buy service credits or not...

[skipro3]

Hi all,
I'm turning 55 end of October and plan to retire the end of December 2012 at 56. I have CalPERS for a pension that includes a COLA increase annually. It is calculated at the 2%@55 formula. I will have a hair over 34 years of service credit at that date after buying military time back and 1 year of sick leave credit that is converted to service credit upon retirement. The pension is also based on my highest average 36 continuous months of pay, for a year. That will turn out to be $100,000. I will be at the 70.1% rate making the raw pension out to be $70,100 annually.
I have the option to buy up to 4 years 'air-time' which is additional service credit. I will have about $350,000 in my 401K/457 accounts total at retirement as well. I can use that to buy my additional service credit with those dollars.
I'm very conservative in investing and consider the stock market darn near a ponzi scheme. My 401K/457 is invested in Wells Fargo Stable Return Fund. While I may not make much with it, it's grown 9% over the last 3 years compared to a loss of 11% in, say, an S&P500 index fund; a difference of 14%. (Not too shabby I think...)
The cost of 4 years additional service credit is about $135,000 and would pay me about $850 a month additional income.

My concern is that my liquid cash would be reduced to about $200,000 if I buy the air time although my pension would be (with a spouse included in the calc) $77,000 a year.

So, my question is; would it be in my best interest to go ahead with the purchase of the extra service credit?

I plan to draw SS 6 years after retiring at 62 and expect about $1400 monthly income from that.

I have no mortgage. Property tax is about $2500 a year. No loans or other debts to pay off. I have full medical/dental/vision costing me about $100 a month. I'm currently taking home around $3,000 a month and live comfortably on that amount. I want to buy a boat when I retire worth around $20,000.

Thanks for the advice!

 

[chinaco]

Congrats... looks like you are in pretty good financial shape from an income perspective.

No simple answer.

One way to help understand the value of the purchase is to see what a similar annuity would cost from an insurance company.


I can see why CALPERS is having funding problems. Apparently it is underfunded and CA other huge public debt overhang. Are you sure they will not change the pension on you (e.g., default and use the courts to make changes)? While you may not have any insight into it... you might want to see what you can find out. I would (at a minimum) do a planning scenario to see if I would survive a cut of the cola or some reduction. While I might not change my ER plans based on some unknown.... I would want to understand what it might mean to me. IOW - would we be ok or would I have to go back to work?

Which... BTW... You did not discuss your income needs... that is critical in retirement planning. Also, do you have known situations that will require a large amount of cash in the future... don't forget the unknown (things that just happen).

I agree $350k is not a lot if one considers the possibility that they may live another 40+ years. $200k is even less. I would be looking at that as emergency reserve money.

I suppose you could always sell the home or get a mortgage if you needed to raise cash later in life. Do you have other assets other than the home?

Does your wife have any retirement resources due to her (e.g., pension, 401k, etc)?

You are out of debt. That is good.

How much do you actually spend each year? What are your income needs now and in the future? What happens if you or your wife die?? Will the survivor have adequate income.

Consider all of your options for all of your resources. How would the plan change if you waited till FRA (66.x) or 70 to take SS? Would it be better for your DW if you passed at say 75 or 80? Does it make your plan more solid?

I would develop several "what if" plans to determine how I might optimize the overall plan (change age of taking guaranteed income, mortality scenarios... younger and older, etc). It seems that you already have a decent amount of guaranteed income resources due. Are those resources inadequate, enough, more than enough

What happens if you get hit with an emergency situation that requires $500k? Would you sell your home?

One final consideration: If I were in your situation... fair amount of guaranteed income and a moderate cash reserve.... I would mitigate any risk that seemed remotely likely that might take my cash reserve. An example would be flood. Perhaps I do not live in a flood plane... but if a 100 year weather event happened and water run off severely damaged my home... I would not want the repair to cost my remaining cash! LTC would be another thing to consider. That could take both income and cash! Spend some time identifying your risks!

Make sure your plan is solid from the risk perspective!!!

