Long term financial advise sought

[Mulligan]

With the increased free time on my hands (to worry) from early retirement and learning from financial posts here, I developed a long term concern for my financial well being and wanted input from anyone willing to offer. As a by product from a cola'd teacher retirement system, I was a typical (at least from my presonal experience) person. Meaning, they take "x" amount out each month and at "x" amount years, I will get "x" amount of money yearly with a cost of living increase. Its protected by law, so no problems, right? I noticed this year they invoked the "fine print' that said if inflation is under 2% no colas has to be given (Im not eligible for my first one until, Jan. 2012) then they cited it would save the system $110 million dollars. Now I've read the system is about 80% prefunded down from 100%, 10 years ago and they are looking to whack the new teachers with a lower retirement package, with increased contribution rates to help shore up the system. If you were me (I'm 46) would you be worried for the long term future, and would you do anything financially about it?

Background: My pension is a little under 75K, before taxes, a year and after 6 months being retired, I find myself saving about $600 a month from it. Only having about 60K in assests (I would have had more, but I purchased 4 years with $85,000, so I could retire earlier), I obviously am just counting on living off my monthly pension ( I sound like a welfare person now). My child support ends in 4 years, lowering my expenses $600 a month then (college is taken care of). No one has threatened to cut current retirees pensions, yet, but even if something as little as not giving cola's could have a dramatic effect on my income down the road if I live to a normal life expectancy. Any general thoughts from anyone? I'm worried that maybe I've been too niave in just "trusting the system". Or is it having too much time on my hands to imagine a financial crisis down the road? Any thoughts appreciated!

 

[GregLee]

I think you can relax, since your retirement finances seem to me to be in pretty good shape. That $600/month you're saving is going into a mutual fund? And in four years, you can up that to $1200/month? Many of us can envy you.

 

[LOL!]

If I was as worried as you appear to be, I would go get a job.

 

[Mulligan]

I think you can relax, since your retirement finances seem to me to be in pretty good shape. That $600/month you're saving is going into a mutual fund? And in four years, you can up that to $1200/month? Many of us can envy you.

I guess I should have added (more worries, I know) I have an 10 yr old car with 175,000, so I'm about to be forced into a car payment with full coverage insurance, plus the ever present potential health care costs as I have a 5K deductible. I was planning on using that extra money to fund my HSA and build it up, also. LOL, I should have mentioned, I do have a part- job that pays about $500 a month and I save that money, but the job ends in May. To be quite honest, my skill set outside of education would not pay much money (or atleast I wouldnt pay much for it as an employer) I would have to re-enter the field, but then I would have to suspend my pension, so I wouldnt gain much by doing that. If nothing else, I definitely understand why people with no pension but sizeable assets, worry about outliving them.

 

[travelover]

There isn't much you can do about your pension's security, but you can continue to save and invest. You have a good pension income and probably have some opportunity to cut your expenses to save even more. As young as you are, you have a lot of years for compounding.

I'm in a similar situation in that my pension is not secure, though I have more savings. I continue to max out my spousal IRA and also save in an after tax account.

 

[GregLee]

Well, okay, I see now that you have some things to worry about. Of the other things you mention, the only one that seems to me, personally, not really a problem is the 10 year old car. My car is that old, and cost me only $6000 used 5 years ago, and still works fine. (I've really never understood the huge amounts people seem to be willing to invest in cars.)

 

[obgyn65]

Hello Mulligan - a lot of people on this board would be happy with 75k a year, even before taxes. This represents $1,875,000 assuming SWR = 4%.

 

[Mulligan]

Hello Mulligan - a lot of people on this board would be happy with 75k a year, even before taxes. This represents $1,875,000 assuming SWR = 4%.

Obgyn- Only through my interest in this forum in the past year, have I learned to appreciate your above analysis. I would guess that the vast majority of pensioners like me are clueless to the amount an individual has to invest on their own to fund their own retirement. A concern from me is the pension system is assuming 8% annual returns to fund this system. I'm not very investment saavy, but you sure cant get that in bonds or cd's now, so that would really put pressure on them hitting some home runs in the stock market yearly to hit that yearly benchmark, I would think.

 

[kumquat]

(I've really never understood the huge amounts people seem to be willing to [-]invest in[/-] spend on cars.)

Fixed it for you.

 

[Mulligan]

Well, okay, I see now that you have some things to worry about. Of the other things you mention, the only one that seems to me, personally, not really a problem is the 10 year old car. My car is that old, and cost me only $6000 used 5 years ago, and still works fine. (I've really never understood the huge amounts people seem to be willing to invest in cars.)

That was a lesson I didnt learn, unfortunatly, until my mid 30's. Traded way too often, and got too many sports cars. Another example of youth wasted on the young, I guess.

 

[Independent]

It looks like your only concern is that the "system" fails. You appear to be single, with a BT COLA'd income of $75k, you're saving $7k and putting another $7k into child support that goes away in 4 years. Most people here would be very comfortable in that position.

The only protection I can see against the system failing completely is a job. You didn't say what you enjoy doing. As a teacher you probably believe in lifetime educaton, so you might think about learning something that might generate a income in the future.

Other than a job, IMO the $7k (soon to be $14k) you're saving per year can be viewed as your safety net. The public pension almost certainly isn't going to be cut to zero. If you eventually get 80% of the $75k, you can easily live on that. If it's 60%, that's still way above poverty and you'll have your savings to fill in any shortage.

