Pension vs Savings


I recently retired at age 63 and 9 months. I'm a fairly moderate
income person - in the past, my nominal federal income tax rate has
run about 10%, but should be a bit lower in the future. The state
where I live has a moderate income tax rate.
When I turn 65 in 2011, I will be able to receive a pension based on a
defined benefit plan with my last employer. In addition to the vested
amount, I have the option to purchase an additional 3 years of service
credits (based on my military service). I'm wondering if this is a
good idea vs leaving the money in a fixed income producing vehicle.
I'm fairly risk-averse. I don't have a need to preserve a large
estate, as I have no spouse or children.
The purchase would cost $22,817.90 and would initially increase my
monthly income by about $220/month for the rest of my life.
Additionally, there is an annual variable COLA that typically runs
anywhere from zero to 3% depending on the whim of the state
government. The funds would come from a pre-tax IRA, would not be
taxed when transfered, and would not be a burden.
I wrote 3 spreadsheets based on earning 1%, 2%, and 3% on this amount,
while withdrawing $220/month from my IRA and paying 10% tax on the
withdrawal. The "break even" times (when the $22,817.90 is gone) vary
from about 8 years/3 months to 9 years.
Does this purchase sound like a good thing to do?
Reply to
bo peep
Go to an annuity quote site that offers inflation-adjusted fixed annuities, such as
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,and get a quote.
Just putting in guesses for your birthdate, state of residence, etc., it looks like your $22,818 might buy you about $100/month in initial income. Since your pension plan offers considerably more, it looks like a good deal, at least in the current interest rate climate.
Dave
Reply to
Dave Dodson
immediateannuities.com gives an annuity of $140/month for a 65 year old with that investment.
If you are healthy, it's a very good deal.
Yes, but if you have non-IRA funds available, use that instead of the IRA funds to increase your protected assets.
-- Ron
Reply to
Ron Peterson
What does that have to do with the return he can get today? Rates were high in 1981 due to inflation. Since his pension includes a COLA any increase in inflation should be compensated by the COLA and is therefore irrelevant. Any way you evaluate it the pension buy-in looks like a great deal.
Reply to
Bill
Yadda writes:
What was inflation in 1981? Double-digits (depends on period over which measured, etc). Inflation-adjusted *real* yields were 5% or so.
FWIW.
Reply to
BreadWithSpam
Worse than that, the nominal 15% return was taxed at federal rates up to 50%. So your real yield was -2.5% or so. -- Doug
Reply to
Douglas Johnson
I once had a 16% CD in the early 1980s. I wish I had locked it in for 30 years instead of 5. After three major inflationary shocks in the 1970s (Vietnam, Arab War, Iran Revolution), people thought inflation was permanent.
Reply to
rick++
"rick++" writes:
Well, you could have bought a 30-year T-bond back then :) Which would have given you the "dilemma" of collecting 14% coupons for 30 years or cashing in massive capital gains :)
-- Rich Carreiro snipped-for-privacy@rlcarr.com
Reply to
Rich Carreiro
I did that with zero coupons in my IRA, selling out when interest rates dropped. I wish I would have had more to invest back then.
-- Ron
Reply to
Ron Peterson
I forgot to mention the minimum amount for a CD was $10,000 in those days. Thats like $40,000 in 2010 dollars. By the mid-80s the minimums had dropped considerably.
Reply to
rick++
Just guessing here, but I suspect the original poster is retired from government service of some kind.
Generally speaking, when government employees have a chance to "buy" time that counts toward their defined benefit (pension) it is a VERY sweet deal. I don't mean to start a debate about government benefits and unfunded liabilities, but usually the obscure rules that allow the employees to buy time are a superb deal for the employees and a poor deal for the employer.
The only thing that gives me pause here is that the original poster is already retired. Usually these "cash for service time" deals are far more advantageous if the option is exercised at the youngest possible age.
But as others have cogently noted in this thread, the rate of return here seems excellent -- especially in today's low rate environment. Moreover the original poster described himself as a conservative man of modest means, and in my view those folks like the security that comes with a pension. So unless he is in poor health, I'd say buy the time.
Reply to
Paul Michael Brown
Darn correct! In my state you buy a year of service credit by paying the personal 8% plus the state contributary 4% of income. Then you can immediately get another 2.5% of pension. That works out to a 2.5/12 = 21% immediate annuity. Many put all their savings into this.
Reply to
rick++

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