 

[ATC Guy]

Maybe simple reasoning but if you take that $135,000 and did NOT buy the service credit you would be using that for income. With a SWR of 4% that would give you roughly $5,400/yr of extra income with slight risk whereas if you bought the service credit it would give you approx an extra $6900/yr with virtually no risk.

Now of course this is going to cut about a third of your liquid capitol, so you have to decide how you originally intended to use that $135,000. You mentioned buying a boat and what not. So you may have wanted to use that cash as "mad money". If so, and you have other income sources that will forever cover your expenses, go for it! When you look at it that way it would take nearly 20 years to have the pension pay you that $135,000 back without interest.

Basically you have to decide how you wanted to use that cash. Do you need/want it for extra annual income, or are you already set on annual income and wanted to use it for "spending cash."

 

[donheff]

If that figure includes spousal coverage it sounds like a no brainer to me. You are purchasing an annuity paying almost 7.5% with a COLA at age 56 ($10K/$135k). Done! If you have to take a 10% deduction for spousal coverage still sounds like a no brainer. Even 20%

 

[skipro3]

Congrats... looks like you are in pretty good financial shape from an income perspective.

I can see why CALPERS is having funding problems. Apparently it is underfunded and CA other huge public debt overhang. Are you sure they will not change the pension on you (e.g., default and use the courts to make changes)?

No, I'm not sure. But then, they are the 'surest' bet I can think of for the foreseeable future. CalPERS and the state (I'm NOT a state worker, instead I work for a public electric company, a Municipal Utility District) would most likely affect future hires and leave current pension plans alone.

While I might not change my ER plans based on some unknown.... I would want to understand what it might mean to me. IOW - would we be ok or would I have to go back to work?

I figure I could 'survive' on $2500 a month income if need be and still be comfortable. I have worked part time as a ski instructor and could easily get seasonal work at the local ski resort during winter if I so chose to. The extra income isn't needed, I would just use this as a time-filler during winter and take an extra trip with that money during the summer.

Which... BTW... You did not discuss your income needs... that is critical in retirement planning.

I mentioned I'm currently taking home about $3000 and find it very adequate to cover all my expenses and pleasures. Is that what you meant? I figure I would 'need' $2500 a month to maintain that quality of life and anything extra would either be banked for some day special or piddled away on incidentals. (I enjoy fixing up my home, have 5 acres and enjoy planting and gardening, etc...)

Also, do you have known situations that will require a large amount of cash in the future... don't forget the unknown (things that just happen).

I don't have any 'known' situations of that nature, but it's that 'unknown' you speak of that has me hesitant to lock in a fixed amount to take home rather than the liquidity my savings is.

I agree $350k is not a lot if one considers the possibility that they may live another 40+ years. $200k is even less. I would be looking at that as emergency reserve money.

That is exactly what I'm concerned with too. If it helps, there is zero chance I will inherit anything from either my or my wife's family. We'll be lucky if our parents' passing won't cost us. (They aren't destitute, just live on pensions that will go away when they die and no real cash reserves as well as brothers and sisters to split inheritance with.)

I suppose you could always sell the home or get a mortgage if you needed to raise cash later in life. Do you have other assets other than the home?

I have quite a large equity in my home, even considering today's real estate market. Home next to mine sold this week in excess of $450,000 and my home is about 10% larger and at least 20 years newer. My only assets of any real value are the home, pension and 401K/457 accounts.

Does your wife have any retirement resources due to her (e.g., pension, 401k, etc)?

Not of any real amount. We were very traditional; stay-at-home mom, went to work when they were in high school and through college so we could continue to save for retirement and not go into debt for school, then quit after they graduated college. Maybe $10,000 or so in an IRA.

You are out of debt. That is good.

I'm uncomfortable with debt. Fear of someone else able to tell me what to do and not make my own decisions as I see fit and all...

How much do you actually spend each year?

