Pension vs Lump Sum....nice choice to have had.

[nun]

My state is allowing a one time transfer of contributions made to the DC state pension plan to the DB state pension plan. It was initiated by the teachers union as many of their members lost a lot of money in the 2007 recession. It's controversial because of the "moral hazard" involved and the choice between DB and DC plans was supposed to be a one time deal, but the legislators gave into lobbying. I'm against the transfer in principle, but did it anyway because I think it's a good deal......what do you think? Here are the final numbers.

I'm a 54.5 year old single male and took $279k from a TIAA-Traditional account earning 4% a year and bought a $19.6k annual pension that will start when I'm 55....in 6 months time. There is a COLA on the first $13.0k which has averaged 3% for the last 20 years with the COLAed amount also getting regular increases, the last one being in 2011 when it went from $12k to $13k. If I die early a designated beneficiary also gets a lump sum payout of the "actuarially calculated balance" of my pension account.

 

[Teacher Terry]

I think it is a great deal.

 

[MasterBlaster]

You have a very sweet deal there:

Using our ubiquitous self-funded pension 25X factor for Cola'd and 16X factor for non-Cola'd pensions, I get that you should have paid around (13X25 + (19.6-13)X16 ==> $430k.

The only (small) issue is that you don't "own" the funds anymore. You take on a little more risk that the state may possible be insolvent over the long haul and does a "Detroit" on you.

 

[Chuckanut]

My state is allowing a one time transfer of contributions made to the DC state pension plan to the DB state pension plan. It was initiated by the teachers union as many of their members lost a lot of money in the 2007 recession.

emphasis added.

I don't understand this. The market recovered very nicely from those days and went on to new highs. Only lately have we seen a significant pull back and the amount and duration of that is yet to be determined.

 

[Big_Hitter]

Using our ubiquitous self-funded pension 25X factor for Cola'd and 16X factor for non-Cola'd pensions

made up annuity factors are always better than real annuity factors

but seriously, who gave you those factors?

 

[hnzw_rui]

emphasis added.

I don't understand this. The market recovered very nicely from those days and went on to new highs. Only lately have we seen a significant pull back and the amount and duration of that is yet to be determined.

Some people are just not made to handle volatility. Chances are they pulled out of stocks at the worst time and never got back in stocks.

 

[MasterBlaster]

made up annuity factors are always better than real annuity factors

but seriously, who gave you those factors?

The 25X factor for (Cola'd self funded-pensions) is just the inverse of our ever-loved 4% nest-egg SWR. The 16X non-Cola'd factor gets posted occasionally on this forum and in the financial [-]Porn[/-] Press. It's one of those "ballpark" numbers that I seem to remember.

They are just ballpark guides, to be used with all of the caveats for nest-egg decumulation strategies. Take them for what they are - "ballpark" numbers.


So using these factors you can do your financial planning in 3 minutes on the back of the water-bill. Those extraordinary spreadsheets we all play with are (really) no better at predicting how much we need, and how much we can spend.

 

[Big_Hitter]

Ah, got it. the COLA factor is heavily dependent on the COLA assumption, so if we have a 6% interest rate and a 2% COLA the net rate is 1.06/1.02-1 or 3.92%.


For a 55 year old a life annuity factor of 25 correlates to something like a 1% net interest rate


The life annuity factor of 16 correlates to something between 4 and 5%.

 

[nun]

emphasis added.

I don't understand this. The market recovered very nicely from those days and went on to new highs. Only lately have we seen a significant pull back and the amount and duration of that is yet to be determined.

It's taken a long time for the legislation to pass and as we all know people do dumb things when stock markets fall. The legislation was first proposed back in 2010 when people had probably sold at a loss and didn't want to take risks anymore. The state calculated the buy in amount for each person by compounding all the contributions to the DC plan at 8% a year. I stayed invested through the crash dong the "Boglehead thing" and had more than enough money in my DC account for the buy in, so I still have a small DC balance. Lots of people did not have enough because they had used TIAA-Traditional or had made poor investing decisions and they had to use other funds from 403b, 457 or even IRAs.