Note that everyone here is at risk of a complete social failure of gov't and economics. Most of us give that a 1% chance and just live with the risk. (A few years ago I might have said put your savings in gold if you're really worried about that.)

 

[Mulligan]

It looks like your only concern is that the "system" fails. You appear to be single, with a BT COLA'd income of $75k, you're saving $7k and putting another $7k into child support that goes away in 4 years. Most people here would be very comfortable in that position.

The only protection I can see against the system failing completely is a job. You didn't say what you enjoy doing. As a teacher you probably believe in lifetime educaton, so you might think about learning something that might generate a income in the future.

Other than a job, IMO the $7k (soon to be $14k) you're saving per year can be viewed as your safety net. The public pension almost certainly isn't going to be cut to zero. If you eventually get 80% of the $75k, you can easily live on that. If it's 60%, that's still way above poverty and you'll have your savings to fill in any shortage.

Note that everyone here is at risk of a complete social failure of gov't and economics. Most of us give that a 1% chance and just live with the risk. (A few years ago I might have said put your savings in gold if you're really worried about that.)

I probably need to learn to be an investor instead of a saver with the above funds. All I have thought about was even if I was able to save $100,000 the next ten years, it would only return me $2500 a year in interest before all the taxes. I actually am working at the school I retired from. They were short a 1/2 time teacher (inschool suspension), so I told them I would do it for 1/2 sub pay ($40). It would save the district over $20 grand and help me a little. I love being around the students, but hated being the boss. I used to think there was a big disconnect between 401's and pensions, but if one system is hurting, ultimatley they both probably are.

 

[growing_older]

One other thing you might consider is expenses. I will have no pension and I hope to have saved a large enough nestegg to generate monthly withdrawals considerably less than your pension. When I meet these goals, I will be happy with my retirement and FI, though they are much lower than yours. To me your pension sounds very generous, but then that likely means I have typical expenses below that level. Maybe it would feel more safe to you if you didn't see your own expenses so close to what you receive from the pension. If you live on less of it, then you would have a larger buffer.

 

[GregLee]

I would have to re-enter the field, but then I would have to suspend my pension, ...

Is that usual? There is no earnings limit on my pension.

 

[chinaco]

You were able to retire at 46 and get a COLA pension of $75k as a school teacher? I assume you live in the US. I'll bet it comes with a guarantee of retirement medical.

No wonder State Pension Funds are in trouble.

There is no way to know what is going to happen. It comes down to how the state deals with it.

There are only 2 options... jack up taxes or cut benefits (so called restructure).

 

[cardude]

Don't but a new car and make car payments!

Take it from a retired car dealer-- new cars are for suckers, or at the very least people with jobs. I drive old cars with 100k plus miles and only carry minimal liability insurance (but I do have an umbrella policy).

Most people waste huge portions of their incomes on vehicles over their lifetimes, and that is why I was able to ER!!

 

[JBmadera]

Even though I cannot relate (my dad is in the same spot - large pension + cola and bene's) since I'm on my own, but the two suggestions made above seem right: lower your current expenses to increase savings and if you really are worried then add another gig (tutoring??) to your current part time position.

when I go thru the analysis with my dad he gets stuck on the same part you did - "how solid can this pension be if they are assuming 8%+ returns", all I can tell him is that their investment methodology and targets are outside of your control, the only thing you can control is your spending and your individual savings/investing.

Joe Dominguez has an excellent series on money, I would see if you could check out the CD's from your local library.

oh and I've got a 10 year old car too - when I used to have to drive to the office in Silicon Valley folks would make fun of me (it's an old honda civic) since up there seems like everyone else had bmw's, range rovers, etc but I love that car and wasn't afraid to tell them all so...

good luck!

 

[donheff]

To be quite honest, my skill set outside of education would not pay much money (or atleast I wouldnt pay much for it as an employer) I would have to re-enter the field, but then I would have to suspend my pension

If things get tight couldn't you move somewhere else and teach? Or look at parochial or other private schools in your area? Or look at workplace training functions (that can be fun, the students are not surly)

 

[Mulligan]

You were able to retire at 46 and get a COLA pension of $75k as a school teacher? I assume you live in the US. I'll bet it comes with a guarantee of retirement medical.

No wonder State Pension Funds are in trouble.

There is no way to know what is going to happen. It comes down to how the state deals with it.

There are only 2 options... jack up taxes or cut benefits (so called restructure).

Chicano, I have 28 service years which equates to about 70% of salary. I was a principal my final few years, which accounts for higher pension. There is no medical benefits. Although its a public pension, it is a stand alone system. I dont believe (nor would I want, as I am a libertarian at heart) there would be a bailout of this system. Just benefit cuts. My only issue would be for them to adjust immediatly, not kick the can down the road, making the problem worse. I have no problem working and will in a low stress, low pay job (I like to work, but dont want stress work). Just dont want to get whacked 50% at 60 when no one will hire me. With advise from above, I will scrutinize my budget (by creating one first, then go line by line). Definitely will look for good deal on a cheaper higher mileage used car.

 

[Mulligan]

Is that usual? There is no earnings limit on my pension.

My understanding is that provision was implemented to prevent double dipping from occuring, to keep you from doubling your pay for doing the same job. Pension is uneffected by work outside public ed, though.