The Great 100 thousand dollar pension question. update

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
User avatar
Topic Author
ofcmetz
Posts: 2394
Joined: Tue Feb 08, 2011 8:09 pm
Location: Louisiana

The Great 100 thousand dollar pension question. update

Post by ofcmetz » Sat Mar 01, 2014 12:51 am

Alright Bogleheads, I've got another pension question for you all. But first the details.

Emergency funds: 3 months cash.
Debt: $8,000 at 2.7% vehicle loan and $145,000 mortgage 15 years at 4.25% (house purchased for $260,000.)
Tax Filing Status: Married Filing Jointly
Tax Rate: 28% Federal, 6% State
State of Residence: LA
Age: him 34, her 37
Portfolio. $300,000 ish

I work for the state of Louisiana and am in a police pension system that allows normal retirement at 25 years at any age. The pension provides 3.3% of your pay for each year worked multiplied by your years of service times your five year average base pay. So 25 years would pay 82.5% of one's base pay upon retirement for life. I started at age 19 after 1.5 years of college and have been with the same department ever since.

I have almost 15 years in and am paid a base pay of $62,000. There is a lot of overtime pay above this, but that does not factor into the pension. The wife also works as a registered nurse.

Recently the state started selling "Air Time", which allows to you purchase credit into the system which counts both towards eligibility and credit. As I understand it, I can transfer directly from my supplemental retirement plans to the retirement system to buy this credit, and have have enough to pay for it in full.

I'm considering the maximum amount I can buy which is 5 years. The actuary recently sent me a price of $103,000 to buy five years worth of time. This would make me eligible for normal retirement in 5 years. I'm thinking this is worth the same as an annuity that pays 16.5% of $62,000 or $10,230 a year at age 40. But it's also worth more than that. It's worth an intangible amount in giving me options to do other things in life at an earlier age because it not only gives me the extra percentage of pay, but it's as if I've worked and contributed for those 5 years. Oh, my contribution rate is 9.5% of pay and the state kicks in about 30% of my pay for their portion.

So my $100,000 question is what would you bogleheads do assuming you had the money available to pay the cost. Would you keep your money where it was invested it or buy the credit in the system?

I plan on working somewhere after law enforcement, but not necessarily in police work. I really have no idea what I would earn in another field and would probably go to college or some training before starting a second career.

Thanks in advance for any input.
Last edited by ofcmetz on Fri May 27, 2016 4:36 am, edited 1 time in total.
Never underestimate the power of the force of low cost index funds.

User avatar
pjstack
Posts: 1308
Joined: Tue Feb 20, 2007 5:03 am
Location: Harbor City, CA

Re: The Great 100 thousand dollar pension question.

Post by pjstack » Sat Mar 01, 2014 1:22 am

I won't give you any financial analysis because I'm no good at it (Lots of others on this board are far better), but the option of retiring early is really valuable. School, college, etc. opportunities and so on and so forth are really worth considering.

I retired from the military at 44 years old and then had the freedom to go to school, travel, scuba dive, ski, etc. (of course I was single so any blunders I made only affected me).

Later on in life, around late 60's, I developed some sort of neurological disorder that affected my balance and motor coordination (sort of a low grade paralysis) and now I can only move around with a walker.

I often think how mad I'd be to have worked until 65, looking forward to traveling and other fun stuff, only to be incapacitated so soon after retirement.

I know this didn't even come close to answering your question (others will do that better than I ever could, anyway), but the opportunity to explore other options may well be worth 100K just by itself.

Best of luck.
pjstack

The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: The Great 100 thousand dollar pension question.

Post by The Wizard » Sat Mar 01, 2014 3:29 am

Your financial analysis seems about right. The only small detail concerns WHEN you have to pay that $103,000. If that fellow is really an actuary, then he's probably already figured this out. $103,000 NOW is worth about $119,400 in five years assuming 3% growth. But then, if your salary grows by 3% per year, then the two track each other.

Regardless, you would be getting an approximate 10% annual lifetime payout on that $103,000 starting at age 40 which is perhaps DOUBLE what you could get with an SPIA, so it's practically a no-brainer: go for it.

But given the nature of police work, it's possible you could go on disability sometime in the next five years, so then what happens to that $103,000 if you buy those five years now? Try to find out whether the offer still stands if you wait 4 years and 11 months from now, even if they up the price to $120,000 or so...
Attempted new signature...

VTXVX
Posts: 97
Joined: Thu Jan 31, 2013 8:08 pm

Re: The Great 100 thousand dollar pension question.

Post by VTXVX » Sat Mar 01, 2014 5:52 am

Delete
Last edited by VTXVX on Sun Jun 22, 2014 6:16 pm, edited 1 time in total.

User avatar
frugaltype
Posts: 1952
Joined: Wed Apr 24, 2013 9:07 am

Re: The Great 100 thousand dollar pension question.

Post by frugaltype » Sat Mar 01, 2014 6:02 am

Is that pension going to actually be there? In my state, that type of pension is bankrupting local governments, and court cases are in progress about whether they can be substantially reduced or not.

