COLA Options in Pension Plan

[hmrambling]

There are two ways that I could receive a COLA or permanent benefit increase during retirement:

1) COLAs generated by the retirement system through excess investment returns and subject to legislative approval. These COLAs are not guaranteed and the amounts may vary. No forms are used and no action is required by members to select these COLAs. They are paid automatically to eligible members when granted. This year, the legislature granted a 2% COLA to those who are retirees who are 60 years old. I'll be retiring at age 51 so I will not meet the age requirement as long as the legislature includes a minimum age for the COLA.

2) COLAs funded directly by the retiree by accepting a lower monthly benefit, known as the Self-Funded COLA. The monthly benefit will be actuarially reduced for my lifetime to fund the 2.5% annual COLAs. COLA won't be payable to me until the anniversary date after I turn 55 (I'll be 51 when I retire). If I elect a self-funded COLA, I'll still be eligible to receive system generated COLA (#1 above), provided I meet the requirements.



Example:

The non-COLA maximum is $5478 mo until death.

With COLA, here is your projected monthly income:

2027: $4402.72
2032: $4568.57
2037: $5168.92
2042: $5848.15

With little effort, I can get returns greater than 2.5%. Is there anything about the self-funded COLA that is appealing? What would make you seriously consider an option like self-funded COLA?

 

[jazz4cash]

There are two ways that I could receive a COLA or permanent benefit increase during retirement:

1) COLAs generated by the retirement system through excess investment returns and subject to legislative approval. These COLAs are not guaranteed and the amounts may vary. No forms are used and no action is required by members to select these COLAs. They are paid automatically to eligible members when granted. This year, the legislature granted a 2% COLA to those who are retirees who are 60 years old. I'll be retiring at age 51 so I will not meet the age requirement as long as the legislature includes a minimum age for the COLA.

2) COLAs funded directly by the retiree by accepting a lower monthly benefit, known as the Self-Funded COLA. The monthly benefit will be actuarially reduced for my lifetime to fund the 2.5% annual COLAs. COLA won't be payable to me until the anniversary date after I turn 55 (I'll be 51 when I retire). If I elect a self-funded COLA, I'll still be eligible to receive system generated COLA (#1 above), provided I meet the requirements.



Example:

The non-COLA maximum is $5478 mo until death.

With COLA, here is your projected monthly income:

2027: $4402.72
2032: $4568.57
2037: $5168.92
2042: $5848.15

With little effort, I can get returns greater than 2.5%. Is there anything about the self-funded COLA that is appealing? What would make you seriously consider an option like self-funded COLA?

When you say this are they actually returns or just increases in the monthly payout?

 

[hmrambling]

When you say this are they actually returns or just increases in the monthly payout?

The projections in the OP are the differences in the monthly pension check should I choose COLA.

I meant that I could invest the difference between the maximum and the COLA pension estimate and get more than a 2.5% return on that difference with little effort.

 

[Koolau]

The projections in the OP are the differences in the monthly pension check should I choose COLA.

I meant that I could invest the difference between the maximum and the COLA pension estimate and get more than a 2.5% return on that difference with little effort.

I agree. You could do better "protecting" yourself outside the COLA system.

 

[old medic]

Our system will allow you to roll your 401K over to add a COLA adjust extra to your pension.
Regular pension is not COLA unless it gets approved... year 5 and only got a one-year bonus.
I left the 401K and its added over $10K a year....

 

[MichaelB]

How does the payout of the 2.5% CPI option look if you live to age 95? At first glance this looks like a longevity option. If you live longer than actuarially predicted you come out ahead.

 

[hmrambling]

How does the payout of the 2.5% CPI option look if you live to age 95? At first glance this looks like a longevity option. If you live longer than actuarially predicted you come out ahead.

Even in a long term comparison, I still beat the self-funded COLA option by a large margin if I invest the difference. It looks like the self-funded COLA won't catch up to investment projections until I'm 97.

 

[Chuckanut]

In my 50’s, I’d take the maximum money you can get and invest the difference in a good total market index fund. You can let it grow for two more decades at least.

