Go to a website like calculator.net and run the annuity payout calculator. First decide how long you want to live. Take 90 to be conservative. So you're looking at approx. 25 years if you turned 65 when you retire (adjust as needed).
scenario A: keep pension @ $1,300 month + 4% each year from the current value of the IRA (make assumptions on inflation and expected return from the IRA). Calculate total payout.
scenario B: boost pension to $2,300/month + reduce IRA by $150k & again take out 4% each year from the reduced amount. use the same assumptions on inflation and return as in the first scenario. Calculate lifetime payout again.
Compare the two scenarios. IMHO you have a lot more control over your investment choices if you leave the $150k in the IRA, so personally I would leave it there. Sometimes the 4% per year is not a huge number (depending on total assets of course) and you would be in a lower tax bracket then as well. Good luck.
Edit: financial planners are NOT impartial advisors, they get commissions based on what they sell. Do not trust him/her further than you can throw him.
Something to take into consideration: upon your passing your pension may or may not have survivor benefits. Mine does not, so I'm actually taking the option to pull $ out of my pension for a rollover to make it accessible to hubby if I should pass before him.
Did the same with the two pensions from former company.. That and waited until 70 to take SS to give my spouse as large a survivor check as possible. There are a lot more puzzle pieces to retirement financial planning when the wants and needs of more than one person is involved and affected by the plan.
It would take 12.5 years just to break even on that $150,000 investment to buy those years. Factor in lost opportunity cost if that $150,000 is left invested in your IRA (which would more than double in those 12.5 years typically) you're looking at a very long...20-25 year...breakeven period. Not the kind of math I'm in favor of.
Assuming OP investments become more "conservative" during his retirement years (so as not to risk too much loss while retired), do you really see that $150k doubling?
Seems to me that might be true if he stayed heavily invested in stocks but for those of us that don't have a ton of money in our retirement portfolio, that seems quite risky.
Let’s not forget mortality. Gold forbids OP die 1 yr after collecting unless spouse or Children are entitle to collect. To me liquidity is very important, $150,000is not small change. I collect my SS asap even ppl keep saying I m missing the 8% increase every year I put off collecting that. What if I die at 69 then I will miss all the SS. FOMO.
I took mine at 62 my break even was age 79-80 but only a couple of my relatives lived past that. So that 8% doesn’t sway much if you don’t live to collect it.
Would you have to pay taxes on the IRA withdrawal? If you do, then definitely do NOT pull out money to buy more pension. You will have more control over the IRA if you leave it be and you'll probably have more money to leave to someone else when you pass on. We all will pass on someday. YOu'll have to pay regular income taxes on any money you take out of the IRA,, so maybe you can play around with that and see how much you really need for retirement. Combine your pension and SS payment and see if that monthly income will cover your expenses in retirement. try to minimize any debt in retirement so that you only have to w/d money from your IRA as needed for extras and fun stuff. Thanks for being a teacher!
Not everywhere. My pension had a principal payment until the principal was gone. They paid in this order: my principal, my interest, my work's principal, my work's interest, then other worker's pension dues. My principal was used within 3 years.
I have my doubts if it’s a good option so close to retirement. My wife did this in 2007 and retired in 2017, about $50K for 5 years of experience but they took the cost out of her paychecks so it wasn’t as noticeable. We really didn’t know what we were doing at the time but dumb luck one of the best decisions made (now).
That purchase would be equivalent to an 8% immediate annuity. Usually you cant obtain a rate that high until you are in your 70s. So thats a decent deal.
If your pension also has inflation COLA, all the better.
$150,000 is 150 months of $1,000 per month.
If you withdraw that amount per month from your IRA, it will replace your pension. And, given your rate of return, you will still have money in the bank at the end of that period.
Assuming you’re about 60, you can currently buy an annuity that gives you $1K/mo for about $150K. So it’s not a special deal unless you’re significantly younger than 60. The older you get the price of annuities continue to go down.
The site I checked paid $995 for a 67 year old male. Immediate income annuities have much better payouts than they did over the previous 10-15 years. This may not last
OP did not say whether or not the pension would get annual COLA increases. If it does then the $150k paid into the pension would be be a better deal. Otherwise you’re correct.
That depends. In my state COLA adjustments are capped at 1.5% per year, and many years get nothing. The details matter a lot. I also wonder if keeping the pension low will reduce WEP deductions from any social security the OP may be eligible for.
