Poll:Complicated retirement withdrawal options

[pb4uski]

I think to me it would depend on how well your taxable investments cover your living expenses since the real constraint is the inability to access your pension from retirement to age 59 1/2 if you elect the DROP when you retire because you can't change it.

The risk is then that if your taxable investments underperformed you would not have enough for living expenses and would need to take a job. One thing might be to calculate what level of underperformance would cause you a problem. For example, if you had enough in your taxable accounts to cover your living expenses from retirement to 59 1/2 you could put those monies in safe investments and then put your equity allocation in your 457b. While that is the inverse of what people commonly do it might be appropriate in your situation.

I'll admit that a low risk 8-10% return opportunity is difficult to pass up but the restrictions that come into play if your retire before 50 are troublesome. Another alternative would be to work to 50 and then bail.

[utrecht]

I could work one more year which would put me at 50 1/2 but either way DW will be under 50. She is only 43 right now. We both work at the same place and have all of the same options available to us. Waiting until I am 50 would clear up the restrictions issues for one of us, but it still is a problem because she wont be drawing any pension at all for several years after we retire due to her younger age. So even if we waited another year and I was over 50, we would still have a very high WR and only I would be benefiting from entering DROP.

When I run some numbers I just dont see it as a much of an advantage until 10+ years down the road because it takes that long to build up any meaningful DROP balance to be earning 8-10% interest on. If the market took a hit and our money ran out in 7-8 years our DROP balance would not all that big. Also, if that happened and our DROP balance was smaller than I projected for and then they ALSO lowered to interest rate down to 4-5% it would've been a huge mistake. I'm leaning towards taking the known quantity of what I have. A pension check and a lump sum of investments that I can draw my 4% off of without concerning myself with all of these other "what ifs".

Here's another factor: If I live off of and draw down my investments to zero I will end up with XX amount in DROP. I will draw the interest off of that balance until I die and then leave the balance to my heirs. If I avoid DROP and draw 4% from my investments until I die, there a good chance that my investment balance will be many many times larger when I die. Firecalc shows an ending balance range of zero to $9,000,000. With DROP I will never end with anywhere near that much.

[pb4uski]

Would your options with respect to making a decision on the pension be any different if you (or DW) resigned rather than retired?

[utrecht]

No. Retired, resigned, quit, fired. It makes no difference.

[utrecht]

Some of you veterans may remember this thread of mine from 4 years ago. Wow, have things have changed. My wife and I were within a couple years of retiring and considering our retirement funding options based around our pension options. If you are interested in this thread, please reread the OP to refresh what was going on at that point.

In post #5 I said

"The subject hasn't come up but I have a feeling that at some point down the road they will decide to lower the DROP interest rate to something more like 4-5%. At this point, a change like that would probably cause a lawsuit and draw more attention to the pension fund which I'm sure they want to avoid"


In post #20 I said


"My heart of hearts tells me that DROP interest could be lowered sometime in the next 10 years when the real benefits of it kick in, which would just about void all benefits of using it. If it was lowered to 4-5% I would definitely not use it. I would rather take my chances with the market."

We ultimatelydecided not to use the DROP option at all. I just didn't trust these people enough and wanted as much money in my own hands as possible. I read thru all the annual reports and saw problems that nobody else saw and none of the board members that I spoke to would admit to (some of them were actual friends of mine).



Wow, how things have changed!


In the past 2 years, serious pension fund mismanagement has been discovered. Now, this pension fund was rated the #1 mid sized pension fund in the country in 2012-2013. The board of directors has been voted out and replaced completely. The CFO was forced to resign and is under investigation by the FBI for fraud. Its a long story but there were all kinds of shenanigans going on and to make a long story short the fund is now 45% funded. Funding levels were around 80-85% when I wrote the OP, but it was smoke and mirrors, bad accounting practices and outright lies and fraud. They owned large amounts of real estate and were pricing it at what they paid for it and not what it was actually worth. Google "Dallas Police and Fire Pension" if you are interested in details. Its ugly.



There was a very important vote by the members to make changes to the DROP plan back in 2015 to stop some of the bleeding which resulted in lowering of the interest rate. The pension fund was sued over it (like I predicted) by the original architects of the DROP plan (who of course are collecting massive amounts of interest and dont want to lose it even though its unsustainable). The plaintiffs lost but are appealing.


As of Oct 2016, the DROP interest rate is slated to go to ZERO due to triggers that were voted in that say it pays no interest if funding levels sink below 55%.