I have a COLA-lite pension that has a cap. I did great for the first 8 years, keeping even with inflation on a national level. But since 2022 the “lite” part of the pension COLA has had me falling slowly behind. I doubt I will ever catch up. But, it’s a heck of a lot better than no COLA at all.

Thankfully, my US Market index fund has comfortably beaten the rate of inflation during that time. And I have skimmed profits from that to help create a stable guaranteed income from very safe investments.

 

[jazz4cash]

The projections in the OP are the differences in the monthly pension check should I choose COLA.

I meant that I could invest the difference between the maximum and the COLA pension estimate and get more than a 2.5% return on that difference with little effort.

Got it, thanks. I agree with taking the higher amount and invest some of it.

 

[Koolau]

In my 50’s, I’d take the maximum money you can get and invest the difference in a good total market index fund. You can let it grow for two more decades at least.

I have a COLA-lite pension that has a cap. I did great for the first 8 years, keeping even with inflation on a national level. But since 2022 the “lite” part of the pension COLA has had me falling slowly behind. I doubt I will ever catch up. But, it’s a heck of a lot better than no COLA at all.

Thankfully, my US Market index fund has comfortably beaten the rate of inflation during that time. And I have skimmed profits from that to help create a stable guaranteed income from very safe investments.

Megacorp never saw fit to COLA protect our modest pension. BUT the stock has more than made up for the lack of COLA - for those of us who kept some of the stock.

A COLA'd pension sure would have been nice, though.

 

[jazz4cash]

Our system will allow you to roll your 401K over to add a COLA adjust extra to your pension.
Regular pension is not COLA unless it gets approved... year 5 and only got a one-year bonus.
I left the 401K and its added over $10K a year....

That's interesting. Kudos to your employer for maintaining the pension together with the 401k. Is it really a good deal or could you do better using the 401k to buy an annuity or just use it as a direct supplement? It sounds like it could be a bit restrictive but lots of people just want a monthly check.

 

[old medic]

Is it really a good deal or could you do better using the 401k to buy an annuity or just use it as a direct supplement?

not for us, we both HAD to pay 6% into the state pension system. 401K was optional, no matching funds. If you take one of the rollover options your money goes into the states system and its gone. We are keeping ours separate and doing Roth conversions for a tax-free nest egg for us if we need it or the grandkids.
We had figured out our pensions and put the excess into our 401Ks so have been living on that amount for several years before accually retiring.

 

[hmrambling]

I had to 7.5% into our retirement system. We have a 457(b) option (deferred comp) through Empower. Most folks don't take advantage of it in hopes that the state pension will be enough despite prep presentations informing employees that the average pension compensation is $32K. We're in a LCOL and the state wages aren't awesome.

Despite that, I've been able to contribute to the 457(b). The state doesn't match any of our contributions and we pay quarterly fees. I've currently got $141K in BlackRock LifePath Index 2040 L. I've put in an inquiry about the three year special catchup. I won't be able to take advantage of all three years however I'm thinking about tightening up the purse strings from July to December to see how close I can come to maxing it out for 2026. I'm on course to contribute $32K this year (includes the 50+ catch up). If I start the 3 year catch up, I should be able to contribute up to $49K. I don't really have the means to contribute $35,250 between 6/12 and 12/31 but it looks like I'll be able to contribute more along the lines of $22K. Then I plan to contribute the 300 hours of leave they will pay at the beginning of 2027, which will be $12K before taxes.

I have a Roth IRA (not affiliated with work at all), as well.

 

[old medic]

We have a 457(b) option (deferred comp) through Empower.
We're in a LCOL and the state wages aren't awesome.
I have a Roth IRA (not affiliated with work at all), as well.

Our 401Ks are with Empower, and separate Roths/Tiras. Doing in account Roth conversion @ Empower.
Tell us about it, We only grossed over 6 digits the last 4 years I worked. Part of the good thing is we have had years of practice live on little money.

 

[hmrambling]

Our 401Ks are with Empower, and separate Roths/Tiras. Doing in account Roth conversion @ Empower.
Tell us about it, We only grossed over 6 digits the last 4 years I worked. Part of the good thing is we have had years of practice live on little money.