I would estimate around $35 to 40K a year. But.... Let me take a moment to explain something;
I paid off my mortgage 10 years ago. 5 years ago I lost my home and everything in it to a wild land fire set by arson. The arsonist was caught and is in prison, but there is little chance the court's ruling on financial restitution will ever come to any real money, indeed if anything at all. However, I had an insurance broker who sold me 'The Gold Plan'. It's not the Platinum Plan but it was very good. The insurance company treated me better than family. They paid off every one of my policies in full, way too many itemization's to list them all here. Since it was a total loss, I was able rebuild anything I wanted with that payment and I rolled all the policy payouts; cars, boat, RV's landscape, personal property, home, outbuildings, etc all into building the one thing (at that time) I could consider an investment; the house. It took me almost 2 years to rebuild and another 2 years on the 'pay-as-you-go' plan to furnish and landscape. However, I now own a 3500 sq.ft. log home that looks like it came out of that TV show; 'Extreme Makeover' including the furnishings. People offer to PAY me to house sit when we go out of town. Ha! It was our plan to rebuild as our 'forever' retirement home. Prop 13 grandfathered my property taxes so I didn't take a big hit on that even though it's a bigger house. It's only been in the past year that I've been back on what I would consider a normal budget. I'm done buying, buying, buying. Everything is brand new from the appliances, roof, driveways, septic, all furnishings and so there should be little need to have to replace anything in the near future.
BTW, I would recommend anyone who insures their home to insure it not for it's appraised value, but have a contractor tell you what it would cost to build that home today. The two are no where near the same amount, I can assure you!! My insurance agent had me do that and I was covered completely and they were my partner and not adversarial in any way.
The home is very energy efficient so utilities are very low for my area.

What are your income needs now and in the future?

Now, $3,000 a month income is very comfortable. Future, same with anything extra to make retiring early worth the effort while I'm young; ski trips, travel, helping my kids and their young families, church and other donations, etc.

What happens if you or your wife die?? Will the survivor have adequate income.

The pension is for both our lifetimes. If taken estate planning measures; family trust for all assets, durable power of atty for medical and financial, wills, living wills, etc. My sons, I have two, are very grounded and very self supportive in their careers. One now lives in New Zealand, has for over 3 years and has permanent residency there. Their immigration laws allow for immediate family to automatically qualify for the same. Mom and Dad, (me!) are immediate family. I suppose if the USA goes completely to heck, that's my safety net; move to NZ.

Consider all of your options for all of your resources. How would the plan change if you waited till FRA (66.x) or 70 to take SS? Would it be better for your DW if you passed at say 75 or 80? Does it make your plan more solid?

Great things to consider. DW says if I pass away, 'Raoole' the pool boy will take care of things. (I mentioned we don't have a pool. She didn't see my point.) But seriously, she would probably move near one of the sons and live in condo-style senior center.

It seems that you already have a decent amount of guaranteed income resources due. Are those resources inadequate, enough, more than enough

I agree, it seems the pension as-is, is decent and very adequate to more-than-enough. That is what makes this decision hard for me; go with the surety of enhancing that COLA enhanced pension with a risk of having all the eggs in one basket and perhaps underfunding my liquidity, but maximizing my monthly income, or stay diversified in case of emergency with the knowledge my risk tolerance to investment is very low and that inflation will erode away that cash reserve as well as dipping into it as it suits my pleasure.

What happens if you get hit with an emergency situation that requires $500k? Would you sell your home?

I'm insured on EVERYTHING. After that devastating fire, I learned the value of having good coverage. I even have a liability umbrella for $1M just in case I inadvertently cause someone else catastrophic loss like that caused to me so that I might have the chance to not loose my home in a lawsuit. (Good reason to put a home in a trust and not as your own personal property BTW. Just ask yourself; how does OJ Simpson live his lifestyle with civil judgement against him that is uncollectable. HINT; all his assets are NOT in his name, they are in a trust fund..)

One final consideration: If I were in your situation... fair amount of guaranteed income and a moderate cash reserve.... I would mitigate any risk that seemed remotely likely that might take my cash reserve.