Another major pension amendment election is coming soon that will make drastic changes to fix this whole situation. If the vote passes, contributions are being increased from 8.5% to 11%. The employer is being asked to kick in an extra $600,000,000. The retiree COLA, which is currently a simple (not compounded) 4%, will be lowered to the CPI but with a max of 2% compounded and only paid out on $30,000 no matter what the annual pension benefit is (and no COLA for the first 3 years).


You have no idea how happy I am that we avoided DROP altogether. I was chastised and mocked by many co-workers when we never joined DROP. Of course I couldve rolled the money into an IRA right about now, but what a nightmare in general.


Now I just have to figure out a way to re-run all my numbers with the new significantly lowered COLA that is certainly coming. I havent figured out how to do it in FireCalc so I guess I'll have to do it by hand.

[MBAustin]

Wow, utrecht, what a bad situation. Thanks for the reminder that relying on any one source of income for retirement can have dangers. Hope things get straightened out and glad you made a good choice there.

[2017ish]

Quote:

Originally Posted by utrecht Some of you veterans may remember this thread of mine from 4 years ago. Wow, have things have changed. My wife and I were within a couple years of retiring and considering our retirement funding options based around our pension options. If you are interested in this thread, please reread the OP to refresh what was going on at that point. ...

Read a number of the articles. Boy, did you dodge a bullet! The prior board and the investment management firm managed to keep the shine on that Pile of Dung for a good while...

[W2R]

So glad it all worked out for you, utrecht, and that you didn't get caught in the middle of that mess! What a shock and what a relief it must be to know that your retirement was not affected. I wonder what will happen to those retirees who did not fare so well.

Quote:

Originally Posted by MBAustin Wow, utrecht, what a bad situation. Thanks for the reminder that relying on any one source of income for retirement can have dangers. Hope things get straightened out and glad you made a good choice there.

+1
I think that having several different income streams from different sources for retirement, and then being able to manage without any one particular income stream is important. Along those lines I think many of us have run FIRECalc without SS included, or without a pension included, and so on, to see what would happen.

Quote:

Originally Posted by utrecht I was chastised and mocked by many co-workers when we never joined DROP.

Isn't it nice to be retired, and to not have to interact with such evil people? I can't possibly imagine someone chastising and mocking a co-worker simply because of their retirement income choices.

[Sunset]

Quote:

Originally Posted by utrecht ...... Now I just have to figure out a way to re-run all my numbers with the new significantly lowered COLA that is certainly coming. I havent figured out how to do it in FireCalc so I guess I'll have to do it by hand.

Glad to hear you dodged the Pension Bomb, seems this is a hidden problem in lots of places.

Hopefully the reduced COLA won't hurt too much, even though I'm sure it's a disappointment.

[utrecht]

The reduced COLA actually makes a bigger difference than you would think. It wont be much at the beginning but as each year goes by, the deficit between what we will get and what we thought we would get gets bigger. Because of that, we have to lower our withdrawals now so that our portfolio balance is bigger down the road to make up for the increasingly smaller pension amount (compared to what our original planned included).

Still, we have planned for all kinds of contingencies and we are fine.

What really ticks me off is that even though its a $3 billion fund, all the board had (has) to do is invest the proper percentages in index funds with the correct AA and it would be fine. There is no need to buy timber farms, wineries, raw land or $20 million luxury houses. They could stick that money in a REIT index fund and save million in investment advisors fees....but what to do I know.

[samclem]

Quote:

Originally Posted by utrecht Well, the poll results show that I should take advantage of DROP.

4 years later . . .

Quote:

Originally Posted by utrecht In the past 2 years, serious pension fund mismanagement has been discovered. Now, this pension fund was rated the #1 mid sized pension fund in the country in 2012-2013. The board of directors has been voted out and replaced completely. The CFO was forced to resign and is under investigation by the FBI for fraud. Its a long story but there were all kinds of shenanigans going on and to make a long story short the fund is now 45% funded. . . . As of Oct 2016, the DROP interest rate is slated to go to ZERO due to triggers that were voted in that say it pays no interest if funding levels sink below 55%. . . . . You have no idea how happy I am that we avoided DROP altogether.

Glad to hear that you guys avoided this huge problem. You were smart to ignore us and the poll results! So much for the "wisdom of crowds" (here, or among your fellow employees).

[Fermion]

The 8% to 10% "guaranteed" return was a red flag and congrats to you and others on here for seeing it back in 2012.

We live in a world where you can't even get 5% guaranteed and people are happy with 2% CDs.

