pontificators were drinking all night, sleeping 'til noon, and being supported by Mommy and Daddy.

Ha

 

[Martha]

I admit it. Periodically I get annoyed at some discourse here, the same way I got annoyed at rich kids at college explaining how messed up and lazy the proles were.

Meanwhile, said pontificators were drinking all night, sleeping 'til noon, and being supported by Mommy and Daddy.

Ha

Me too.

 

[Spanky]

The term DROP refers to Deferred Retirement Option Program, which is a qualified retirement account

Why not just call it DRA?

Image how the term can be referenced:
Let's talk about DROP.
Drop it. I do not want to talk about DROP.
Can I drop my DROP?
What are some of the DROP options?

 

[Patrick]

The boat owner's two happiest days: The day he buys a boat. The day he sells it.

Definition of a boat: a hole in the water you dump money into.

 

[Patrick]

The CFP who works for my pension system recently published an article about members who were going through the lump sum portion of their pensions. I can't link to the article because the site is password protected, but here's a couple of interesting quotes: (note: The term DROP refers to Deferred Retirement Option Program, which is a qualified retirement account - the balance depends on the individuals contribution rate and length in the program - which can be withdrawn w/out penalty if the member works to age 50, or age 59 1/2 if he/she retired early - think lump sum)

The article goes on to explain SWR, and it caused so much email and telephone comments that he had to come back a couple of weeks later and explain how to determine what SWR to use.

We tried to get a DROP plan where I used to work, but the State legislature would not approve it. They said they were not sure what it would cost them to administer the program. They way it would have worked is that the employee would sign a contract with the employer that he would terminate on a certain date (up to five years) in the future. The employee would continue to collect his salary but the employer would pay nothing more to the retirement system on his behalf. The retirement system would take the money that they would have paid the employee if he had been retired and put it an separate account for the benefit of the employee. The employee's retirement benefit is frozen at the amount he would get on the day he signed the contract. On the day the employee terminates, he begins collecting his pension AND has access to the lump sum in the separate account set up by the retirement system.

So, for example, if he made $100K/yr and his retirement would have been $50K/yr, and he signed up for 5 years, he would work those 5 years with $100K/yr salary, and 5 X $50K = $250K would go into his DROP plan. When he retires, he gets the $50K/pension and a $250K lump sum.

The tradeoff is that his pension didn't increase from the $50K for those 5 additional years he worked. For people who are maxed-out on their pensions, the plan is a good deal (assuming you don't mind working another 5 years).

It's really cost-neutral to the retirement system because they would have been paying the employee the $50K if he had retired earlier anyway.

 

[Leonidas]

We tried to get a DROP plan where I used to work, but the State legislature would not approve it. They said they were not sure what it would cost them to administer the program.

I don't know what it costs to administer our program. But in my case (luckily for me) the pension is administered by an independent governing board and any additional costs are from the pension system's revenue. In fact, my employer actually saves money on each employee in DROP, because it no longer has to make any matching contributions to the pension fund for DROP'ed employees.

Why not just call it DRA?

Image how the term can be referenced:
Let's talk about DROP.
Drop it. I do not want to talk about DROP.
Can I drop my DROP?
What are some of the DROP options?

We woik for the guvmint and we love acronyms. After DROP was such a hit they came back and initiated PROP (Post Retirement Option Plan). After you stop working you can roll your money over into an traditional IRA or keep it at the pension system where it continues to earn interest. So, after you DROP, you need to be PROP'ed up.

My night shift desk officer spent his last year at work calculating his retirement funds to the penny and parts of a penny. He wanted to travel more during his retirement but he had to do it as inexpensively as possible. He bought a used travel trailer and was renovating it during his off days. He was a real bargain shopper, and every morning when I came into the office he would stop by on his way out the door to tell me all about his latest acquisition that he had bought and installed for a fraction of the cost.

He finally retired and about a month later called into the office to let us know how he was doing. He was in the mountains driving his brand new truck and pulling a brand new travel trailer.

"What's up with the Guillermo? You spent all that time and energy making that other trailer ready to go so you could save some money, and now you blew it all for new stuff?"

"Well Boss, I saw all that money in my DROP account and I decided that I could afford something nice - and new. Hell, you only live once."

And that's how lump sums turn into nothing.

 

[Zoocat]

Larry I watched that Oprah show too. I want to watch that special, there were a lot of things they vaguely mentioned like alcohol addiction and his problem with authority figures. The Oprah show almost made me think he was going to turn things around and be a success story but sadly that's not the case. At one point when she was grilling him about the things he should have done my dh said "She doesn't give anyone any slack does she," IMHO she should have been tougher.

