buy service credits or not...

[GregLee]

Quote:

Originally Posted by clifp The $6.4 trillion dollar question is 8% a reasonable assumption for future pension plan earnings? In a week when the market drop 6%, 10 year Treasury bonds drop to below 2%, and the Fed vowed to lower long term rates, I am not convinced.

Suppose that actual pension plan earnings turn out to be less than 8%. What happens then? Does it follow that the state pension system goes into default and does not pay out the benefits it has promised to pensioners? It's a conceivable outcome, but it certainly doesn't follow. Think of all the reasons against it. In fact, pension fund earnings have fallen below 8%, yet to my knowledge, no state pension system has defaulted on promised benefits. And why is that? -- let me count the ways: (1) state pensioners vote -- if there were a default, politicians would lose jobs, (2) states have resources that private individuals or companies do not -- they can raise taxes and borrow lots of money. According to the last figures I've seen, the Hawaii state retirement fund is $7 billion in the hole, and the state health insurance system is $14 billion in the hole (i.e., those are the estimated unfunded liabilities, over and beyond the 7+% legislatively assumed yearly fund increase). Yet pension benefits are still paid out, and health insurance is still funded. Why hasn't the sky yet fallen?

[clifp]

States have not yet. However, cities like Central Falls RI and Vallejo is in the process. More importantly countries have been forced to cut pensions. Ireland up to 10%, Iceland instituted means testing. for pensioners Greece has cut pensions 20% and 40% for early retirees. Now the US may not be Greece, but I am not sure the CA, IL, or HI are in much better shape. Countries like states can raise taxes, and even sort of print money.

More importantly, there is still money in the funds. Most estimates have the worse states IL running out in 2019, with the other states a few years latter. This doesn't mean that won't have money to pay any pension, just not the full benefits with reductions in the 10%-33% range being typical.

[steelyman]

Quote:

Originally Posted by clifp More importantly, there is still money in the funds. Most estimates have the worse states IL running out in 2019, with the other states a few years latter. This doesn't mean that won't have money to pay any pension, just not the full benefits with reductions in the 10%-33% range being typical.

Illinois has already reduced the payouts (at least for the university system) this year by adjusting a factor that is used in calculating the monthly pension payment, effective July 2012. It escapes a lot of people's radar but it's in place, and amounts to approximately an 8% reduction.

[GregLee]

Quote:

Originally Posted by steelyman Illinois has already reduced the payouts (at least for the university system) this year by adjusting a factor that is used in calculating the monthly pension payment, effective July 2012. It escapes a lot of people's radar but it's in place, and amounts to approximately an 8% reduction.

I've looked for news of this but failed to find anything, so far. Could you please give a reference?

[steelyman]

Quote:

Originally Posted by GregLee I've looked for news of this but failed to find anything, so far. Could you please give a reference?

Yes (I apologize for being incomplete!). The university system is called SURS (State Universities Retirement System), and here is their announcement of the change:

SURS News Features

[GregLee]

Quote:

Originally Posted by steelyman SURS News Features

Thank you, but I raised the question "Does it follow that the state pension system goes into default and does not pay out the benefits it has promised to pensioners?" According to your reference, the changes do not affect current annuitants:

Quote:

The changes to the Money Purchase factors will not affect: Current annuitants Members in the Self-Managed Plan Members who began participation on or after July 1, 2005 The General Formula calculation

[steelyman]

Quote:

Originally Posted by GregLee Thank you, but I raised the question "Does it follow that the state pension system goes into default and does not pay out the benefits it has promised to pensioners?" According to your reference, the changes do not affect current annuitants:

You're welcome. And you're also correct that the statement indicates that current annuitants are not supposed to be affected (that does not include me). The key events occurred in 2005 and 2011 when the rules were changed (you can kind of read that into the news item). The "money purchase calculation" which typically resulted in a higher monthly payment was no longer available to employees hired in 2005 and later and in 2011, a "two-tier" system was created that results in much lower benefits on retirement. There is currently legislation to change current employees' benefits, but to my knowledge no resolution yet.