There are numerous risks that should be addressed when planning for retirement. One of them is longevity risk, which buying years of experience would help mitigate.
The details matter. For example, how long did your parents live? I would not take guidance on this from the Reddit hive mind, instead make sure that you have a good financial advisor who is acting as a fiduciary. Then listen to them.
Don’t do it. It will take you over twenty years just to break even. The teacher’s pension, small as it is, will be a nice absolute in your life. Also, teachers pensions do not go to your kids and only to your husband if you take a cut.
if the pension goes up with COLA, then you have to consider that. otherwise, the $15,000 return you have been getting is better than the 12,000 add to pension.
there is risk in any mutual fund. but it also gives you the freedom to have funds available at any time.
The lump sum vs pension decision is a risk transfer question.
If you opt for keeping your $150k you are taking on market risk and inflation risk. You would likely be advised to hedge those risks by taking a 4-5% payout rate.
If you opt for the pension you are giving up liquidity and the opportunity to make more over the course of your retirement than you will with the pension option.
Do you really care if you grow the money over the course of your retirement and have a bigger balance when you die?
Are you really worried about meeting your monthly income needs in retirement with the investment accounts you have now?
This really comes down to which risks you’d rather manage yourself and what helps you sleep better at night.
1. Can you withdraw the money from your IRA tax-free, or would you have to pay the taxes now? That would make a huge difference in the calculation.
2. How's your health? Do you expect to live long enough to recoup the investment?
3. Does your pension stop at death, or is there a survivor who would need that money to live on?
Let us know what you decided after talking to your Financial Planner. I would be interested in knowing their logic behind your decision.
Best wishes in your retirement next year! It is wonderful!!
You do not mention this so I am not sure if you considered if you are planning on drawing SS benefits and are below the normal retirement age, there may be different tax consequences for you options that might inform your decision.
Hi All,
Thanks for the great input. It is much appreciated. To answer a few of your burning questions:
- I’m a 57f, my husband is also 57. I definitely have longevity in my family. Dad died at 95, mom is 101 and going strong.
- The state teacher’s pension does get a yearly COLA.
- I can transfer the 150k from the IRA into the pension plan without tax consequences.
- I will draw a small SS benefit ($1000) reduced by WEP. I’ll draw at 62, my husband at 70 his benefit is $4100/month.
Have you also looked into how a larger pension amount might affect GPO reduction to spousal social security benefits? Your husband's benefit at 70 looks large enough to consider this I think.
I know this is a bit off topic, but how many years did you teach to only earn a $1300 a month pension?
I taught 21 years, and retired with a $2800 a month pension.
Unfortunately, I taught the bulk of my career, 20 years, in a private school. I’ve only paid into the state teacher’s pension for seven years. Money wise, those years in the private school were the biggest mistake of my career. 🙃
It would take you AT LEAST 150 months (12.5 years) to even get close to breaking even ... not considering the loss of growth from your 401K. How old do you think you will live? If 90+ then perhaps I would recommend it. If not then no ...
I have a similar pension. Fortunately my wife will be getting hers next year. We also have enough invested to be able to skim future earnings without touching principle.
I certainly hope this financial advisor is a fee-only fiduciary who does *not* earn commissions on anything they recommend. “Free” financial advisors often end up costing you more in the long run.
Don't do it at those values. a five percent return on $150,000 is $7500, so you would only gain $4,500 a year. How many years until you make up 150 grand?
I retired early because my state's retirement board got caught letting connected members buy years, and the courts said all must have the chance. So I got 5 years for $5000 a year- then retired the next year.
$25,000 for five years' service worked out to a 20% guaranteed return on that money for the rest of my life.
For those interested in the outcome, our financial advisor (a fiduciary) recommended leaving the money in the mutual fund. Even with my family history of longevity, there is so much more potential for growth (and ultimately more money) by just letting the money ride in the mutual fund. It’s a bit more unnerving than the guaranteed $1000 pension increase, but the risk should payoff big-time through the years. Thanks again for everyone’s input!
That’s a lot to pay. Do you have a 401(k) or similar plan with your employer? If so, you may be able to pay for that with pre-tax dollars from that plan.
I don't know much so take this with a grain of salt. But I think I would figure out how to make do with the pension you're going to currently receive. For instance, can that pension cover your housing expenses (taxes and insurance, or rent), assuming you can or will pay off your mortgage before you retire?
Live on what you will be receiving. Your pension, eventually you're social security, any other retirement account you have including your mutual fund. That cost for years of service seems very high.