MikeNJ
Posts: 8
Joined: Mon Feb 10, 2014 10:08 pm

Re: The Great 100 thousand dollar pension question.

Post by MikeNJ » Sat Mar 01, 2014 6:54 am

My sister (and brother in-law) are contemplating a similar scenario.

Think about this from a very high level:

One of the things folks on this forum think a lot about is financial diversification. We would NEVER suggest working for the same company and investing your wealth in company stock. Your future financial wealth is highly dependent on the state of LA paying your pension predictably (your future financial health is "over-exposed" to the State of LA pension system). We know there is pressure on all states to re-think pensions. Could future events cause the State of LA to reduce/change pension assumptions?


My question for you to contemplate is:

Does it make sense to take a third of your wealth that is outside the State of LA pension system and become even more exposed to it? Maybe you think of NOT buying those years as the cost of insurance for financial diversification. Maybe this decision is easy if you had $1M of liquid assets and buying the years was a small portion of your overall. Take it to the other extreme, if you only had $100,000 in savings would you spend 100% of your life savings to do this?


I am only playing devil's advocate here a little (I don't have an answer for you). But I am taking the other side of the argument so you can contemplate what makes the most sense for you.

An alternative with that cash might be to payoff your mortgage and take some of that macro-life risk off the table. That is a guaranteed 4.25% return on your money.

User avatar
midareff
Posts: 6465
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: The Great 100 thousand dollar pension question.

Post by midareff » Sat Mar 01, 2014 7:37 am

goforit .. no brainer.

carolinaman
Posts: 3944
Joined: Wed Dec 28, 2011 9:56 am
Location: North Carolina

Re: The Great 100 thousand dollar pension question.

Post by carolinaman » Sat Mar 01, 2014 7:47 am

I think it is a good move to buy the 5 years. FWIW, I bought 5 years of prior service in the NC system years ago and thought it was a no brainer.

One thing you did not mention is whether LA pension has annual COLA or not. If not, this could have a dramatic effect on your pension over your lifetime because you will be retiring so young. That would not deter me from buying the time but you should reflect your COLA status in your planning. NC does not guarantee a COLA but at the time I retired had given increases equal to inflation for past 20 years. Due to market impact on our pension assets, we have not had a COLA in 5 years and do not expect one this year.

Your pension is incredibly rich compared with others I have seen (our multiplier is 1.85 times years of service). Also, Louisiana's pension system is one of the most underfunded in US. In 2011 it was only 56% funded. See this article: http://www.ncsl.org/documents/summit/su ... edians.pdf

The Detroit bankruptcy case shows that pensions are not immune to cuts and benefit reductions. It would seem there is some long term risk of that in Louisiana, but it is difficult to predict what impact, if any, that will have. The key point of this is to diversify and not rely solely on your pension. You indicate plans for a second career outside of law enforcement which would be a great strategy to counter this risk along with continuing to save and invest.

Best wishes.

User avatar
Topic Author
ofcmetz
Posts: 2394
Joined: Tue Feb 08, 2011 8:09 pm
Location: Louisiana

Re: The Great 100 thousand dollar pension question.

Post by ofcmetz » Sat Mar 01, 2014 8:13 am

johnep wrote: One thing you did not mention is whether LA pension has annual COLA or not. If not, this could have a dramatic effect on your pension over your lifetime because you will be retiring so young. Your pension is incredibly rich compared with others I have seen (our multiplier is 1.85 times years of service). Also, Louisiana's pension system is one of the most underfunded in US. In 2011 it was only 56% funded. See this article: http://www.ncsl.org/documents/summit/su ... edians.pdf

The pension does grant COLA's from time to time depending on the returns of a seperate investment account which is set up to provide cost of living raises. They are not given every year and can't be counted in in my opinion for the returns to completely keep up with inflation. The system is above 60% funded right now, and we could coninue to invest about $38,000 a year in supplemental retirement accounts.
Never underestimate the power of the force of low cost index funds.

User avatar
Topic Author
ofcmetz
Posts: 2394
Joined: Tue Feb 08, 2011 8:09 pm
Location: Louisiana

Re: The Great 100 thousand dollar pension question.

Post by ofcmetz » Sat Mar 01, 2014 8:21 am

The Wizard wrote:Your financial analysis seems about right. The only small detail concerns WHEN you have to pay that $103,000. If that fellow is really an actuary, then he's probably already figured this out. $103,000 NOW is worth about $119,400 in five years assuming 3% growth. But then, if your salary grows by 3% per year, then the two track each other....
The numbers I gave were provided by an the system's official actuary and I had to pay $150 to get the calculation done. Actual numbers are: $102,964 if paid by 4-30-2014. $103,617 if paid by 5-30-2014, and $104,274 if paid by 6-29-2014.
The Wizard wrote: Regardless, you would be getting an approximate 10% annual lifetime payout on that $103,000 starting at age 40 which is perhaps DOUBLE what you could get with an SPIA, so it's practically a no-brainer: go for it....
Thanks. I was thinking about this way as well and this doesn't even price in the options it gives me later on in life.
The Wizard wrote: But given the nature of police work, it's possible you could go on disability sometime in the next five years, so then what happens to that $103,000 if you buy those five years now? Try to find out whether the offer still stands if you wait 4 years and 11 months from now, even if they up the price to $120,000 or so...
Seems like it will go up significantly the longer I wait to accept. Another co-worker with 4 more years than me and a lower income got a quote for $160,000 for the same offer. If I became disabled I would be either eligible to retire with what I had earned up to that point. There is some kind of floow, but this would actually raise me above it and just cause an early retirement to happen. I've had some health issues in the last two years that have really made me think of like outside of law enforcement. This job is hard on your body in many ways.

