Should I cash in pension to avoid social security WEP?

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texasdiver
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Should I cash in pension to avoid social security WEP?

Post by texasdiver » Sat Apr 13, 2019 2:32 pm

I have earned a small teachers pension from 9 years of teaching in Texas that will subject my future social security benefits to the Windfall Elimination Provision (WEP) because my Texas school district did not pay into social security. I am trying to figure out whether it is worth it to keep the pension and subject myself to the WEP, or cash it in now and roll the balance into an IRA.

The pension in question is a Texas Teacher Retirement System (TRS) pension that will pay a fixed $9984 per year starting in 2029 at age 65 and is non-indexed for inflation.

I have run both scenarios using the MaximizeMySocialSecurity software to determine the estimated hit I will be taking under the WEP. Here are the relevant numbers:

2019 Cash Value of Pension: $32,211.50
Annual Pension Payment (starting in 2029 at age 65) $9,984
SS starting at age 70 in 2034 with WEP: $21,264
SS starting at age 70 in 2034 w/o WEP: $26,472
Annual impact of WEP from 2034 onwards: $5,208
Net Pension age 70 onwards with WEP: $4,776

The main unknown variable is the future value of the lump sum pension rollover. at 8% annual returns if invested in an IRA it would grow to about $70,000 by age 65 and about $102,000 by age 70.

By my calculations if I keep the pension, I would receive pension payments of $9,984 between ages 65 and 70, dropping to $4,776 from age 70 onwards after the WEP is taken into account. This would not be indexed for inflation.

If I cash in the pension and roll over the lump sum of $32,211, I'd expect a lump sum amount in the neighborhood of $70,000 by age 65 or $100,000 by age 70 to replace the lost pension at 8% annual returns.

Seems to me that it is barely still worth keeping the pension. By age 70, the expected earnings on the lump sum rollover if withdrawn at 4% would be about $4,000 per year which would just about replace the net pension. But I'd be giving up the 5 years from ages 65-70 in which the full pension of $9984 would be paid. I'm estimating the break even point is at around 10-11% annual returns on the lump sump pension payout if I took it today. Which is certainly possible but perhaps not plausible.

Am I missing anything here?

NOTE: The cash balance of the pension currently appreciates at 2% per year so there is not much benefit in postponing the decision and more benefit in deciding sooner rather than later what to do.

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arcticpineapplecorp.
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Re: Should I cash in pension to avoid social security WEP?

Post by arcticpineapplecorp. » Sat Apr 13, 2019 2:55 pm

texasdiver wrote:
Sat Apr 13, 2019 2:32 pm
The main unknown variable is the future value of the lump sum pension rollover. at 8% annual returns if invested in an IRA it would grow to about $70,000 by age 65 and about $102,000 by age 70.

By my calculations if I keep the pension, I would receive pension payments of $9,984 between ages 65 and 70, dropping to $4,776 from age 70 onwards after the WEP is taken into account. This would not be indexed for inflation.

If I cash in the pension and roll over the lump sum of $32,211, I'd expect a lump sum amount in the neighborhood of $70,000 by age 65 or $100,000 by age 70 to replace the lost pension at 8% annual returns.

Am I missing anything here?
The only thing is you're assuming 8% returns on your invested money. Do you think that is reasonable? What asset allocation would you invest the money to achieve 8% per year? What happens to your money if we have another 2008-2009? What happens to your withdrawals then?

The other thing to consider is that your pension is payable for life. The lump sum amount could run out.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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texasdiver
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Re: Should I cash in pension to avoid social security WEP?

Post by texasdiver » Sat Apr 13, 2019 3:06 pm

arcticpineapplecorp. wrote:
Sat Apr 13, 2019 2:55 pm
texasdiver wrote:
Sat Apr 13, 2019 2:32 pm
The main unknown variable is the future value of the lump sum pension rollover. at 8% annual returns if invested in an IRA it would grow to about $70,000 by age 65 and about $102,000 by age 70.

By my calculations if I keep the pension, I would receive pension payments of $9,984 between ages 65 and 70, dropping to $4,776 from age 70 onwards after the WEP is taken into account. This would not be indexed for inflation.

If I cash in the pension and roll over the lump sum of $32,211, I'd expect a lump sum amount in the neighborhood of $70,000 by age 65 or $100,000 by age 70 to replace the lost pension at 8% annual returns.

Am I missing anything here?
The only thing is you're assuming 8% returns on your invested money. Do you think that is reasonable? What asset allocation would you invest the money to achieve 8% per year? What happens to your money if we have another 2008-2009? What happens to your withdrawals then?

The other thing to consider is that your pension is payable for life. The lump sum amount could run out.
The roughly $10k pension is less than 10% of my wife and my expected retirement income. Possibly more like 5%. So it isn't going to be a "make or break" proposition either way.

I just picked 8% out of the air based on past returns of the S&P 500. The $32k lump sum rollover would just be dumped into our existing IRAs which are already over 7 figures so it isn't going to be managed separately or "run out" one way or the other.

I'm just trying to make a rational decision and make sure that I'm not missing anything important in the calculations.

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HueyLD
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Re: Should I cash in pension to avoid social security WEP?

Post by HueyLD » Sat Apr 13, 2019 3:08 pm


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texasdiver
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Re: Should I cash in pension to avoid social security WEP?

