Unlimited Pension Buy In

[RetireAge50]

If you were age 65, had a $1,500,000 portfolio and $60,000 estimated expenses how much would you convert to this pension?
1. NO LIMIT on buy in amount (send a check or convert from other retirement accounts).
2. Buy in and payments start immediately
3. First year pays 7.9% Single Life or 6.7% 100% Joint Life (of amount purchased)
4. Every year COLA (maximum 3%)
5. Purchase amount (less benefits received) refunded to beneficiaries
6. Assuming default risk is near zero (state issued pension)
Tempting to put a lot maybe all. $1,500,000 times 6.7% would be an income of $100,500. A typical 4% SWR would only be an income of $60,000.

 

[harley]

Nothing. I prefer to manage my own money. That 3% max COLA is a particular red flag to me. I lived through the 15-18% per year inflation of the 70s/80s. You'd lose a massive amount of purchasing power if that happens again. And personally, I'm waiting for the other shoe to drop.

I also don't buy the nearly zero chance of default risk. A judge in Illinois or California or one of those other places with massive pension debt has ruled that pensions are no safer from bankruptcy than any other debt.

JMO.

 

[samclem]

I would do a lot of research into that "zero default risk" point, figuring not just how things are today, but how they could change. Until states can issue their own currency, there will be at least some risk of default.

And on the other side--inflation could go considerably higher than 3%, it has stayed higher than that every year for decades at a time. So, keeping some/a lot of assets invested in a balanced portfolio to grow with the rest of the economy and at least keep pace with higher inflation is something I'd do.

How much would I put in? I'd treat it like an annuity. If I already had a very solid pension or an annuity from another source that would cover my basic needs, I might not invest anything. If I was willing to give up growth in order to buy a baseline monthly income that would keep up with very moderate inflation, then I might invest enough to buy an income stream to keep food on the table and the lights turned on in the event of a major market meltdown. Another type of diversification. But in the case of a general economic/financial cataclysm I'd always know that State coffers could dry up at the same time taxpayers lose patience with paying more.
Note: The chart below shows the annual rise in prices, not the prices themselves. Seems obvious, but the point is that unless the line goes below "zero", the prices never go down, and those 10%+ rises in prices during the 1970s represented a permanent loss of earning power to those on fixed income--they never regained the ability to buy what they used to be able to buy if inflation exceeds the cap of their COLA.

 

[brewer12345]

I'd want to really, really nail down the default risk. I limit myself to no more than 5% of my portfolio going into a position and cap appreciated ones at 8 to 10% (and usually I get nowhere near that). If you are going to take an outsized exposure to a single obligor, you had better be damn sure it is safe. If you can get there, I would be tempted to convert enough of your stash to fund bare bones expenses, say no more than 500K or so. Then I would make sure the rest of my portfolio had some stuff that does real well in hgh inflation environments.

 

[MooreBonds]

If you were age 65, had a $1,500,000 portfolio and $60,000 estimated expenses how much would you convert to this pension?
1. NO LIMIT on buy in amount (send a check or convert from other retirement accounts).
2. Buy in and payments start immediately
3. First year pays 7.9% Single Life or 6.7% 100% Joint Life (of amount purchased)
4. Every year COLA (maximum 3%)
5. Purchase amount (less benefits received) refunded to beneficiaries
6. Assuming default risk is near zero (state issued pension)
Tempting to put a lot maybe all. $1,500,000 times 6.7% would be an income of $100,500. A typical 4% SWR would only be an income of $60,000.

Compared to other pensions, that sounds like it's almost "too good to be true". As in - down the road, it would be a ripe target for retroactive re-evaluation/cuts.

I'd probably think along the lines of Brewer's thought of maybe 1/3 of your portfolio, and let that be most of your fixed income in your AA.

 

[RetireAge50]

Thanks for the replies. Cool inflation graph. I agree not all as default and inflation is a concern. Also not really wanting to depend on the government by giving up control. Such a good deal though, will likely participate at some level (unless the law gets changed).

 

[Totoro]

Agree with the COLA remark, the limitation is dangerous.

That said, I would consider joining the plan as an extra diversification. It's a decent longevity insurance and I would treat it that way. So go for the joint life option.

Considering that, can you tweak the conditions? e.g. drop the beneficiary refund to get a higher pay-out.

All in all, I'd probably put in enough money to coincide with an "austerity budget" taking into account SS (if any), and leave the rest (100%) in the stock market. So buy-in anywhere from 500k to 750k.

If you want to further protect for (and assess) default risk, try and find some CDS on the state in question.