One other thing is that, the pension has a survivor benefit for ones spouse that is 75% of whatever I've earned.
Never underestimate the power of the force of low cost index funds.

User avatar
Topic Author
ofcmetz
Posts: 2394
Joined: Tue Feb 08, 2011 8:09 pm
Location: Louisiana

Re: The Great 100 thousand dollar pension question.

Post by ofcmetz » Sat Mar 01, 2014 8:23 am

TvilleBogle wrote:Since you work for the state do you have the benefit of taking classes at a state university tuition free?
Yes, I can take 6 hours a semester for free and have taken advantage of this at various points throughout my career. Since I work about 60 hours a week, it's been a little difficult to always fit these classes in.
Never underestimate the power of the force of low cost index funds.

Grt2bOutdoors
Posts: 21749
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: The Great 100 thousand dollar pension question.

Post by Grt2bOutdoors » Sat Mar 01, 2014 8:32 am

Do it - you are 34. I don't like to lose money, but even if your investment went bad it's only worth 2.75 years of your current retirement investments ($38K * 2.75), chances are you would recoup it in the form of gains over the next 25 years or so.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: The Great 100 thousand dollar pension question.

Post by The Wizard » Sat Mar 01, 2014 8:57 am

ofcmetz wrote:
The Wizard wrote:Your financial analysis seems about right. The only small detail concerns WHEN you have to pay that $103,000. If that fellow is really an actuary, then he's probably already figured this out. $103,000 NOW is worth about $119,400 in five years assuming 3% growth. But then, if your salary grows by 3% per year, then the two track each other....
The numbers I gave were provided by an the system's official actuary and I had to pay $150 to get the calculation done. Actual numbers are: $102,964 if paid by 4-30-2014. $103,617 if paid by 5-30-2014, and $104,274 if paid by 6-29-2014...
OK, sounds like you have a real actuary on the hook there.
Those numbers are increasing by about 7.9% annualized which I guess is their assumed pension fund return.
This compounds to make $103,000 equal about $150,500 in five years. So this makes the additional $10,230 payout in five years around 6.8% of $150,500, a much more credible payout rate than 10%, but still HIGH for age 40.

So yes, I would go for it, assuming you have confidence in the LA state pension fund not going bust. I'd have to wonder if independent rating agencies render opinions on state pension funds similar to annuity-selling life insurance companies, such as TIAA-CREF in my case?
Attempted new signature...

Valuethinker
Posts: 39238
Joined: Fri May 11, 2007 11:07 am

Re: The Great 100 thousand dollar pension question.

Post by Valuethinker » Sat Mar 01, 2014 9:48 am

It feels like a 'no brainer'.

The issue is if there are significant changes to the pension fund. New Jersey appears to have shown these can be retrospective ie hitting vested benefits.

Nonetheless if you asked yourself the question 'if I could buy 5 more years of healthy life in my prime, for $100k, would I do so?' Well, most of us who have more than subsistence income would do so in a flash- $20k a year.

Taking the risk the pot of gold at the end of the rainbow is just not there. But some of it is likely to be there.

YttriumNitrate
Posts: 1093
Joined: Tue Mar 26, 2013 12:13 pm

Re: The Great 100 thousand dollar pension question.

Post by YttriumNitrate » Sat Mar 01, 2014 9:57 am

frugaltype wrote:Is that pension going to actually be there? In my state, that type of pension is bankrupting local governments, and court cases are in progress about whether they can be substantially reduced or not.
It seems like that could be an argument in favor of retiring early and get while the getting's good. If we look at Detroit and other places [while ignoring the larger societal questions to keep this thread on topic] these issues are getting resolved at a near glacial pace. It is disconcerting that Louisiana has the fourth most underfunded pension system, but you have at least two ways to "win" by paying the money and retiring early:

First, the pensions might not be cut for a long time (7+ years) or at all, in which case you'd come out ahead from a purely financial standpoint.

Second, even if the pensions were cut by half and you end up just getting back your $100k five to ten years from now ($25K/yr for 5 years, roughly) you would have another five years to work on that second career you mentioned on your first post on this forum.

User avatar
InvestorNewb
Posts: 1617
Joined: Mon Sep 03, 2012 11:27 am

Re: The Great 100 thousand dollar pension question.