It's interesting to me what people focus on with a story like that. What I heard was a man who spent some of the money to get his teeth fixed. I imagine after two decades on the street he had quite a bit of deferred maintenance. He also lent money to relatives. To me that reveals a man who has heartache and wanted to re-establish family connections. Too bad his relatives couldn't step up to the plate. He also got married. This too shows that he wanted to make a new life for himself. Many people focused on the fact that he didn't get a job and that he didn't save any of the money. That would have been my choice, and I wish he had put himself first in a more practical way before he tried to establish new relationships. Obviously, the man has some real problems. But frankly I think a lot of people would have reacted the same way when confronted with a windfall.

I wish that Oprah would get over herself and her judgemental attitudes.

 

[Patrick]

I don't know what it costs to administer our program. But in my case (luckily for me) the pension is administered by an independent governing board and any additional costs are from the pension system's revenue. In fact, my employer actually saves money on each employee in DROP, because it no longer has to make any matching contributions to the pension fund for DROP'ed employees.

That's how our program would have been, too. But the retirement system opposed it because they didn't know how much it would cost them to establish and oversee the DROP accounts with the cash in them.

Oh, well, it's probably better that it didn't pass because I would have stayed 5 more years (over DW's objections) to get the cash. Of course, I wouldn't have squandered the lump sum on extravagant impulse purchases!

I did a spreadsheet on it and figured that the breakeven point for me was about 15 years into retirement due to the fact that I wasn't topped-out on my pension yet and would have got a few COLAs on my salary. But I figured cash now is better because I don't know if I'll make it for 15 more years. Water under the bridge. If it's available for you, I'd definitely consider it, though.

 

[sgeeeee]

Quote from: HaHa on December 03, 2006, 12:09:15 PM

I admit it. Periodically I get annoyed at some discourse here, the same way I got annoyed at rich kids at college explaining how messed up and lazy the proles were.

Meanwhile, said pontificators were drinking all night, sleeping 'til noon, and being supported by Mommy and Daddy.

Ha

Me too.

You drink all night, sleep 'til noon, and are supported by Mommy and Daddy?

I would never have guessed.

 

[Leonidas]

That's how our program would have been, too. But the retirement system opposed it because they didn't know how much it would cost them to establish and oversee the DROP accounts with the cash in them.

Oh, well, it's probably better that it didn't pass because I would have stayed 5 more years (over DW's objections) to get the cash. Of course, I wouldn't have squandered the lump sum on extravagant impulse purchases!

I did a spreadsheet on it and figured that the breakeven point for me was about 15 years into retirement due to the fact that I wasn't topped-out on my pension yet and would have got a few COLAs on my salary. But I figured cash now is better because I don't know if I'll make it for 15 more years. Water under the bridge. If it's available for you, I'd definitely consider it, though.

I am, as we are known here, a Dropasaurus.

DROP was created here as a means to keep older workers on the job. Most people retired here at the earliest opportunity and then collected their pensions while working elsewhere. Now, with DROP, we work longer than the minimum, but we can afford (in most cases) to not have to start a second career. There is no maximum or minimum time limit applied to participation. You stop working when you think the time is right. Of course, the longer the participation in DROP the greater the lump sum.

Current demographics make finding qualified new hires to replace us very expensive and difficult to find. so the employer wants to keep us around as long as they can.

My career closed out during a brief period when the employer was desperately trying to keep employees and was throwing money into programs to keep people working longer. Like the version of DROP that you described, when we entered DROP our pension was frozen, and that amount was contributed to the DROP account on a monthly basis. Salaries could rise because of salary hikes and promotions, but upon actual retirement, the pension was whatever it was at the time of DROP entry (plus COLA's). That was changed in favor of refiguring our pensions at time of actual retirement to what it would have been if we never entered DROP (i.e., we got the full effect of all raises in the interim). It didn't affect what you have paid into DROP, but you would get the DROP benefit and the higher pension payments.

The absolute best goodie that they dangled to keep the slaves on the boat older employees working was what they called "Back-DROP". I called it the what-if clause. Basically, if after entering DROP you had a significant salary increase (usually through promotions) then you could play a game of "what if". As in, "what if I had waited until after my promotion to enter DROP - how would the corresponding increased contributions to DROP affect my account balance?" If you were going to work a few years more you could significantly increase your balance. People had to give up some of their accumulated DROP money up front, but gained an increased salary and percentage contribution upon which DROP was calculated. If you were going to work for a few more years it meant a lot more money to retire on. The pension system automatically ran a break even point for everyone. In my case the difference was only a couple of grand, but a friend "gave back" $300k while doubling his future lump sum payout and adding significantly to his future pension check as well (changing DROP entry date means your pre-DROP longevity increases and that increases the percentage of final salary paid as pension).

Some things have changed and a lot of those windows are closed now (but not before I made it ). But most people around here still think DROP is almost better than sex.