[Mulligan]

Quote:

Originally Posted by GregLee Suppose that actual pension plan earnings turn out to be less than 8%. What happens then? Does it follow that the state pension system goes into default and does not pay out the benefits it has promised to pensioners? It's a conceivable outcome, but it certainly doesn't follow. Think of all the reasons against it. In fact, pension fund earnings have fallen below 8%, yet to my knowledge, no state pension system has defaulted on promised benefits. And why is that? -- let me count the ways: (1) state pensioners vote -- if there were a default, politicians would lose jobs, (2) states have resources that private individuals or companies do not -- they can raise taxes and borrow lots of money. According to the last figures I've seen, the Hawaii state retirement fund is $7 billion in the hole, and the state health insurance system is $14 billion in the hole (i.e., those are the estimated unfunded liabilities, over and beyond the 7+% legislatively assumed yearly fund increase). Yet pension benefits are still paid out, and health insurance is still funded. Why hasn't the sky yet fallen?

Since most state pensions are supposed to be pre funded the deficit of the system in the short term isnt problematic. It isn't the amount of the shortfall that's material, what's probably more important is the percentage shortfall. If $7 billion represents a 10% shortfall, not a real problem. If it represents a 50% shortfall, someone might get the short end of the stick 20 years from now unless contribution rates increase dramatically, investment rate of return jumps, or tax payer money is infused into the system. "Public sentiment against public supported pensions" was mentioned in my retirement systems reasoning for reducing COLAs. Hawaii and their support of the pension system maybe more positive and thus willing to support infusion if it's ever needed.

[GregLee]

Quote:

Originally Posted by Mulligan It isn't the amount of the shortfall that's material, what's probably more important is the percentage shortfall. If $7 billion represents a 10% shortfall, not a real problem. If it represents a 50% shortfall, someone might get the short end of the stick 20 years from now unless ...

I don't understand your reasoning, but I saved a reference giving estimates of some relevant figures for the Hawaii Employment Retirement System (ERS):

Quote:

The ERS portfolio of investments had a total value of $11.6 billion as of June 30, 2011, up 18.3 percent over the previous year. The fund also saw a 20.7 percent return on investments for the year ended June 30. At the same time, it faced a $7 billion unfunded liability as of June 30, 2010. Honolulu Civil Beat - Hawaii Employees' Retirement System

for whatever interest it may have.

[Mulligan]

Quote:

Originally Posted by GregLee I don't understand your reasoning, but I saved a reference giving estimates of some relevant figures for the Hawaii Employment Retirement System (ERS): for whatever interest it may have.

Wow there is a lot of interesting articles on that link. I still didn't find the funding ratio, however, one article stated "woefully underfunded pension system" and "highest state tax payer liability in the nation" (I'm assuming per individual tax payer) would cause me great concern if I was in my 30's or 40's and that was my sole source of retirement income.
I read they are attempting to correct some of the problems- increasing retirement age on newcomers, increasing contribution rates, etc. Although an actuarial person in another article said it needed more than that.
I also read that it isn't totally the pension system fault. I read the legislature raided from the pension system over 1.6 billion dollars from the 1960's to 1990's thus also losing investment gains from that money.
I'm no retirement system funding expert and would be fired quickly if I was hired, but if I was a younger person in that system, I would be nervous. My retirement is funded from a separate trust fund beyond the reach of legislatures hands, so they cant raid the funds like the Hawaii legislature has done apparently in the past.

[GregLee]

Quote:

Originally Posted by Mulligan My retirement is funded from a separate trust fund beyond the reach of legislatures hands, so they cant raid the funds like the Hawaii legislature has done apparently in the past.

Yes, it's quite a story. I don't think the Hawaii legislature can take moneys out of the trust fund, but it can change the rules about employers' matching contributions which are supposed to go into the trust fund, and, I gather, that is how the fund was depleted.

[skipro3]

Quote:

My retirement is funded from a separate trust fund beyond the reach of legislatures hands, so they cant raid the funds like the Hawaii legislature has done apparently in the past.