Post by InvestorNewb » Sat Mar 01, 2014 10:11 am

If it was me, I would definitely pay the 100k to retire 5 years earlier.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)

User avatar
Topic Author
ofcmetz
Posts: 2394
Joined: Tue Feb 08, 2011 8:09 pm
Location: Louisiana

Re: The Great 100 thousand dollar pension question.

Post by ofcmetz » Sat Mar 01, 2014 10:21 am

Thanks to all for the excellent feedback so far. It's people like you that make this forum so special.

One thing I didn't mention, is that the opportunity to buy "air time" for credit and eligibility doesn't happen often. It is approved by the legislature on a temporary basis which is why I never checked on this before. It's unclear how long they will allow this, but it seems that it only opens up during times when the retirement system has had a string a really decent returns.
Never underestimate the power of the force of low cost index funds.

Valuethinker
Posts: 39238
Joined: Fri May 11, 2007 11:07 am

Re: The Great 100 thousand dollar pension question.

Post by Valuethinker » Sat Mar 01, 2014 10:40 am

ofcmetz wrote:Thanks to all for the excellent feedback so far. It's people like you that make this forum so special.

One thing I didn't mention, is that the opportunity to buy "air time" for credit and eligibility doesn't happen often. It is approved by the legislature on a temporary basis which is why I never checked on this before. It's unclear how long they will allow this, but it seems that it only opens up during times when the retirement system has had a string a really decent returns.
$100k is not a trivial sum, but you are not destroyed if you 'lose' it? (ie if the payback turns out to have a rate of return of 0%, say).

So I'd look at it as this amazing lottery ticket, that allows you to buy 5 more years of life time in the prime of life, for $100k.

Financially it *could* all go wrong. But for 5 years?

The legislature is, of course, being totally irresponsible with taxpayer money. Not understanding the cyclicality of investment returns. They shouldn't be offering deals like this unless the plan is in surplus. However there are probably a few elections between now and it coming home to roost.

spencer99
Posts: 346
Joined: Thu Apr 01, 2010 5:17 pm

Re: The Great 100 thousand dollar pension question.

Post by spencer99 » Sat Mar 01, 2014 10:55 am

I won't weigh in on the financial pluses/minuses - good thoughts earlier in this thread. I do work with and am friends with a number of police officers. Yours is a physically and psychologically challenging job in ways that civilians don't fully understand, and that doesn't begin to address the potential danger officers face every shift. The opportunity to begin a second, equally valuable and rewarding, career at an early age is a big plus.

Good luck,

S

User avatar
wjo
Posts: 497
Joined: Fri Jan 22, 2010 12:17 pm

Re: The Great 100 thousand dollar pension question.

Post by wjo » Sat Mar 01, 2014 12:39 pm

ofcmetz wrote: Seems like it will go up significantly the longer I wait to accept. Another co-worker with 4 more years than me and a lower income got a quote for $160,000 for the same offer.
This raises a red flag for me - lower income, more money to buy the annuity (with expected lower annual payout and likely slightly lower life expectancy)? The only way that works in my head is if the projections are for a starting date fixed to a std retirement age somewhere in the future. Since you are younger, you have more years of growth so the price is less.

My wife has a teacher's pension-- there, she gets credit for each year of service. To receive benefits she needs to meet a rule of 85 where her years of service credit plus physical age = 85. You said in your original post that you didn't need the physical age part and just needed 25 years of service credit - that is great. However, I would have to wonder about the comparison above with your co-worker.

*EDIT* - ok, I can see how the proximity to the 25 years service date would affect price if they assume you retire at 25 years service. You will get credit for the time until you hit 25 years, so if someone has 4 more years than you, the price they would pay is adjusted for 4 years less growth. However, the difference in quotes your report seems greater than 4 years of growth....if the prices do reflect nothing more than 4 years to get to 25 years and the price escalation is what you report, it seems too good a deal not to act on it.....

User avatar
frugaltype
Posts: 1952
Joined: Wed Apr 24, 2013 9:07 am

Re: The Great 100 thousand dollar pension question.

Post by frugaltype » Sat Mar 01, 2014 1:39 pm

Valuethinker wrote: The legislature is, of course, being totally irresponsible with taxpayer money. Not understanding the cyclicality of investment returns. They shouldn't be offering deals like this unless the plan is in surplus. However there are probably a few elections between now and it coming home to roost.
Is it? Perhaps they're saving a significant amount on benefits over the years from the employees they're letting go. Not that I mean to imply legislatures know what they're doing.

Or would the OP continue to have their health insurance coverage for himself and his dependents if this offer is taken?

User avatar
Rainier
Posts: 1450
Joined: Thu Jun 14, 2012 5:59 am

Re: The Great 100 thousand dollar pension question.

Post by Rainier » Sat Mar 01, 2014 1:57 pm

This morning Warren Buffett said that public pensions are in deep trouble. Louisiana would be no exception. I wouldn't put a dime into what is essentially a massive ponzi scheme that could be turned off at any time.

chaz
Posts: 13604
Joined: Tue Feb 27, 2007 2:44 pm

Re: The Great 100 thousand dollar pension question.