That's why I'm invested in a guaranteed savings for my 401K/457 plans and not in stocks or other markets.

An example would be flood. I would not want the repair to cost my remaining cash!

I'm well covered by insurance with a company that has proven itself with me to be responsible and accountable.

LTC would be another thing to consider. That could take both income and cash!

When we built our log home, I included an unfinished 900sq ft. 'apartment' in the attic off of a 400 sq. ft. loft. It's all preplumbed and prewired for bath, kitchenette, preframed for doors, etc. For under $5,000 a live-in health care provider can live upstairs while we live downstairs. The downstairs was built all ADA compliant; showers, counters, doorway openings, everything for wheelchair access. (But that loft and loft access to the future apartment living space.)
Our living wills are quite specific on end-of-life decisions based on quality of life expectancy. Neither of us have a desire to exist or drain the resources to the other's detriment. When the time comes, the plug gets pulled. That's not to say we don't realize we may someday need some sort of help if we live long enough, but being unable to do anything else of financial costs, paying for that sort of care shouldn't be impossible. We do have that house as the fall back if one or the other, as a survivor, gets put in the old-folks-home.

Make sure your plan is solid from the risk perspective!!!

Risk is my greatest concern....

 

[skipro3]

Basically you have to decide how you wanted to use that cash. Do you need/want it for extra annual income, or are you already set on annual income and wanted to use it for "spending cash."

I DON'T KNOW!!! Ha!
I 'think' I'm set on my income via my pension and would just use this as spending cash. My pension looks to be larger than my current take-home pay but frankly, I don't spend so much time working, I'm not sure what my retirement activities might cost me. I have my list of things I'm wanting to do; $20,000 fishing boat, $10,000 camper for my truck, spend more time playing my guitars, I've always ridden motorcycles and before our house fire, had a touring bike and was planning to do a lot of touring on it with the DW. There are some initial capitol outlays for these activities, but in general, once the 'toys' are bought, the expenses to recreate with them isn't that much over just normal every-day living costs I would think.

 

[skipro3]

If that figure includes spousal coverage it sounds like a no brainer to me. You are purchasing an annuity paying almost 7.5% with a COLA at age 56 ($10K/$135k). Done! If you have to take a 10% deduction for spousal coverage still sounds like a no brainer. Even 20%

Yes, the pension includes spousal coverage. Same payout covering both our lifetimes.

 

[donheff]

Yes, the pension includes spousal coverage. Same payout covering both our lifetimes.

You would only get 50-55% of that on the private market. It is far more than you could safely withdraw if you held the cash. Unless you expect to die soon you would do well to take the annuity. If you don't need the money, save it. It is like buying a TIPS bond paying 7.5% on top of inflation. WOW!

Note: I see others talking about this as a $350K investment but OP says he can buy in for $135K -- huge difference!

 

[skipro3]

You would only get 50-55% of that on the private market. It is far more than you could safely withdraw if you held the cash. Unless you expect to die soon you would do well to take the annuity. If you don't need the money, save it. It is like buying a TIPS bond paying 7.5% on top of inflation. WOW!

Note: I see others talking about this as a $350K investment but OP says he can buy in for $135K -- huge difference!

The CalPERS Service Credit Cost Estimate Results tells me that $132, 796.35 Lump Sum payment will give me $847 monthly unmodified and $762 modified to continue same monthly allowance over both our lifetimes.

So I think I misstated earlier that the approx. $850 monthly increase was for both our lifetimes. It's reduced by 10% to include both of us for our lifetimes.

 

[skipro3]

I use a uniform draw down calculator to compare. $135,000 growing at 3% and withdrawing $850 a month will last me 202 months or almost 17 years when I will be 73 years old.

However, 6 years into retirement I start to draw SS at around $1400 a month. That means 6 years into this draw down of $850 on my $135,000 savings will have almost $95,000 remaining. Added to the $200,000 I didn't spend for the service credit or use for anything else and growing at 3% for those 6 years, It's about $340,000 in liquidity at 62 with my original pension plus SS for a total in today's dollars of $6,800 a month gross at 62.