[Johnora]

Seeing as not all defined benefit pensions are the same, it is hard to judge in this case. A lot depends on the strength of your pension system. My DW and I are both in DB COLA'd pensions, but they are legislated, run statewide and one of the strongest in the country. They also do not offer a DROP plan. When we hit our points, we both plan on retiring and immediately getting our pension plus cola for life. On the other hand we have been feed money into separate 401k's and 457 fc, for years as well to have just a little extra out there beyond the pensions and add another leg to the stool.
I know your pension system has been tested for strength. On August 11th, the following headline came out: Can Dallas Police and Fire Pension fund be saved? Officials propose changes to head off insolvency? The link to the article is here: Can Dallas Police and Fire Pension fund be saved? Officials propose changes to head off insolvency | Dallas Morning News

The bottom line is you have to protect your financial future against those that may have done damage to your pension protection. This DROP program sounds like it will give you that added protection and after reading that, assuming that I am discussing the same pension system that you are, I would definitely diversify from just your pension, I don't know that I would even take a lump sum payment out as that is generally a very bad idea.

[utrecht]

There was a vote in 2014 to lower the guaranteed interest 1% each year until it reached 5%, but part of the vote included the clause that triggered the drop to 0% if funding levels went below 55%. Triggers were hit right away when the assumed rate of return was lowered from 8.5% to 7.25% (which shouldve been done a long time ago as well and another reason why I sensed trouble).

[Johnora]

As a quick follow up, I am also a very soon to FIRE officer (27 years), who has spent amazing amounts of time making sure I have checked everything twice. Our pension payout is 85% funded, which ranks 8th in the nation, but we also have a lower pension payout of roughly 60% of highest average 42 months of salary. Two things can happen to your pension as they try to climb out of being only 45% funded. First they will increase the level of every active member paying in, then they may look at as a last resort reducing the pension payout, or changing the funding formula.
Dallas is a good agency and I hope you guys get that system fixed. You put your lives on the line for your career expecting that someone else had you back come retirement time.

Hang in there, and I hope they let you invest in the DROP at those rates you have shown!!

LT

[utrecht]

Quote:

Originally Posted by Johnora Seeing as not all defined benefit pensions are the same, it is hard to judge in this case. A lot depends on the strength of your pension system. My DW and I are both in DB COLA'd pensions, but they are legislated, run statewide and one of the strongest in the country. They also do not offer a DROP plan. When we hit our points, we both plan on retiring and immediately getting our pension plus cola for life. On the other hand we have been feed money into separate 401k's and 457 fc, for years as well to have just a little extra out there beyond the pensions and add another leg to the stool. I know your pension system has been tested for strength. On August 11th, the following headline came out: Can Dallas Police and Fire Pension fund be saved? Officials propose changes to head off insolvency? The link to the article is here: Can Dallas Police and Fire Pension fund be saved? Officials propose changes to head off insolvency | Dallas Morning News The bottom line is you have to protect your financial future against those that may have done damage to your pension protection. This DROP program sounds like it will give you that added protection and after reading that, assuming that I am discussing the same pension system that you are, I would definitely diversify from just your pension, I don't know that I would even take a lump sum payment out as that is generally a very bad idea.

Yes, my pension fund is the one you listed....and it was voted #1 best run mid sized pension fund in the country just a few years ago, so dont be too sure that yours is as strong as they are telling you it is. Apparently its pretty easy to cook the books for years.

[Johnora]

Quote:

Originally Posted by utrecht Yes, my pension fund is the one you listed....and it was voted #1 best run mid sized pension fund in the country just a few years ago, so dont be too sure that yours is as strong as they are telling you it is. Apparently its pretty easy to cook the books for years.

Amazing isn't it, we spend our career taking care of others and then have the ones watching our future turn out to be the ones we should have really been watching.

[utrecht]

Quote:

Originally Posted by Johnora As a quick follow up, I am also a very soon to FIRE officer (27 years), who has spent amazing amounts of time making sure I have checked everything twice. Our pension payout is 85% funded, which ranks 8th in the nation, but we also have a lower pension payout of roughly 60% of highest average 42 months of salary. Two things can happen to your pension as they try to climb out of being only 45% funded. First they will increase the level of every active member paying in, then they may look at as a last resort reducing the pension payout, or changing the funding formula. Dallas is a good agency and I hope you guys get that system fixed. You put your lives on the line for your career expecting that someone else had you back come retirement time. Hang in there, and I hope they let you invest in the DROP at those rates you have shown!! LT

If they make all the proposed changes, which are mostly listed in that article, things should be fine. Higher contributions and lowered benefits. Its complicated but simple at the same time. Everyone will take a hit, but honestly its not THAT bad. People are pissed of course, but they are pissed at the wrong people and they just dont understand financial matters. Most of the retirees dont care about the situation and are trying to demand they get what they thought they would get. Its literally impossible, and they think the pension board is trying to rip them off.

