31yo should I consider a VAC annuity?

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CnC
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31yo should I consider a VAC annuity?

Post by CnC » Tue Sep 12, 2017 1:20 pm

I asked a similar question a few months ago but I didn't get very much of a reply, possibly because I didn't describe it very well.


I currently belong the the IMRF pension system. It is 90% funded currently protected by law and undergone an overhaul which greatly limits the liability for new participants. It is not related to IDOT state pensions that are very underfunded.

The IMRF offer the option to invest up to 10% of my salary into a VAC program which pays 7.5% interest per year with no chance of loss. (They state that interest rates may change but have been the same for the past 20-30 years)

It has very friendly withdrawl rules.
At any moment I can withdraw the entire amount I have invested. And I then receive all interest upon separation from my employer.

I also have the option of taking the lump sum and converting it into an annuity which pays out 8.5% of initial annuity amount per year with a 3% increase every year.

To me this seems like a very powerful tool for investing, and since it is "safe" it seems like a good place to put a portion of the bond portion of my portfolio.

Am I missing anything? I suppose there is the chance of the entire fund going bankrupt, but it clearly states that I can withdraw my investment amount at any time and I will be limited to 10% of my salary which is considerably less than will be going into my wife's and my 401k's.


https://www.imrf.org/en/members/origina ... tributions

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nedsaid
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Re: 31yo should I consider a VAC annuity?

Post by nedsaid » Sun Sep 24, 2017 4:44 pm

How can an entity guarantee a safe 7.5% return when investment grade intermediate term bonds yield maybe 2% or 3%. 30 year treasury bonds don't even yield 3%. A fundamental rule of finance is that guarantees are only as good as the institution standing behind the guarantee. A diversified portfolio of maybe 70% stocks/30% bonds ought to generate 7.5% a year over many years but there are just no guarantees. What "magic" investments exist out there that give you a 7.5% risk free return? I don't know of any. They are relying on historical returns from riskier asset classes like stocks. The guarantee is essentially backed by the underlying portfolio.
A fool and his money are good for business.

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Watty
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Re: 31yo should I consider a VAC annuity?

Post by Watty » Sun Sep 24, 2017 4:59 pm

CnC wrote:
Tue Sep 12, 2017 1:20 pm
pays 7.5% interest
I don't know much about annuities problems is that the 'X% guarantee is often misleading. It could be that the X% only applies to a very small part of the investment.

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Tyler Aspect
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Re: 31yo should I consider a VAC annuity?

Post by Tyler Aspect » Sun Sep 24, 2017 5:42 pm

My take of this situation is that IMRF is taking an ill advised guarantee that could cost them in the long run. This thing could create unfunded pension liabilities in a market downturn. Trustees asleep at the wheel.
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stevew7
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Re: 31yo should I consider a VAC annuity?

Post by stevew7 » Sun Sep 24, 2017 7:21 pm

I agree at first glance the VAC option looks very promising.

If it were me, I would NOT participate for three reasons.

1. Concentration risk. You are already counting on IMRF for your pension when you retire. You don't have social security (federal) like most others. So, you are at risk of some Illinois politician 30-40 years in the future making a cut that will affect your payouts in retirement, when you may be unable to earn additional income. You are also at risk of the IMRF being mismanaged (think fraud or simply poor investment decisions). Are you willing to put all your eggs in one basket?

2. 7.5% is too good to be true. So you can either hop on the "gravy train" and try to jump off before it derails, or you can put that money to work in the market like everyone else. By buying low cost index funds and starting early so you can benefit from the power of compounding, like most on this forum, you control your destiny and not some pension board and not some local and state politicians.

3. The state of Illinois is in trouble. The state is losing residents (which means fewer people to pay taxes) and the pensions it has promised to current workers and retirees are not adequately funded (liabilities keep going up). While the IMRF may be 90% funded today and is in better shape than other Illinois pension plans, how do you think the plan will look if we have a 30% market correction? We've had an 8 year bull market so without any other context, these plans should be in the best shape they have been in a long time!

Are you confident the local municipalities and state will keep raising income, property, or sales taxes to fund the IMRF instead of making cuts to those plans in the future? If you were a politician, would it be easier to campaign on cutting "generous" pensions or cutting local and state services like schools and fire/police/library? Are you willing to bet your retirement on it? If it were me, I would opt out and put those dollars into an IRA or 401k and control my own destiny.

123
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Re: 31yo should I consider a VAC annuity?

Post by 123 » Sun Sep 24, 2017 8:33 pm

There is a risk that the Illinois Municipal Retirement Fund (IMRF) will be hit by the contagion of Illinois financial problems. The promised yield seems very high on a historical basis. While things may look good at the IMRF right now the risk is that if more plan participants are laid off or retire early as a result of economic cutbacks in Illinois that will place a significant burden on the assets of the IMRF, which might be severely strained by the time by you are ready to cash in.