Once more for clarity;
Option 1:
keep the money in my 401K/457 and withdraw $850 a month for 6 years when SS kicks in with a bump to $1400, then stop withdraws and have about $340,000 in savings, totaling a gross monthly income of $6800 at 62. (pension $5400 + SS $1400)
Option 2:
Spend $135,000 up front for $850 a month for life and get a bump of an additional $1400 six years in at 62 for life, having $240,000 in savings. (the $200,000 remaining from the $335,000 original savings growing for 6 years at 3%)totaling a gross monthly income of $7650 at 62. (pension $5400 + extra service credit $850 + SS $1400)

Does that sound right?

But what about those 6 years between retirement and when SS kicks in?
What I'm trying to get my head around is having enough money while I'm still healthy and young enough to enjoy life without being cash and / or income 'heavy' once I start to slow down a little.

BTW, I don't intend to leave an inheritance with the money. The house equity should be plenty to leave my two sons when DW and I depart for the great beyond. Zeroing out my savings on the day the surviving spouse dies would be my ultimate goal. (Anyone have that crystal ball)

 

[Bestwifeever]

FIRST PLEASE NOTE:
I wrote a HUGE reply to chinoco but it seems a mod or admin must approve it first....
I will see if I can break it into smaller pieces....
....

Not sure why your posts are being sent to the automoderated queue (to prevent spammers, posts by new members with certain elements in them are automoderated until a certain threshhold of posts is met, but I don't see those elements in your posts).

Since you are now breaking that really long first post down into parts, though, you'll soon reach that threshhold and also your shorter posts will be easier for people to respond to.

 

[Mulligan]

SKIPRO- Congrats on nice pension. I'll give you a few thoughts to consider as I am like you fortunate enough to have a pension to live on. I bought 4 service years, but I had to do this to reach the retirement age threshold. It took me from 24 to 28 years (67% of salary) You are already vested with 34 solid years in. You mentioned you are averse to the stock market, but remember that's were the majority of your pension fund from CALPERS is at. If memory serves right they were very aggressive in their investments the past few years to try to "catch-up". It has worked in the short term, hopefully it wont bite back. I say this in mentioning the terms of your pension are probably something like " guaranteed by law". That can also be a code word in today's world of "but remember we can always change the law".
what I'm trying to get at is if you buy the years you are in effect doubling down on your pension thus becoming less diversified and more dependent on the whims of the state laws and also the stock market in general. 15 years ago, buying the years would have been a no brainer, now if your pension is already sufficient to cover needs, having the cash in a safe, but low yielding vehicle provides you diversity and protection in case your pension is ever "adjusted". I retired a year ago, and my cola which was supposed to match the CPI has already been changed to 2% a year.
I am not a right wing anti government person, as I received my employment and pension through the state government. But I would think through this completely before I bought more since you already have 34 years invested. Although I bought four years at about $85,000, I had to in order to retire early. If I could buy more, I wouldn't even though on paper it would be beneficial. I would prefer having another leg on the retirement stool besides a pension which is the only leg I have as the WEP captures most of my SS, and continuing to work to increase will provide little benefit.
Only you knows what's best for you, but hopefully I gave you information to help in your decision. Good luck!

 

[clifp]

SKIPRO- You mentioned you are averse to the stock market, but remember that's were the majority of your pension fund from CALPERS is at. If memory serves right they were very aggressive in their investments the past few years to try to "catch-up". It has worked in the short term, hopefully it wont bite back. I say this in mentioning the terms of your pension are probably something like " guaranteed by law". That can also be a code word in today's world of "but remember we can always change the law".
what I'm trying to get at is if you buy the years you are in effect doubling down on your pension thus becoming less diversified and more dependent on the whims of the state laws and also the stock market in general. !