The actual pension benefit (monthly check) wont change. Its guaranteed and protected by the Texas Constitution. The changes will be for new hires, lower COLA, lower DROP interest (3% fixed), and things like that that aren't considered "accrued benefits" and arent protected by law.

[Johnora]

As it usually does it falls on the ones still working and of course that can hit you guys when it comes to recruiting too. Hope it all works out well for you and they get that ship in shape for all the rest of them too.
Broken promises can take a long time to get over, they should make a point of explaining it to the members clearly, maybe even have FOP or other union put it out to all the members so they know exactly who is to blame for the mess they are left with.

[utrecht]

I tried to update a thread but its too old. I started it in 2012 and have given a couple updates. Here is a link
http://www.early-retirement.org/foru...ml#post1768419

This saga has gotten more crazy. As I mentioned in the bolded section there was a vote of the pension members to make drastic cuts to fix the pension. The pension amendments were voted down. The amendments would've helped fix the issues but they were voted down basically because the members had already voluntarily given up benefits in 2 previous votes in recent years and also because there was nothing being done by the City at all to assist with the problem (no additional money being kicked in).

The State Legislature which governs these matters stepped in and told all parties that if they could not negotiate a settlement, that the Legislature would come in and fix the problem themselves and neither party would like it. Months of negotiations went on but no agreement was reached. I feel like Im somewhat of an unbiased person and I can tell you that the City was not negotiating in good faith. The Mayor tried everything he could to force an end to the pension as we know it. He wants a DB program instead of a DC. He lied to the citizens in TV ads. He lied to the State Legislators. It was so bad that the Chairman of the State Finance committee who is in charge of fixing entire mess sent out several public tweets telling the Mayor to quit lying to the public. I couldnt find a link to them but here's an interesting article.

https://www.dmagazine.com/frontburne...nsion-problem/

No settlement was ever reached and the State did go forward and passed a new state law which mandates changes to the pension. I dont have exact details but here are some changes:

1) Retirement age is raised to 58 from 50
2) COLA is ELIMINATED until the pension has a funding ratio of 70%. This alone will cost my wife and I approx $750,000 over 20 years. What we had was a 4% non compounding COLA which I believe is pretty fair. 4% of your original amount and that same amount every year going forward so the actual percentage decreases every year. Compounded 2% COLA would be fine also, but NO COLA? That's a huge hit to people like me who just recently retired.
3) All DROP money is frozen from withdrawals and will be paid out as an annuity based on lifespan. 2% interest will be paid on balances going forward.
4) Contributions for active members go from 8.5% to 13%
5) The City's contributions increase from 24.5% to 27%

There are other monetary changes that I cant remember and dont affect me and there are also administrative changes. For example: Pension board members must now have certain degrees, experience or other credentials in the finance area. WOW! Who wouldve thought that wasnt already a requirement? Ive had many conversations with board members in the past and their eyes glazed over as I talked about certain specifics. It was clear they knew less about investment and pension relates issues that I do.

There is also a clause written into this new law that addresses "clawback" of DROP interest. This is a major hot button because a lot of people who were paid 8-10% interest on their DROP accounts for years could be made to pay some of that money back. During this whole debacle, many of them made a run on the bank and withdrew a total of over $500 million of DROP money from the pension fund in fear that they would never get it. This caused the problem with the pension fund to get even worse and if 'clawback" is enacted, those people will have their future pension checks garnished until the overpayment of interest is collected.

Most people believe that if "clawback" is ever used, it will be determined by the Supreme Court to be illegal. Also, on Aug 1st when the next round of cost of living increases shouldve been given out, a lawsuit will be filed. It is already prepared and ready for filing. A Federal Court has already rule in another case that future COLA increases are earned "as you go", which would mean COLA increases could not be taken away for past years worked and only for future new hires. We will see how that ends up. What a mess!

For us this means, Im happy as hell that I had the foresight to research and plan for the future and not just assume everything will be OK like the majority of people did. We are lowering our anticipated income for the near future until this COLA situation is settled, but we still have more than enough. However, a lot of retirees are literally selling their houses right now.

To make matters worse, the City is of Dallas is in a world of hurt because people are retiring in droves right now to get out before the new rules kick in Sept 1st. Just about anyone over 50 is leaving and the dept is already understaffed by like 700 officers. They are struggling mightily to recruit people due to all of this mess.

The City of San Antonio is recruiting in Dallas using billboards like this on major Dallas highways.
San Antonio uses billboards, promise of 'strong pension' to recruit Dallas officers - Story | KDFW