 

[2B]

I also don't buy the nearly zero chance of default risk. A judge in Illinois or California or one of those other places with massive pension debt has ruled that pensions are no safer from bankruptcy than any other debt.

I find it interesting in how perception on this issue has changed over the last couple of years. Back in my early days on this forum, I got into an ugly exchange with someone that planned on retiring with few assets other than a municipal pension. I took the position that they needed liquid assets and that you can't assume the pension is totally safe. Their comeback was that it was protected by their state constitution. We now all know what that's worth.

I would not be very comfortable if I was totally dependant on a government backed pension. The safety is in order of the size of the government entity with a federal pension being the safest. Even a federal pension comes with risks. COLAs can get slashed. Special pension taxes can be implemented. Even places you think should be safe are more at risk than people think. Here in booming Houston the municipal pension plans are all in dire straights.

 

[ArkTinkerer]

Personally I would be very wary of this. I agree strongly with the "too good to be true" quote. While the 3% limit can eventually become an issue, right now this sounds higher than anything else I've looked at and higher than many that don't have any COLA. Care to name who is making this offer?

 

[Golden sunsets]

Personally I would be very wary of this. I agree strongly with the "too good to be true" quote. While the 3% limit can eventually become an issue, right now this sounds higher than anything else I've looked at and higher than many that don't have any COLA. Care to name who is making this offer?

I concur. The State that I live in with a republican governor looking for ways to balance the budget, changed the pension system to limit increases to 2% per year, including the pensions of current retirees. Further changes could also occur, as this governor does not have a great deal of respect for public employees.

 

[W2R]

If you were age 65, had a $1,500,000 portfolio and $60,000 estimated expenses how much would you convert to this pension?

Me? Hmmm, I'd put between $200K and $500K into it.

My best guess is that I would convert $300K to this pension. At 7.9% that would give me $23,700/year, leaving $1.2M to invest or for any possible future lump sum needs. With SS in addition to this pension I'd have a nice retirement ahead.

 

[2B]

Further changes could also occur, as this governor does not have a great deal of respect for public employees.

Some small reductions to Detroit's pensions may have saved the big whack they ended up having to take. Saving a pension system is showing a lot of respect for those covered by it. Many difficult decisions will have to be made. Selective early cuts are one option. Bankruptcy is another one.

 

[Running_Man]

I would look to see the shape of the retirement fund, if this is the state of Illiinois or one of the other top ten worst I would be a little concerned 20 Best & Worst States for Pension Funding. The payout though is very good, especially if backed by the state. The joint COLA with a 3% COLA is better than buying an SPIA with no COLA. One question is what is Social Security? I am assuming none.

Assuming not one of the 10 worst, knowing it is not a city I would invest 600K for 40K per year leaving 900K to provide for 20K per year (2.2% withdrawl rate) and shortfall on inflation. If there is Social Security on top of this then this becomes even safer as the 900K needs to provide for less. If the state is one of the 10 best makes this a much easier decision.

In short this investment is paying about 30% better than market rates, that is paying for quite a bit of risk assuming this is not an imminent default state.

 

[2B]

My concern with this "too good to be true" offer is that the pension plan is worried about having enough assets with their current short term projections. If they get enough assets deposited by youger people, they will have the pension plan covered for the next 10 to 20 years and then it's someone else's problem. Oh, yeah!

They then "hope" investment returns skyrocket which will make the plan financially sound for the long haul.

 

[Running_Man]

My concern with this "too good to be true" offer is that the pension plan is worried about having enough assets with their current short term projections. If they get enough assets deposited by youger people, they will have the pension plan covered for the next 10 to 20 years and then it's someone else's problem. Oh, yeah!

They then "hope" investment returns skyrocket which will make the plan financially sound for the long haul.

Are you aware of any of the 50 states doing this?

 

[RetireAge50]

Top 10 best state so that is good.

As far as "too good to be true" it may be that it is not comparable to "market rates" as those have profit and different risks built into them.

This supposedly will be able to sustain itself from the amount I contribute (and other teachers).

It may also have some additional benefit dollars thrown in from somewhere as the COLA and dying guarantee is only available to Vested employees (in our case 20 years of teaching).

Also age 65 is not age 50 so maybe on average people don't last so the pension funding levels are ok but will be good longevity insurance if we live long.