From a strictly financial decision buying credits is a no brainer. If you took $135,000 and tried to buy a annuity for a 56 years with a COLA (capped at 3%) you get $398/month using the Federal government's annuity provider or $574/month with Warren Buffett's company Berkshire Hathaway without an inflation adjustment. So by comparison $850/month is an absolutely a great deal especially since I assume there is a COLA provision like most CALPERs 2%@55 benefits.

However, I think Mulligan comments are absolutely spot on. At some level you have to ask yourself the question, how in the hell can CALPER's offer people such a great deal better than twice as good as private insurance companies offer.

Either one of three things has to be true. The insurance company selling simple (SPIA) annuities are ripping off consumers and are making a ton of profit. OR The folks running CALPERs pension plan are brilliant money manager earning twice as much as the stupid guys at insurance companies. OR the folks at CALPERS are promising more benefits than they can afford to give out and are counting on California taxpayers to bail them out. My money is on number #3.

As Mulligan say 15 years ago, the possibility that CALPERS might have to reduce pension benefits for current pension beneficiaries was inconceivable. Today I'm not so sure. You already are fortunate in having a very nice pension. (It would require almost $2 million to buy this pension from insurance company). You are smart to live considerably below your means so you don't really need the additional income. $135,000 is a considerable portion of your liquid net worth.

If everything goes fine and CALPERS continues to pay the pension of retirees you won't miss the money that much, if however pension get reduced, than an $80K (70K+10K from buying more years) is more likely to get substantially cut than the average CALPERS pension of 35K or so.

FYI, what is the name of your insurance company nice to hear a positive story about the industry?

 

[skipro33]

My insurance company is SAFECO. Let me tell you more about their coverage on my loss;
The day of the fire, all I had was the proof of insurance in my glove box in the truck I left in. I called the number from the fire station I was evacuated to. They answered immediately and I explained the situation. When I got off the phone about 20 minutes later, I had a debit card for $400 waiting for me at WalMart, a motel room at Residence Inn with two bed rooms and full kitchen, and assurance that an adjuster for my home, another for my car and a third for my boat would be calling me within the hour. My wife had grabbed her purse so we at least had a cell phone. Indeed, each adjuster called me and a meet was set up for the next morning at 10am at the house site. The adjusters beat me there. They had already agreed that the home adjuster would handle all the insurance claims. We walked through the debris. A neighbor let us use their dining room so we could talk. He told me that he had good news, more good news, and some bad news. Which did I want first? Well, I've had some bad news recently, how about some good news. He told me that my insurance broker sold me the 'GOLD' plan; that I had more coverage than I was most likely aware of. That they knew who caused the fire, it wasn't me and they saw no reason not to max out the limits on my policies contingent to an appraisal from a home appraiser. (interesting how they can appraise the value of a home to what it would have sold for if it hadn't burned...). He told me that I had coverage for not only the value of the house, but for the labor to rebuild that house on the same property. This is important. It cost money to demo out the site. Most homes are built in neighborhoods taking advantage of assembly line and bulk material construction. The replacement labor was same as it would be for a custom home. My policy for the house was $250,000. The rebuild clause was another 50%; $125,000. The contents was 30% of the house value; $75,000. The outbuildings (any improvements to the land that is not the house itself) was 20%; $50,000. landscape was 10% of the house value; $25,000. So now, for a house (not including the land it sat on) insured for $250,000 was going to get me $525,000. But he didn't stop there. One car, a 1994 mazda Navajo SUV that I had full coverage because my kids used it when they came home from college with their friends was covered for $4,400; more than double it's blue book value. I don't know why. My boat, motorcycles, RV, etc. all the same; close to double what I thought they were worth. The adjuster asked me how much money I needed right now to get through the next few weeks. The motel tab was in their name already so I had no idea and said so. He wrote a check for $20,000 and a second check for another $20,000 in case I needed more before the appraisal justified the full limit value of the policy. 4 days later an appraiser came by. He said the house would be worth more than the limit on the policy, no problem. within a week after that, I had a check for a little over $500,000 and was told to let them know when I needed the next draw. They never asked me for a list of my personal property I lost, brands, models, age, value, etc. They just gave me the limits of the policy. The house that burned down was a spec house about 1400 sq. ft. I figured was worth maybe $250,000 with the land. The appraiser set the house at more than that and the land at $300,000.
Well, I could go on and on but be assured, the insurance company was great. They told me I could build what ever I wished and could use the other claim payments to build even a bigger house. We rolled all the claim payments together and my thinking was that a house would appreciate in value and I didn't need a boat or even furniture while we were rebuilding. So I rolled every dime into a house.