Post by texasdiver » Sat Apr 13, 2019 3:21 pm

HueyLD wrote:
Sat Apr 13, 2019 3:08 pm
Did you read this SSA POM on WEP? https://secure.ssa.gov/apps10/poms.nsf/lnx/0300605364
Yes, that's what I'm relying on. The lump-sum payout that Texas would pay represents only my contributions and not those of the school district. That's why the amount is so low. So I would qualify there.

As I read it, I have until age 65 to make the decision, and as long as I pull the lump-sum out before I become eligible to start drawing the pension at age 65 I would not be subject to the WEP.

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arcticpineapplecorp.
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Re: Should I cash in pension to avoid social security WEP?

Post by arcticpineapplecorp. » Sat Apr 13, 2019 3:58 pm

is there a survivor benefit for your pension (and if so, what's the amount) and is there any significant age difference between you and your spouse? Would a survivor benefit be reduced/affected by WEP for your spouse?

I still think expecting 8% annual returns for the S&P500 over the next 10 years is overly generous from all estimates I've read due to current valuations, etc.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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texasdiver
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Re: Should I cash in pension to avoid social security WEP?

Post by texasdiver » Sat Apr 13, 2019 4:05 pm

arcticpineapplecorp. wrote:
Sat Apr 13, 2019 3:58 pm
is there a survivor benefit for your pension (and if so, what's the amount) and is there any significant age difference between you and your spouse? Would a survivor benefit be reduced/affected by WEP for your spouse?

I still think expecting 8% annual returns for the S&P500 over the next 10 years is overly generous from all estimates I've read due to current valuations, etc.
Yes, there are the usual different options from no survivor benefit to reduced pension and 100% benefit and various increments inbetween. The numbers I gave were with no survivor benefit. I haven't calculated how much lower it would be for the varous other options.

My wife is 7 years younger so that could be a factor. She is also a physician and unlikely to retire early and, knowing her, will probably be dinging around doing some sort of part-time locum work long into retirement. So whether to do survivor benefits for this pension is probably trivial to her overall financial health. Her attitude is, "let's spend the money now when we are both alive rather than keeping it for really old age"

I honestly don't know how WEP affects survivor benefits. Haven't gotten that far into my research.

Small Savanna
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Re: Should I cash in pension to avoid social security WEP?

Post by Small Savanna » Sat Apr 13, 2019 9:49 pm

Could you continue working long enough to reach 30 years (or close to 30 years) of "substantial earnings" under social security? Then you could take the pension and social security with no WEP.

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texasdiver
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Re: Should I cash in pension to avoid social security WEP?

Post by texasdiver » Sun Apr 14, 2019 11:36 am

Small Savanna wrote:
Sat Apr 13, 2019 9:49 pm
Could you continue working long enough to reach 30 years (or close to 30 years) of "substantial earnings" under social security? Then you could take the pension and social security with no WEP.
I could but not interested in it. I'm doing some part-time consulting work and substitute teaching right now but I don't think I'm on pace to hit it for 2019 and I don't really want to factor that into my planning. Right now I have about 20 years so it would mean working full time right up until 65 which is not what we are interested in doing. My wife and I are already approaching FE and this is frankly not a big enough deal to rearrange our lives around. So I'm not factoring it into my planning.

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sergeant
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Re: Should I cash in pension to avoid social security WEP?

Post by sergeant » Sun Apr 14, 2019 12:20 pm

With the wife 7 years younger it usually makes sense to keep the pension and go with the max survivor benefit. I would continue to evaluate as you get closer to retirement. The good thing is that for you two it really doesn't matter.
Lincoln 3 EOW!

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texasdiver
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Re: Should I cash in pension to avoid social security WEP?

Post by texasdiver » Sun Apr 14, 2019 12:40 pm

sergeant wrote:
Sun Apr 14, 2019 12:20 pm
With the wife 7 years younger it usually makes sense to keep the pension and go with the max survivor benefit. I would continue to evaluate as you get closer to retirement. The good thing is that for you two it really doesn't matter.
I would be thinking like that if it was a COLA pension but since it is a fixed non-COLA pension the lower max survivor amount will eventually diminish into pocket change if my wife greatly outlives me. If it was a major component of her future income that would be a different story, of course.

I guess we are luckly that this isn't any kind of make-or-break decision. But I do want to get it right anyway.

ivk5
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Re: Should I cash in pension to avoid social security WEP?

Post by ivk5 » Sun Apr 14, 2019 1:12 pm

Personally I’d compare based on assumption of buying a 32k SPIA since that seems like the most financially comparable. Which is greater, non-WEP SS + SPIA payout or WEP-reduced SS?

Can run same calculations with survivor benefit both ways if that is of interest.

Agree with comments above that given age difference, additional survivor benefit seems valuable; I’d probably take pension with survivor benefit and live with WEP-reduced SS.

From what I understand, SS survivor benefits are not reduced by WEP. (I’m affected as well due to foreign pension.)

ralph124cf
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Re: Should I cash in pension to avoid social security WEP?

Post by ralph124cf » Sun Apr 14, 2019 1:22 pm

It seems that this money is not really an important part of your life.

Cash out, invest or not as you choose, and avoid future paperwork.

Ralph

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