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[Running_Man]

So it is probably more likely this ability to pay in was the result of a contract agreement probably allowing the state to give smaller raises (which reduces future pension costs). Since most states are assuming 7-8 percent annual returns they can offer this as not losing money. I would check the fine details to insure it is the state and not an insurance company that is responsible for this pension, and if everything is ok and since it is a top 10 funded state the biggest risk would be major under performance in near term of investments. From the details given I would not be hesitant at all to invest 600K

 

[2B]

Are you aware of any of the 50 states doing this?

Obviously, no one would announce they were getting people to buy into higher benefits when they are concerned about long term funding. Long term funding of all pension plans depends on how well investment returns meet their assumed returns. One of the problems public pension plans have is that they have over estimated their returns for decades. Yes, they might meet it one year but they have almost universally failed to meet them over longer time frames.

I am not aware of how Washington State funds their teachers' pensions. Having lived in Washington for a number of years, I wouldn't have too much faith in Olympia taking care of me.

 

[Chuckanut]

Agree with the COLA remark, the limitation is dangerous.

Certainly he would be far better off without the cap on the COLA (ignoring the risk that the state might not be able to sustain that level of increase), But...... many, perhaps most, pensions have no COLA at all. 3%, if it is sustainable, is certainly better than nothing.

That said, I can only tell the OP what I have done. I have managed my retirement assets so that I have three legs - personal investments, pension, and social security. I can live OK on any two, though, if I lost a leg, I'll have to give up flying to Paris for a quick weekend following the fashion scene. For that reason , I would not invest more than 1/3 of my cash in the pension plan.

Also, Detroit has taught us that public pensions can be modified despite what was 'promised'. And politicians, can and will, play dirty tricks doing things like skipping pension contributions, or using pension funds to favor certain industries. (Michigan did that with the movie industry.)

Michigan-Subsidized Film Studio Fails; State Pension Fund Had Guaranteed Loan | Tax Foundation.

Be warned.

 

[dallas27]

Sounds great, and if true its a great deal. I would still keep control of my money.


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[Sunset]

How much of your retirement will already come from this source ?
I would consider topping it up but perhaps you will already be getting a significant chunk from it (and at State Pension risk), so then the question becomes how much more do you want to bet on this horse?

 

[RetireAge50]

That 3 legged thing is starting to sink in. Maybe something close to $30,000 portfolio, $30,000 pension, $30,000 social security.

Could probably even do a weird looking stool and go $20k portfolio, $40k pension, and $30k SS.

Thanks again for the input, it helps to be able to get all the ideas and cautions.


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[Chuckanut]

FWIW, I have also run FireCalc assuming my pension is cut by 20% with NO COLA, and SS is cut by 30% but the COLA continues.

In both cases, I survive well. Instead of a weekend run to Paris for the fashion show, it will be a weekend flight to Pittsburgh for a museum visit.

 

[samclem]

That 3 legged thing is starting to sink in. Maybe something close to $30,000 portfolio, $30,000 pension, $30,000 social security.

I think that, or something like it, makes a lot of sense.

Also, when it has been necessary to reduce pension benefits (due to a bankruptcy of the company, failure of the fund, etc), there is sometimes protection for some base amount of pension (say $30K per year, approx) with amounts above that subject to trimming (sometimes dramatic trimming). So, in the event the teacher's pension payout is later subject to cuts, it's possible you'd be hurt less if your annual amount from the pension was on the lower end.

Only time will tell--maybe the teacher's pension will do spectacularly well, or stocks will go to the moon. At this point, you aren't trying to get fabulously wealthy, you are trying to avoid a failure. The independent (as much as possible) income streams help do that.

Unmentioned so far: Any need/desire to leave assets to children, grandkids, charities when you are gone? Stocks would probably do that better than a pension that quits when you draw your last.

 

[Running_Man]

Another way to think of this is if the 100K was your annual pension that you could cash in for a payout the comparable to the 1.5 million they are offering you would be 2.3 million dollars. Then you'd be thinking they are trying to save their pension system at your expense. I wonder if there is any way to take the income stream and then sell that to a 3rd party. Could pick up a few hundred grand real quick.

Having read the state pension documents and the manner they are calculating these it appears they are using the expected return on plan assets instead of the 30 year bond that most annuity companies are using to calculate the payout, Washington is using an 8 percent assumed rate of return for the pension liability calculation. Based on that assumed return which is higher than the 5.7 percent Moody's recommends, the TR1 plan is 79% funded and the TRS 2/3 plans are 104% funded. Overall Washington is rated the 5th best pension funded state in the nation, and one of the safest. They are tied for 14th in credit rankings for all states. I think from what I have heard you are in the TRS2/3 category and the risk of reduction of the pension is extremely low.