Oh, and the bad news; it wouldn't be enough money. He says it never is... O.K. I could live with that.

Regarding the air time service credits being backed by California tax payers, I don't think so in my situation. I don't work for the state of California. I work for a public municipality; the electric company in Sacramento. The funding is not State Worker but Misc. State. But I could be wrong. Probably am, but I just wouldn't know why someone in the state who doesn't have their power provided my a public power company would have to help fund my pension.

BTW to any mods or admins. I had to create a NEW logon. my original skipro3 is blocked. I keep getting a message saying I can't post because I'm suspicious or have suspicious posts.

 

[westcoast]

I bought five years of credit recently. I wouldn't have done it for myself, but my wife is 15 years younger, so there's a good chance that one of us will be collecting well after the breakeven point. I'm not sure I'd have done it if my wife and I were close in age.

The other consideration is whether you want to leave money to your kids, If you don't have any, that's a good reason to buy the service credit.

A final thought is that $135,000 in a 401(k) is not really $135,000. If you were to withdraw the money, you'd have to pay nearly a third of it in taxes. Try calculating the return based on the aftertax value of those untaxed dollars.

 

[donheff]

A final thought is that $135,000 in a 401(k) is not really $135,000. If you were to withdraw the money, you'd have to pay nearly a third of it in taxes. Try calculating the return based on the aftertax value of those untaxed dollars.

I am still a fan of buying credits but just like withdrawals from a 401K are taxed so are about 90% of payments from a pension. From the sound of Calpers they may be calculating that at more like 95%. (At least for Federal, do they exempt payments from CA tax?)

 

[Mulligan]

Skipro- If I am understanding you correctly, your pension is provided more at a local level, but CALPERS is in charge of the investment portfolio. Many states do this however mine is not. Have you checked into the exact funding ratio of your retirement system? In other words how much of the promised pension money to all workers in the system is pre funded? The goal of a system is 100%, however very few actually are. Anything above 80% is considered safe (I don't quite understand the reasoning but that is what my system said). When it's lower there could be potential problems as the system would have to invest it's way out of the problem, increase contributions, bail out , or a decrease in benefits. Some systems are near a ponzi scheme like the Illinois teacher system which I believe is under 50% pre funded.

 

[Mulligan]

From a strictly financial decision buying credits is a no brainer. If you took $135,000 and tried to buy a annuity for a 56 years with a COLA (capped at 3%) you get $398/month using the Federal government's annuity provider or $574/month with Warren Buffett's company Berkshire Hathaway without an inflation adjustment. So by comparison $850/month is an absolutely a great deal especially since I assume there is a COLA provision like most CALPERs 2%@55 benefits.

However, I think Mulligan comments are absolutely spot on. At some level you have to ask yourself the question, how in the hell can CALPER's offer people such a great deal better than twice as good as private insurance companies offer.

Either one of three things has to be true. The insurance company selling simple (SPIA) annuities are ripping off consumers and are making a ton of profit. OR The folks running CALPERs pension plan are brilliant money manager earning twice as much as the stupid guys at insurance companies. OR the folks at CALPERS are promising more benefits than they can afford to give out and are counting on California taxpayers to bail them out. My money is on number #3.

As Mulligan say 15 years ago, the possibility that CALPERS might have to reduce pension benefits for current pension beneficiaries was inconceivable. Today I'm not so sure. You already are fortunate in having a very nice pension. (It would require almost $2 million to buy this pension from insurance company). You are smart to live considerably below your means so you don't really need the additional income. $135,000 is a considerable portion of your liquid net worth.