After 30 years in state service, I'll be leaving just having broken $80K yr, and that's mostly because I managed a section for 11 years. Sad. DW is in academia right at $60K. Also sad, especially for a PhD with her years of experience. IMHO it's by design. I see so many that are approaching their 30 years who are pushing out their retirement dates for that extra 2.5% of FAC ((2.5%*years)*FAC). Combined, we broke $100K but neither of us are close individually.


I can piecemeal $100K together: state salary + moonlighting at the library + VA benefits. It's amazing that our 457 has $28K max ($56K max in special 3 year catchup). The only reason I'm even contemplating contributing $22K in 6 months is because of the piecemealed income. I'll basically be doing paycheck replacement with the VA benefits and library because 457 has to come straight from my state paycheck (which will essentially be zero after I pay the 457, taxes, health insurance).

Sometimes I say to myself, "It seems like we're not supposed to be here. (Here being early retirement.)" Why do I feel like I beat the odds by being able to retire after holding down a job for 30 years? It's almost by design we were supposed to fail and fall into the statistic that draws only the $32K annually from the pension fund.... Or have to stay longer (up to 40 years) like I see other people doing. It's definitely not the promise that we were sold.

 

[Koolau]

After 30 years in state service, I'll be leaving just having broken $80K yr, and that's mostly because I managed a section for 11 years. Sad. DW is in academia right at $60K. Also sad, especially for a PhD with her years of experience. IMHO it's by design. I see so many that are approaching their 30 years who are pushing out their retirement dates for that extra 2.5% of FAC ((2.5%*years)*FAC). Combined, we broke $100K but neither of us are close individually.


I can piecemeal $100K together: state salary + moonlighting at the library + VA benefits. It's amazing that our 457 has $28K max ($56K max in special 3 year catchup). The only reason I'm even contemplating contributing $22K in 6 months is because of the piecemealed income. I'll basically be doing paycheck replacement with the VA benefits and library because 457 has to come straight from my state paycheck (which will essentially be zero after I pay the 457, taxes, health insurance).

Sometimes I say to myself, "It seems like we're not supposed to be here. (Here being early retirement.)" Why do I feel like I beat the odds by being able to retire after holding down a job for 30 years? It's almost by design we were supposed to fail and fall into the statistic that draws only the $32K annually from the pension fund.... Or have to stay longer (up to 40 years) like I see other people doing. It's definitely not the promise that we were sold.

Is your pension decent? I've often seen state j*bs "back-loaded" with a nice pension after so-so salary. How about Social Security? That can make a huge difference in retirement.

 

[old medic]

Is your pension decent? I've often seen state j*bs "back-loaded" with a nice pension after so-so salary. How about Social Security? That can make a huge difference in retirement.

For us the so-so salary directly figures into the pension. My pension is about 65% of my last 4 years.
DW will only be about 50% mostly because of leaving early with a 15% reduction. Time Vs Money.
Add my SS and we are about equal with her future SS pushing us to est 130%.
The thing for us was we have been living on our expected pensions for years and everything above went into 401Ks.

 

[stepford]

Is your pension decent? I've often seen state j*bs "back-loaded" with a nice pension after so-so salary. How about Social Security? That can make a huge difference in retirement.

DW is about to experience that back loading big time. When we both worked I made about 2-3 times what she did in her state job, had been in my career for longer and had much larger savings. So, though we shared expenses, I was the financial bulwark of the relationship and often just took care of stuff when she couldn't.

When I ER'd a bit over 10 years ago she partially joined me and started working half time. So her compensation was also reduced by 50% and, though my pension wasn't that large, I remained the financial backstop by virtue of savings (and a now paid off house).

Then this month rolls around and DW finally retires - with a COLA'd pension based on her full time compenation. With the pension, some deferred comp and spousal SS (thanks to GPO repeal) we figure her monthly take home will roughly triple. Suddenly, and for the first time, I'm no longer the rich one in our relationship. We'll see if she still feels like keeping me.

 

[Just_Steve]

My pension COLA is CPI ÷ 2 capped at 3% on the first 18k nothing for the rest. Last year it was $18 a month. Didn't know what I was going to do with all of that extra $$$$