They can't pay you your money if they don't have it to give out.

Do you have other options?
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CnC
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Re: 31yo should I consider a VAC annuity?

Post by CnC » Mon Sep 25, 2017 2:43 pm

stevew7 wrote:
Sun Sep 24, 2017 7:21 pm
I agree at first glance the VAC option looks very promising.

If it were me, I would NOT participate for three reasons.

1. Concentration risk. You are already counting on IMRF for your pension when you retire. You don't have social security (federal) like most others. So, you are at risk of some Illinois politician 30-40 years in the future making a cut that will affect your payouts in retirement, when you may be unable to earn additional income. You are also at risk of the IMRF being mismanaged (think fraud or simply poor investment decisions). Are you willing to put all your eggs in one basket?

2. 7.5% is too good to be true. So you can either hop on the "gravy train" and try to jump off before it derails, or you can put that money to work in the market like everyone else. By buying low cost index funds and starting early so you can benefit from the power of compounding, like most on this forum, you control your destiny and not some pension board and not some local and state politicians.

3. The state of Illinois is in trouble. The state is losing residents (which means fewer people to pay taxes) and the pensions it has promised to current workers and retirees are not adequately funded (liabilities keep going up). While the IMRF may be 90% funded today and is in better shape than other Illinois pension plans, how do you think the plan will look if we have a 30% market correction? We've had an 8 year bull market so without any other context, these plans should be in the best shape they have been in a long time!

Are you confident the local municipalities and state will keep raising income, property, or sales taxes to fund the IMRF instead of making cuts to those plans in the future? If you were a politician, would it be easier to campaign on cutting "generous" pensions or cutting local and state services like schools and fire/police/library? Are you willing to bet your retirement on it? If it were me, I would opt out and put those dollars into an IRA or 401k and control my own destiny.
1) I do get social security. Just because I work for a government and get a pension does not prevent me from getting social security. It is different than a state or federal pension. I pay into social security, I even checked SSA.gov to see my records.

2) I also think 7.5 seems too good to be true, that is my only concern. But it's hard to argue against something simply because it is good.

3/4) That is a bit of a concern, but as I said before they have already enacted quite harsh pension reforms. I missed the cut off by a few years. (in 2011 they GREATLY reduced the benefits for all future employees for the pension as well as vac for future workers) Cities are mandated – through a court-enforced funding guarantee – to fund IMRF pensions before everything else so while it may be cut they would have to change a whole host of laws.


Finally, my question was not to rely on the imrf pension and vac to fund my retirement. I am obligated to contribute 4.5% of my pay to my pension (matched by 10% employeer) this is a requirement of my job and non negotiable.

I am limited to 10% of my pay into the 7.5% VAC program. My IRA and 457 are not in danger of going unfunded.


I ask again can you explain to me why I wouldn't put a few thousand into this a year rather than into bonds. I'm not asking if this should be my only form of retirement savings.

Let's put it another way.
If my wife and I plan on retiring at 50-55 and want to have 70% stock 30% fixed assets allocation. Would there be anything wrong with this compromising around half of my fixed asset allocation (15% total)?

stevew7
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Re: 31yo should I consider a VAC annuity?

Post by stevew7 » Fri Sep 29, 2017 6:44 pm

CnC wrote:
Mon Sep 25, 2017 2:43 pm
Finally, my question was not to rely on the imrf pension and vac to fund my retirement. I am obligated to contribute 4.5% of my pay to my pension (matched by 10% employeer) this is a requirement of my job and non negotiable.

I am limited to 10% of my pay into the 7.5% VAC program. My IRA and 457 are not in danger of going unfunded.


I ask again can you explain to me why I wouldn't put a few thousand into this a year rather than into bonds. I'm not asking if this should be my only form of retirement savings.

Let's put it another way.
If my wife and I plan on retiring at 50-55 and want to have 70% stock 30% fixed assets allocation. Would there be anything wrong with this compromising around half of my fixed asset allocation (15% total)?
Since you are contributing to social security as well as the imrf, your retirement is less reliant on imrf alone, which is good.

However you seem to not be valuing the concentration risk in imrf as highly as I am. The point I was trying to make was you are already making significant contributions to imrf via your contribution as well as your employer's. Why would you contribute even more if you can put your dollars into a bond fund that directly invests in many companies and municipalities instead?

For example, I'm sure you've read about the Detroit bankruptcy. A lot of external dollars came in to try to stabilize the system, but pension benefits were still cut. I'm sure you've also read about companies that have gone bankrupt and have had to had their pensions transferred to the pbgc with pensioners taking large benefit cuts. Do you believe that imrf is immune and Illinois tax payers will bail out the fund if it is unable to meet its obligations? Laws can change and do change.

Diversification is an easy way to mitigate risk. Instead of putting more dollars into Illinois, I would recommend you own a bond fund that is invested across 50 States and many companies.

http://michiganradio.org/post/detroit-b ... cipalities

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