Maybe, maybe not. The government has hinted at 'nationalizing' some types of accounts; collecting the assets and redistributing the wealth as they determine the need.

Then there's always the specter of going to a world economy. Kinda like the Euro only we'd really get screwed on this one. Even if a whole new national monetary restructuring system resulting in exchanging 'old dollars' for 'new dollars', anyone with cash assets is gonna be the big looser.

[chinaco]

It seems that you thought through many of your circumstances. But these are complicated issues. You can get books from your public library on retirement planning, investing, etc.


It appears that you may have more income (before the extra credits) than expenses (If I am understanding it correctly). Therefore you will be a net saver and investor with your excess pension income and eventually SS income.

How much will you be saving and investing yearly?


A few extra considerations to mull over.

While it seems you are risk averse... you might reevaluate your risk profile... just to verify your decisions in certain areas.

If you are a net saver in FIRE and have no debt and a reserve pool of $350k (for emergencies and large one time expenses), you might find that investing some of your savings (from pension income) in other investments (e.g., manage the risk using a diversified portfolio of stocks and bonds) could be to your advantage over the next 20 to 30 years. But, you need to self educate yourself on the topic before you make that kind of decision.

You should also spend some time clarifying your financial goals, personal goals, etc. You might determine that you are not spending as much as you can... IOW - foregoing certain consumption that you can afford (e.g., travel).

BTW - your LTC planning seems reasonable. But that $5k/mo.... where is it going to come from? There are many situations where you or your spouse could end up in a NH for an extended period of time (which might be more than 5k/mo) . It would be a mistake to assume otherwise (just dismiss it). Remember, LTC planning often also about protecting the surviving spouse. How will care funded and how is it done without impairing the financial situation of the spouse before, during, and after an event? Since you are a net saver, you might consider some of the LTC insurance products that are available. There is the traditional LTC insurance and some new hybrid products that seem to be available. Even if you conclude you do not need LTCi, you will at least know you made the right decisions based on the details you uncover doing your analysis.

[skipro3]

Great post for me to mull over there chinaco, thanks!

I will probably be conservative in my spending until I'm comfortable with the whole budget on income vs outgo.

LTC; I can appreciate that LTC could drain the whole budget / income IF one of us were to need it early in our retirement. My initial thoughts are to forego any purchase of LTC policy until I am 62, when my SS kicks in. Then use that boost in income to cover that policy.

BTW, I just found the SS website where I can calculate my future benefits as well as 'what-if's' for early retirement. It says I will get $1680 per month, not the $1400 I was guessing at. Also, even though my wife has not worked much during our 36 plus years of marriage, I guess she's worked some and I calculated HER benefit. It turns out SS will give her $493 per month when she turns 62.

I do have a question on that though;
Is there any sort of 'marriage penalty' with SS?
In other words; will my estimated payment at 62 or her estimated payment at 62 be affected because we are married to each other? If not, then 6 years into the retirement, retiring at 56, I will see a bump of $2173 per month.

Regarding the portfolio and diversifying into some stocks/bonds/etc. My estimate is that I will greatly slow down the drain on my 401k/457 accounts at year 6 when SS kicks in as well. The calculators say I'll be able to grow that account back up to it's $350,000 after pulling it down to $250,000 or so for the first 6 years by the time I'm 80. So why risk, even a little risk, if I don't need that money to grow more than that anyways?
Speaking of which, I could fund any LTC with that money if needed. At $5K a month for a nursing home, it would last at least 5 years. If I live in a nursing home longer than 5 years, I'll probably not be worrying about how it's getting paid for any more anyways.

[Chuckanut]

The fact that any state or company can default on a pension shows how badly the working person is being treated. These people worked to earn their pensions and deserve to be paid. Why is that so hard for people to understand? Why is the working class accepting this nonsense so easily? If their employer said, "I know I promised to pay you $2000 last month, but times are tight, so I am only going to pay you $1500 for all the work you have done for me" they would be dragged into court. Why are pensions any different? We worked, we earned them. They should be paid.

If the pension system of any state, city or corporation is too generious, then change it starting today for future employees, but don't renege on past promises.