If everything goes fine and CALPERS continues to pay the pension of retirees you won't miss the money that much, if however pension get reduced, than an $80K (70K+10K from buying more years) is more likely to get substantially cut than the average CALPERS pension of 35K or so.

FYI, what is the name of your insurance company nice to hear a positive story about the industry?

Clifp, you got me thinking about your 3rd paragraph (sorry can't figure out how to paste with my IPad). Never really done this to the exact dollar before, as I just bought the years because I wanted to retire, but.. I had 24 years which would be 2.2 times 24 which would make my pension 52.8% of salary. By buying 4 years it went to 28 X 2.35= 65.8%. Buying those years thus increased my pension from 58k to 72k. That's 14k a year increase off of about 85k or so it took to buy them. They would have to be damn good investors to get a yearly return to pay for that. They said it is revenue neutral but I think the bean counters were under the influence at the time. Fortunately very few people are eligible to buy years and fewer even do in our system. If you could buy and were 100% certain you'd get your money, you'd have to be a fool not to mortgage your house to the hilt at 4%, and immediately collect a 15% return on your borrowed money. Throwing in the assumed 8% yearly return on investments, it makes you wonder how truly safe some retirement systems really are down the road.

 

[Chuckanut]

I think most people would give a lot to be in your shoes. My pension is decent, yours is great! You have no real bills, are young enough to enjoy your retirement, and seem to have the right attitude.


[Getting on soapbox]


My only concern would be that future politicians might try and renege on your pension. Your worked hard to earn it and you can't go back in time and redo your the past 34 years. Yet many politicians (many who are quite rich and in bed with assorted special interests) make it seem like your pension is the root of all of our financial woes today. (They seem to have forgotten about investment bankers, liar loans, NINJa loans, and the greed of many of those in power in Wall Street.) So, I would have some alternative in case they decide to punish you for their sins against society and reduce your pension.

[Getting off soapbox]

 

[clifp]

Clifp, you got me thinking about your 3rd paragraph (sorry can't figure out how to paste with my IPad). Never really done this to the exact dollar before, as I just bought the years because I wanted to retire, but.. I had 24 years which would be 2.2 times 24 which would make my pension 52.8% of salary. By buying 4 years it went to 28 X 2.35= 65.8%. Buying those years thus increased my pension from 58k to 72k. That's 14k a year increase off of about 85k or so it took to buy them. They would have to be damn good investors to get a yearly return to pay for that. They said it is revenue neutral but I think the bean counters were under the influence at the time. Fortunately very few people are eligible to buy years and fewer even do in our system. If you could buy and were 100% certain you'd get your money, you'd have to be a fool not to mortgage your house to the hilt at 4%, and immediately collect a 15% return on your borrowed money. Throwing in the assumed 8% yearly return on investments, it makes you wonder how truly safe some retirement systems really are down the road.

Given the financials you are right, mortgage the house to buy the credits. The same thing is true to lesser extent for Skipro. One of the phenomena I've observed over the last few years (and its gotten more pronounced in the last couple of years) is that when the question comes up for private pensions should I buy more credits, work a few more years to reduce the early retirement etc. the answer is almost always ambiguous. In contrast with government pensions the answer is always buy the credits/retire early.

Believe it or not the bean counters are in fact being revenue neutral given the assumptions they are making. Most public pension plan have an assumed rate of return typically 7-8.5% year and assumed inflation rate 2-3%. The bean counters are required to use those assumptions on all of their calculations So for example if Skipro wife is also in her 50s the joint life expectancy for both of them is 33-35 years. With a 7% interest rate a $132K lump sum will give a pension benefit of around $860/month.

Private plans base annuities calculation on current interest rates.

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. Of course as soon as unemployment drops to 5% and housing prices and real wages rise, state will be flush with cash and be able to rehire workers, and properly fund their pension plans. At which point all of my doom and gloom prophecy will look silly.

 

[GregLee]

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]

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]

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]

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