Post by chaz » Sat Mar 01, 2014 1:57 pm

ofcmetz, if you like your work, keep working. A job change in your 30's could be unpleasant.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

User avatar
Topic Author
ofcmetz
Posts: 2394
Joined: Tue Feb 08, 2011 8:09 pm
Location: Louisiana

Re: The Great 100 thousand dollar pension question.

Post by ofcmetz » Sat Mar 01, 2014 2:51 pm

chaz wrote:ofcmetz, if you like your work, keep working. A job change in your 30's could be unpleasant.

I don't plan on quitting right away regardless of if I do this or not. If I bought the five years, then I would still be over just five years from retirement and could continue to increase my benefit for another 5 after that if I choose to stay. Plus I could do three years of DROP as well. DROP is when you keep working after locking in your pension. During the three years the pension accumulates in an IRA type account. Not to mention, I could work for another PD and get paid twice essentially afterwards.

To me, this is about life options as well as the investment side of things.
Never underestimate the power of the force of low cost index funds.

User avatar
Rainier
Posts: 1450
Joined: Thu Jun 14, 2012 5:59 am

Re: The Great 100 thousand dollar pension question.

Post by Rainier » Sat Mar 01, 2014 2:57 pm

It would be one thing if the five year buy in meant you could retire next week, but waiting another five years is the scary part to me. So hard to know what will happen in five years.

Also, working for another PD (at least in the same state) is part of a double dipping problem that could easily be eliminated. Most taxpayers find that arrangement unacceptable today.

User avatar
Topic Author
ofcmetz
Posts: 2394
Joined: Tue Feb 08, 2011 8:09 pm
Location: Louisiana

Re: The Great 100 thousand dollar pension question.

Post by ofcmetz » Sat Mar 01, 2014 7:03 pm

Rainier wrote:It would be one thing if the five year buy in meant you could retire next week, but waiting another five years is the scary part to me. So hard to know what will happen in five years.
I did not want to complicate my original question with too much info, but I would actually become eligible for an early retirement in 6 months. It's an actuarially reduced retirement that would start paying immediately upon employment separation. You basically lose the difference in years that you are away from a normal retirement (25 years). If I leave at 20 even then the difference would be 5. Subtract 5 from 20 and you would have 15 times 3.3% to get your percentage rate of pay. Leave at 21 and subtract 4 from 21 etc.
Never underestimate the power of the force of low cost index funds.

wassabi
Posts: 474
Joined: Sun Feb 02, 2014 8:06 am

Re: The Great 100 thousand dollar pension question.

Post by wassabi » Sat Mar 01, 2014 7:17 pm

pjstack wrote:I won't give you any financial analysis because I'm no good at it (Lots of others on this board are far better), but the option of retiring early is really valuable. School, college, etc. opportunities and so on and so forth are really worth considering.

I retired from the military at 44 years old and then had the freedom to go to school, travel, scuba dive, ski, etc. (of course I was single so any blunders I made only affected me).

Later on in life, around late 60's, I developed some sort of neurological disorder that affected my balance and motor coordination (sort of a low grade paralysis) and now I can only move around with a walker.

I often think how mad I'd be to have worked until 65, looking forward to traveling and other fun stuff, only to be incapacitated so soon after retirement.

I know this didn't even come close to answering your question (others will do that better than I ever could, anyway), but the opportunity to explore other options may well be worth 100K just by itself.

Best of luck.

Incredibly insightful comment full of so much wisdom. Thanks for posting it as a great reminder that while it's important to be financially prudent, it's also important to live your life. God bless.

ofckrupke
Posts: 678
Joined: Mon Jan 10, 2011 2:26 pm

Re: The Great 100 thousand dollar pension question.

Post by ofckrupke » Sat Mar 01, 2014 10:27 pm

What are the ways this could go really wrong?

There are a bunch of possibilities involving legislative reduction of benefits, all of which would be subject to court challenge. But I'm not going there. Here's the one I'm still thinking about, now that you mentioned the pension includes 75% to surviving spouse: how is the wife's survivorship situation to be made whole if you drop the $103-105k into the system now and then croak (non line-of-duty) a couple of months before the planned retirement? You might want to include in your calculations the cost of an additional ~150k of life insurance (accounting for missing investment returns - but more, maybe much more, if you want coverage for the PV of the annuity during the deferred period). 5 year term - maybe 10 years, if there's a chance you'll hang for the 100% of FAS pension at 30 (actual + bought) service years. And if you won't be paying some company to assume this particular tail risk, then she needs to buy in on it.

User avatar
Watty
Posts: 18088
Joined: Wed Oct 10, 2007 3:55 pm

Re: The Great 100 thousand dollar pension question.

Post by Watty » Sat Mar 01, 2014 10:50 pm

I'm considering the maximum amount I can buy which is 5 years. The actuary recently sent me a price of $103,000 to buy five years worth of time. This would make me eligible for normal retirement in 5 years. I'm thinking this is worth the same as an annuity that pays 16.5% of $62,000 or $10,230 a year at age 40.
If I understand it correctly then you will paid the same when you are 45 if you buy the extra years and retire at 40 or you work until you are 45 and retire then.