[clifp]

Quote:

Originally Posted by Chuckanut The fact that any state or company can default on a pension shows how badly the working person is being treated. These people worked to earn their pensions and deserve to be paid. Why is that so hard for people to understand? Why is the working class accepting this nonsense so easily? If their employer said, "I know I promised to pay you $2000 last month, but times are tight, so I am only going to pay you $1500 for all the work you have done for me" they would be dragged into court. Why are pensions any different? We worked, we earned them. They should be paid. If the pension system of any state, city or corporation is too generious, then change it starting today for future employees, but don't renege on past promises.

Private companies cut pay and pensions all the time. The case of companies making a retroactive pay cut is somewhat unusual but not unheard of it. For instance, AFAIK the 1100 folks laid off when Solydnra declared bankruptcy didn't even get their final pay. It has happened countless times in the last 40 years where companies promised workers a defined benefit pension and switched to define contribution system, retroactively screwing their employees.

Back in the 1970s when Penn Central when bankrupt retirees lost their pension period. This lead to the establishment of the Pension Benefit Guaranty Corporation to insure private pension plans. It is worth noting the PBGC has a cap of $4500/month for people who retired at 65 for somebody who retired at 55 the max is 2025/month. It includes no COLA and very little money for somebody who was more than 3 years away from retirement. There are countless pilots who thought they were retiring at 60 (FAA max age) with pension near 100K who ended with pension around 25K after the airline when bankrupt.

You are right these situations almost certainly result in court challenges, but if the money isn't there what can the do? To me one of the fascinating cases will be California where there are numerous constitutional amendments that prevent taxes from being raised without supermajority of either voters or the legislators, but there are also constitutional amendment protecting public employment pensions. I predict somebodies constitutional rights are going to get screwed.

[Chuckanut]

To get this back on topic, I am wondering how many people have thought it was a good deal to buy extra pension years with their hard earned cash?

Given the uncertainty of pensions, I am not sure I would do it again.

[meierlde]

Quote:

Originally Posted by clifp Private companies cut pay and pensions all the time. The case of companies making a retroactive pay cut is somewhat unusual but not unheard of it. For instance, AFAIK the 1100 folks laid off when Solydnra declared bankruptcy didn't even get their final pay. It has happened countless times in the last 40 years where companies promised workers a defined benefit pension and switched to define contribution system, retroactively screwing their employees. Back in the 1970s when Penn Central when bankrupt retirees lost their pension period. This lead to the establishment of the Pension Benefit Guaranty Corporation to insure private pension plans. It is worth noting the PBGC has a cap of $4500/month for people who retired at 65 for somebody who retired at 55 the max is 2025/month. It includes no COLA and very little money for somebody who was more than 3 years away from retirement. There are countless pilots who thought they were retiring at 60 (FAA max age) with pension near 100K who ended with pension around 25K after the airline when bankrupt. You are right these situations almost certainly result in court challenges, but if the money isn't there what can the do? To me one of the fascinating cases will be California where there are numerous constitutional amendments that prevent taxes from being raised without supermajority of either voters or the legislators, but there are also constitutional amendment protecting public employment pensions. I predict somebodies constitutional rights are going to get screwed.

According to this web site from the PBGC: Maximum Monthly Annuity Guarantees, Pension Benefits
The benefit depends on when the pension plan was terminated. It is the year the pension plan was terminated, not the year you started to receive the pension if its earlier that controls the benefit. So if you are already recieving a pension, its the date the plan was terminated, and your age on that date, not the date you started to receive benefits if earlier.

Note that those who actually worked for the railroads were probably not affected only non railroad employees in the Penn Central situation. If you work directly for a railroad you are part of railroad retirement which is a federal pension program for railroad workers. The first part is the equivalent of SS as railroad employees are not covered by it, then there is a tier ii pension which is .7% times the number of years working on railroads times the average of the highest 5 years limited to 87k a year.

[PERSonalTime]

I think if you're a member of a State run pension system AND it's well-funded, it's a no-brainer. Do it!