Pension vs Savings

Go to an annuity quote site that offers inflation-adjusted fixed annuities, such as

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

Nobody offers close to 12% a year, especially with COLA. Go for it.

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

What was the T-Bill in May 1981? 15%

on 1/22/10 1:14 AM bo peep said the following:

Did you factor in higher inflation?

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.

What was inflation in 1981? Double-digits (depends on period over which measured, etc). Inflation-adjusted *real* yields were 5% or so.

FWIW.

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

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.

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

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

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.

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.

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.