If that is correct then another way of looking at it is that instead of an annuity you are buying five payments of $62K at the ages of 40,41,42,43,and 44. In effect you would be getting $310K (5*$62K) then by paying $103K now.

If it works like then there may be some risk of pension problems but few investments would allow you to triple your money in ten years with less risk.

User avatar
Ged
Posts: 3839
Joined: Mon May 13, 2013 1:48 pm
Location: Roke

Re: The Great 100 thousand dollar pension question.

Post by Ged » Sat Mar 01, 2014 11:05 pm

A 60% funding level is pretty low. In New Jersey state pensions are at a 67% funding level and they have already killed COLAs for the foreseeable future, and this year the governor is coming back for a second round of benefit cuts.

Retiring 5 years earlier is a big deal. But so is diversification.

I think it's a hard choice.

User avatar
Topic Author
ofcmetz
Posts: 2394
Joined: Tue Feb 08, 2011 8:09 pm
Location: Louisiana

Re: The Great 100 thousand dollar pension question.

Post by ofcmetz » Sat Mar 01, 2014 11:16 pm

ofckrupke wrote:What are the ways this could go really wrong?

There are a bunch of possibilities involving legislative reduction of benefits, all of which would be subject to court challenge. But I'm not going there. Here's the one I'm still thinking about, now that you mentioned the pension includes 75% to surviving spouse: how is the wife's survivorship situation to be made whole if you drop the $103-105k into the system now and then croak (non line-of-duty) a couple of months before the planned retirement? You might want to include in your calculations the cost of an additional ~150k of life insurance (accounting for missing investment returns - but more, maybe much more, if you want coverage for the PV of the annuity during the deferred period). 5 year term - maybe 10 years, if there's a chance you'll hang for the 100% of FAS pension at 30 (actual + bought) service years. And if you won't be paying some company to assume this particular tail risk, then she needs to buy in on it.

She would be entitled to 75% of the increase that I purchased I after I kicked the bucket. I have over 12 years left on a 750K 20 year term life policy as well. State would throw in another 250K if I got killed on duty and she would get 80% of my pay for life for a line of duty death regardless of what I've earned.

http://www.lasersonline.org/uploads/23M ... lan_bw.pdf
Never underestimate the power of the force of low cost index funds.

User avatar
Topic Author
ofcmetz
Posts: 2394
Joined: Tue Feb 08, 2011 8:09 pm
Location: Louisiana

Re: The Great 100 thousand dollar pension question.

Post by ofcmetz » Sat Mar 01, 2014 11:25 pm

Ged wrote:A 60% funding level is pretty low. In New Jersey state pensions are at a 67% funding level and they have already killed COLAs for the foreseeable future, and this year the governor is coming back for a second round of benefit cuts.

Retiring 5 years earlier is a big deal. But so is diversification.

I think it's a hard choice.
Yes, this part does bother me and will keep me motivated to continue saving in supplemental accounts regardless of whether I purchase this credit or not. The plan uses a five year smoothing on the returns so the recent gains haven't all reflected yet in the numbers. I also plan to continue working and am thinking that worst case I'll have to stay at the department long enough to retire from a reduced pension along with my 457B and 403B.

I think this year may be the first year that Louisiana gave a COLA in the last four years or so.
Never underestimate the power of the force of low cost index funds.

anonenigma
Posts: 754
Joined: Thu Apr 21, 2011 11:58 pm

Re: The Great 100 thousand dollar pension question.

Post by anonenigma » Sat Mar 01, 2014 11:35 pm

Double check whether the five years of airtime count toward the 25 year service requirement.

I bought five year of airtime in my state teachers retirement system (before it was no longer permitted) but it did not count toward any of the longevity incentives.

Otherwise, as long as your pension is guaranteed, it's a great deal. Wish I could have bought ten years.

VTXVX
Posts: 97
Joined: Thu Jan 31, 2013 8:08 pm

Re: The Great 100 thousand dollar pension question.

Post by VTXVX » Sun Mar 02, 2014 5:54 am

Delete
Last edited by VTXVX on Sun Jun 22, 2014 6:16 pm, edited 1 time in total.

Valuethinker
Posts: 39238
Joined: Fri May 11, 2007 11:07 am

Re: The Great 100 thousand dollar pension question.

Post by Valuethinker » Sun Mar 02, 2014 7:24 am

TvilleBogle wrote:Is your agency hiring? It might be time for me to leave engineering and reenter the law enforcement field!
Try to spend a couple of nights maybe as a volunteer community cop (if they do that sort of thing where you live) on a Friday and Saturday night in the back of a patrolman's car. When they pull someone over for DUI and the nice middle class father starts yelling.

Or do crowd duty in front of City Hall when the mob is getting angry.

Or follow a drug bust into a big Project-- say 15 floors up.