 

[nun]

You have a very sweet deal there: Using our ubiquitous self-funded pension 25X factor for Cola'd and 16X factor for non-Cola'd pensions, I get that you should have paid around (13X25 + (19.6-13)X16 ==> $430k. The only (small) issue is that you don't "own" the funds anymore. You take on a little more risk that the state may possible be insolvent over the long haul and does a "Detroit" on you.

The IRR, assuming I live to 83, is 7%. I ran it through FireCalc and there's only a 30% chance that a 60/40 portfolio would do better if we accept that future returns will be similar to the historical ones. I'm not concerned about payment of the pension as the state has passed some recent reforms and is paying in larger amounts itself to get the funding up from 70% with a goal of full funding by 2030.

 

[marko]

I think it is a great deal.

IIRC, like me, Nun is from Massachusetts.

If I may be[-] cynical [/-]realistic for a moment, I'd say that anything being set up between the state teachers union and the legislature is going to be a no-brainer good deal. (And likely a moral hazard as well)

 

[nun]

IIRC, like me, Nun is from Massachusetts.

If I may be[-] cynical [/-]realistic for a moment, I'd say that anything being set up between the state teachers union and the legislature is going to be a no-brainer good deal. (And likely a moral hazard as well)

The fact of the buy in is really the only exceptional part of the deal. The DB pension is the same that other state retirees get and the average annual return of the DB pension fund (8%) was used as the interest rate to calculate the buy in. So when people started contributing to the DC plan and how they managed their money meant for many that they had less than an annual 8% return and had a shortfall in the DC plan amount. Also the MA state pension plan is a fantastic deal for MA and a relatively bad one for the employees as the state contributes 4% and the employees put in 11%. It actually saves the state money as it opts out of SS (MA retirees don't get SS checks) and hence MA avoids having to pay 6.2% FICA saving 2.2%.

 

[marko]

Also the MA state pension plan is a fantastic deal for MA and a relatively bad one for the employees as the state contributes 4% and the employees put in 11%.

Still wish I had taken friends' advice 40 years ago and either got on the "T", "the courts" or registry. Buddies that did all retired at 45 or 48 with a full pension. One RE'd with full pension at 38 due to "stress"....yeah, that's what it was....stress.

 

[nun]

Still wish I had taken friends' advice 40 years ago and either got on the "T", "the courts" or registry. Buddies that did all retired at 45 or 48 with a full pension. One RE'd with full pension at 38 due to "stress"....yeah, that's what it was....stress.

There was certainly cases of abuse. But the reforms of a couple of years ago closed the loopholes and raised the minimum retirement age for most workers to age 60. Most state employees work hard and as I said the pension is mostly funded from their own salary. The average MA state pension is $28k and there's no SS in addition to that. So MA is vigorous in encouraging state workers to save extra money to 403b or 457 plans....but those don't get any match from the state. If MA were to ever default on the DB pension or replace it with a fully DC plan then it would have to start paying into SS again and that would cost them an extra 2.4% of the state employee wage bill.

 

[Teacher Terry]

I retired from a state that does not pay into SS either. WE also had to pay some of the costs of the pension. In fact SS will take most of the SS that I earned at other jobs which does not seem right to me.

 

[nun]

I retired from a state that does not pay into SS either. WE also had to pay some of the costs of the pension. In fact SS will take most of the SS that I earned at other jobs which does not seem right to me.

I assume you mean WEP will reduce your SS. There are maximum amounts for WEP and I don't think you can lose more than 50% of your SS because of it.

 

[Chuckanut]

I assume you mean WEP will reduce your SS. There are maximum amounts for WEP and I don't think you can lose more than 50% of your SS because of it.

I retired from a state that does participate in the SS system. I had to contribute to my pension.

WEP is often misunderstood. The best explanation of it I have heard is from Tom Margeneau:

government pension offset law simply treats them in the same way that all other working people have always been treated. In other words, if a woman who worked at a job that was covered by Social Security gets a Social Security retirement pension, that pension has always offset any spousal benefits she might have been due. Before the GPO law went into effect, people getting a non-Social Security pension were the only working people in this country who could get their own retirement pension AND a full dependent's benefit from Social Security.

http://www.creators.com/lifestylefe...urity/those-darn-social-security-offsets.html

 

[youbet]

I retired from a state that does participate in the SS system. I had to contribute to my pension.