The job has pretty constant stresses in it that the rest of us don't have in our jobs. A certain percentage of the public that you meet will actually have hostile intent to harm you, and a *lot* of the public that you interact with regularly will have bad views/ experiences of law enforcement and the authorities, and take that out on you.

User avatar
Topic Author
ofcmetz
Posts: 2394
Joined: Tue Feb 08, 2011 8:09 pm
Location: Louisiana

Re: The Great 100 thousand dollar pension question.

Post by ofcmetz » Sun Mar 02, 2014 7:27 am

anonenigma wrote:Double check whether the five years of airtime count toward the 25 year service requirement.

I bought five year of airtime in my state teachers retirement system (before it was no longer permitted) but it did not count toward any of the longevity incentives.

Otherwise, as long as your pension is guaranteed, it's a great deal. Wish I could have bought ten years.
You can buy air time towards just credit, or you can buy it towards credit and eligibility. It costs much much more to buy the eligibility part. When I sent the form to the actuary I had to pick either option and this is definitely the credit and eligibility quote.
Never underestimate the power of the force of low cost index funds.

VTXVX
Posts: 97
Joined: Thu Jan 31, 2013 8:08 pm

Re: The Great 100 thousand dollar pension question.

Post by VTXVX » Sun Mar 02, 2014 7:39 am

Delete
Last edited by VTXVX on Sun Jun 22, 2014 6:15 pm, edited 1 time in total.

z3r0c00l
Posts: 1537
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC
Contact:

Re: The Great 100 thousand dollar pension question.

Post by z3r0c00l » Sun Mar 02, 2014 8:38 am

frugaltype wrote:Is that pension going to actually be there? In my state, that type of pension is bankrupting local governments, and court cases are in progress about whether they can be substantially reduced or not.
+1 The early retirement is a great deal. Almost too great. Not sure how long government jobs can continue to offer these benefits and in a few places, we see that they already can't. Be conservative and take the great deal, but don't go "all in" on one deal.

Jack FFR1846
Posts: 10805
Joined: Tue Dec 31, 2013 7:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: The Great 100 thousand dollar pension question.

Post by Jack FFR1846 » Sun Mar 02, 2014 10:29 am

I believe that the biggest consideration is your trust that you will actually get what they promise. I am a skeptic at heart and will be able to theoretically be able to start taking early social security in five years. I have strong doubts that I'll ever get a dime out of social security. So there's how strong my skeptisism is.

Research your state's retirement system. Research what the laws in Louisiana allow for changes in the system. My understanding is that Louisiana is more French based than English based and perhaps that's going to make things different from Illinois or New Jersey etc.

Worst case scenario: You buy into the system and the legislature abolishes the retirement payout completely to pay for their other bills.

Best case: What you describe getting out with a good, solid retirement payout along with the ability to continue to a new career with less monitary worry.

I would expect that the real outcome is going to be someplace in between those extremes. Personally, I wouldn't pay in a penny, but that's me.
Bogle: Smart Beta is stupid

mur44
Posts: 685
Joined: Tue Feb 27, 2007 9:30 am

Re: The Great 100 thousand dollar pension question.

Post by mur44 » Sun Mar 02, 2014 11:10 am

You need to research if LA allows for reneging pensions
already accrued in case of 'bankruptcy' type of situation.

State of New Jersey cut pensions and health benefits to
employees in 2011. COLA was eliminated for all including
retirees.

lhl12
Posts: 643
Joined: Mon May 27, 2013 8:24 am

Re: The Great 100 thousand dollar pension question.

Post by lhl12 » Sun Mar 02, 2014 11:47 am

I agree that this seems like a phenomenal deal, and you should jump at it.

The fact that it is so clearly beneficial to you, and such an obvious choice, means that it is a terrible deal for the persons on the other side of the trade -- the taxpayers of the state of LA. If I were one of them, I would be furious that my representatives were giving so much value away for reasons that don't seem at all clear.

With the benefit of hindsight, it is clear that the elected officials of the City of Detroit gave away far too much value in their pension promises, which is one of the primary reasons the city was forced into bankruptcy. If other pension systems don't start to get realistic about these obligations (as LA appears not to have done just yet) then we will see the Detroit bankruptcy repeated all across the country. I don't know the overall strength of your pension system, but if it is teetering then the benefit you would be purchasing here could turn out to be illusory. Caveat emptor.

User avatar
LadyGeek
Site Admin
Posts: 58750
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: The Great 100 thousand dollar pension question.

Post by LadyGeek » Sun Mar 02, 2014 12:53 pm

This thread is now in the Personal Finance (Not Investing) forum (pension).
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Novine
Posts: 1164
Joined: Mon Nov 17, 2008 9:07 pm

Re: The Great 100 thousand dollar pension question.

Post by Novine » Sun Mar 02, 2014 2:03 pm

Detroit's pensions costs weren't one of the primary causes of its bankruptcy. While they were significant, Detroit's financial distress was primarily caused by a massive collapse of property values and exodus of population and the resulting hits on its revenue. The pension funds actually have higher funding levels than some of the state pension funds previously mentioned. As some posters have noted, at the state level, there's still the threat of pensions being cut because of the inability/unwillingness of states to fulfill the obligations that they made. But the reason that a state will refuse to meet those obligations won't be because of a Detroit-style bankruptcy.

travellight
Posts: 2841
Joined: Tue Aug 12, 2008 5:52 pm
Location: San Diego

Re: The Great 100 thousand dollar pension question.

Post by travellight » Sun Mar 02, 2014 2:14 pm

I would not sleep well at night with just a pension bucket. I would develop another bucket that would provide for your low level of expenditures. If all goes well, you can live more handsomely in your retirement. I have a pension as well but have developed 2 other buckets, just in case.
364

User avatar
frugaltype
Posts: 1952
Joined: Wed Apr 24, 2013 9:07 am

Re: The Great 100 thousand dollar pension question.

Post by frugaltype » Sun Mar 02, 2014 5:18 pm

Rainier wrote: Also, working for another PD (at least in the same state) is part of a double dipping problem that could easily be eliminated. Most taxpayers find that arrangement unacceptable today.
There are people in RI who are not only double dipping, but triple dipping.

[OT comments removed by admin LadyGeek]

lhl12
Posts: 643
Joined: Mon May 27, 2013 8:24 am

Re: The Great 100 thousand dollar pension question.

Post by lhl12 » Sun Mar 02, 2014 9:31 pm

Novine wrote:Detroit's pensions costs weren't one of the primary causes of its bankruptcy. While they were significant, Detroit's financial distress was primarily caused by a massive collapse of property values and exodus of population and the resulting hits on its revenue. The pension funds actually have higher funding levels than some of the state pension funds previously mentioned. As some posters have noted, at the state level, there's still the threat of pensions being cut because of the inability/unwillingness of states to fulfill the obligations that they made. But the reason that a state will refuse to meet those obligations won't be because of a Detroit-style bankruptcy.
The reasons you cite are certainly a major contributing factor, but the problem wasn't only a revenue problem. When revenue began declining, prudent financial management would have called for a proportional reduction in spending. This didn't happen. Rather, excessive compensation to city employees - partially in the form of pension commitments - was also part of the problem. The fact that the system wasn't as underfunded as some others simply means that the city's political leaders chose to funnel more of their (scarce) revenue into the pension system. You could have a pension system that was 100% funded and that wouldn't mean everything was OK. The problem occurs when the pension obligations are made. If they are fully (or mostly) funded, that helps, but only so long as the city has enough revenue to fund its pensions while also providing all necessary services, without having to borrow to do so. Detroit simply took on debt to be able to maintain its pension contributions. Eventually, they couldn't make the interest payments on the debt, hence the bankruptcy. The excessive commitments to city employees were one (though definitely not the only) contributing cause.

User avatar
LadyGeek
Site Admin
Posts: 58750
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: The Great 100 thousand dollar pension question.

Post by LadyGeek » Sun Mar 02, 2014 9:37 pm

Please stay on-topic, which is helping ofcmetz decide on his pension options. Opinions of pension funds, especially those not in Louisiana, are off-topic.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

technovelist
Posts: 2918
Joined: Wed Dec 30, 2009 9:02 pm
Contact:

Re: The Great 100 thousand dollar pension question.

Post by technovelist » Sun Mar 02, 2014 10:01 pm

I agree that this increases the OP's concentration of assets, which is more dangerous than proper diversification. As long as he keeps saving elsewhere, that may not be disastrous.

If he is eligible for Social Security, that acts as a diversification of sorts as well.
In theory, theory and practice are identical. In practice, they often differ.

User avatar
Random Musings
Posts: 5579
Joined: Thu Feb 22, 2007 4:24 pm
Location: Pennsylvania

Re: The Great 100 thousand dollar pension question.

Post by Random Musings » Sun Mar 02, 2014 10:21 pm

LadyGeek wrote:Please stay on-topic, which is helping ofcmetz decide on his pension options. Opinions of pension funds, especially those not in Louisiana, are off-topic.
There is a risk, as even Warren Buffett has alluded to, is that state pension systems are not in tip top financial shape. So the question of moving $100K from one risky asset basket to another risky asset basket has to take into consideration potential risks, regardless if they have not happened in the past in LA.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

User avatar
celia
Posts: 9981
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: The Great 100 thousand dollar pension question.

Post by celia » Sun Mar 02, 2014 10:53 pm

I had a similar situation, but purchased the 5 years of air time in my last month of work. My reasoning was that if my spouse and I died before that, that would be money down the drain, not available to our beneficiaries. Also my premium for 5 years was closer to 1 year of my base pay.

Be aware, though, that if you wait, you will probably get raises and the offer later on will be based on a higher 5-year average. But then you will be collecting a higher pension each month.

One consideration for me was that the pension went up after every quarter year of age and of years of employment. So the retirement date shouldn't be the week before you hit your anniversary at work or hit a new birthday.

I am also in the group that thinks diversification helps. Don't do it if it wipes out your other assets.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

Post Reply