WEP is often misunderstood. The best explanation of it I have heard is from Tom Margeneau:



http://www.creators.com/lifestylefe...urity/those-darn-social-security-offsets.html

Why did you say that "WEP is often misunderstood" but then present a quote explaining "GPO," a very, very different thing?

I guess you're right. WEP is often misunderstood. Some people confuse it with GPO. I think we know one!

Also, just as an FYI, the explanation of GPO by Tom Margeneau is flawed.

 

[Chuckanut]

Why did you say that "WEP is often misunderstood" but then present a quote explaining "GPO," a very, very different thing?

I guess you're right. WEP is often misunderstood. Some people confuse it with GPO. I think we know one!

Also, just as an FYI, the explanation of GPO by Tom Margeneau is flawed.

You are correct. The article starts first with WEP (which deals with the amount of SS the earner will get paid) and then switches to GPO (which deals with the amount of SS a spouse gets paid) . I failed to notice the switch. My bad.

How is Margeneau's article flawed? I am curious since I know a lot of people who think they are being 'ripped off' by these rules especial GPO.

 

[alaska55]

I had heard of the SS offset (wep) but never looked into it because it doesn't affect me. After reading Tom Margeneau it makes sense. They are combining your non SS pension and SS and then scales your SS. Social Security replaces a higher % of income for lower income folks. Makes perfect sense to me.

 

[youbet]

I had heard of the SS offset (wep) but never looked into it because it doesn't affect me. After reading Tom Margeneau it makes sense. They are combining your non SS pension and SS and then scales your SS. Social Security replaces a higher % of income for lower income folks. Makes perfect sense to me.

You seem to be combining WEP and GPO which are two very different things.

 

[nun]

You seem to be combining WEP and GPO which are two very different things.

All this discussion of WEP is very nice, but irrelevant for people that have careers working for states that opt out of SS. The average state worker in MA gets a $28k pension and no SS. Part of the deal allowing the SS tax opt out is that the state provide a guaranteed alternative.

If you do have SS that is WEPed maybe you should lobby your congress person to support the WEP repeal bills that come up regularly. But I've never had a problem with WEP as all it does is adjust SS to reflect your actual average earnings not some lower number biased by a small number of FICA contributing years.

 

[youbet]

All this discussion of WEP is very nice, but irrelevant for people that have careers working for states that opt out of SS. The average state worker in MA gets a $28k pension and no SS. Part of the deal allowing the SS tax opt out is that the state provide a guaranteed alternative.

If you do have SS that is WEPed maybe you should lobby your congress person to support the WEP repeal bills that come up regularly. But I've never had a problem with WEP as all it does is adjust SS to reflect your actual average earnings not some lower number biased by a small number of FICA contributing years.

Are you impacted by WEP?

 

[Chuckanut]

<snip>
Part of the deal allowing the SS tax opt out is that the state provide a guaranteed alternative.

If you do have SS that is WEPed maybe you should lobby your congress person to support the WEP repeal bills that come up regularly. But I've never had a problem with WEP as all it does is adjust SS to reflect your actual average earnings not some lower number biased by a small number of FICA contributing years.

Very good points. One would hope that the money the state saves (and the employee also) would go into a pension that are more generous than those from states where everybody pays into SS. After all, what else is there to do with money not paid to SS?

 

[youbet]

Very good points. One would hope that the money the state saves (and the employee also) would go into a pension that are more generous than those from states where everybody pays into SS. After all, what else is there to do with money not paid to SS?

Yeah, one would hope that. Sadly, in some states such as Illinois, the state paid into neither SS or a pension plan. The employee's portion, however, was ALWAYS deducted from their checks. What a surprise!

Public employees in states where they do not participate in SS are fools if they are not lobbying hard to get SS participation. At least in states where the politics allows for hanky panky with the pension funds.