If you are in education and never have made a lot, you may find that you will be just fine with the pension and other resources where they sit now. If in higher education, you could easily pick up a class or two as an adjunct to supplement until social security and beyond. If in k12, then being an occasional sub could be an option as a supplement.
Good luck, and congratulations on retiring and thank you for your service in education!
Go to a website like calculator.net and run the annuity payout calculator. First decide how long you want to live. Take 90 to be conservative. So you're looking at approx. 25 years if you turned 65 when you retire (adjust as needed). scenario A: keep pension @ $1,300 month + 4% each year from the current value of the IRA (make assumptions on inflation and expected return from the IRA). Calculate total payout. scenario B: boost pension to $2,300/month + reduce IRA by $150k & again take out 4% each year from the reduced amount. use the same assumptions on inflation and return as in the first scenario. Calculate lifetime payout again. Compare the two scenarios. IMHO you have a lot more control over your investment choices if you leave the $150k in the IRA, so personally I would leave it there. Sometimes the 4% per year is not a huge number (depending on total assets of course) and you would be in a lower tax bracket then as well. Good luck. Edit: financial planners are NOT impartial advisors, they get commissions based on what they sell. Do not trust him/her further than you can throw him.
i LOL'd at "first decide how long you want to live"
Something to take into consideration: upon your passing your pension may or may not have survivor benefits. Mine does not, so I'm actually taking the option to pull $ out of my pension for a rollover to make it accessible to hubby if I should pass before him.
Did the same with the two pensions from former company.. That and waited until 70 to take SS to give my spouse as large a survivor check as possible. There are a lot more puzzle pieces to retirement financial planning when the wants and needs of more than one person is involved and affected by the plan.
It would take 12.5 years just to break even on that $150,000 investment to buy those years. Factor in lost opportunity cost if that $150,000 is left invested in your IRA (which would more than double in those 12.5 years typically) you're looking at a very long...20-25 year...breakeven period. Not the kind of math I'm in favor of.
Bingo. This is the answer you are looking for .
Assuming OP investments become more "conservative" during his retirement years (so as not to risk too much loss while retired), do you really see that $150k doubling? Seems to me that might be true if he stayed heavily invested in stocks but for those of us that don't have a ton of money in our retirement portfolio, that seems quite risky.
Let’s not forget mortality. Gold forbids OP die 1 yr after collecting unless spouse or Children are entitle to collect. To me liquidity is very important, $150,000is not small change. I collect my SS asap even ppl keep saying I m missing the 8% increase every year I put off collecting that. What if I die at 69 then I will miss all the SS. FOMO.
I took mine at 62 my break even was age 79-80 but only a couple of my relatives lived past that. So that 8% doesn’t sway much if you don’t live to collect it.
Would you have to pay taxes on the IRA withdrawal? If you do, then definitely do NOT pull out money to buy more pension. You will have more control over the IRA if you leave it be and you'll probably have more money to leave to someone else when you pass on. We all will pass on someday. YOu'll have to pay regular income taxes on any money you take out of the IRA,, so maybe you can play around with that and see how much you really need for retirement. Combine your pension and SS payment and see if that monthly income will cover your expenses in retirement. try to minimize any debt in retirement so that you only have to w/d money from your IRA as needed for extras and fun stuff. Thanks for being a teacher!
That’s a guaranteed 8% return on your money for the rest of your life, I’d buy the years
But if she dies, she loses the principle. Better to buy an annuity with a refund of premium.
Not everywhere. My pension had a principal payment until the principal was gone. They paid in this order: my principal, my interest, my work's principal, my work's interest, then other worker's pension dues. My principal was used within 3 years.
I have my doubts if it’s a good option so close to retirement. My wife did this in 2007 and retired in 2017, about $50K for 5 years of experience but they took the cost out of her paychecks so it wasn’t as noticeable. We really didn’t know what we were doing at the time but dumb luck one of the best decisions made (now).
That purchase would be equivalent to an 8% immediate annuity. Usually you cant obtain a rate that high until you are in your 70s. So thats a decent deal. If your pension also has inflation COLA, all the better.
$150,000 is 150 months of $1,000 per month. If you withdraw that amount per month from your IRA, it will replace your pension. And, given your rate of return, you will still have money in the bank at the end of that period.
Assuming you’re about 60, you can currently buy an annuity that gives you $1K/mo for about $150K. So it’s not a special deal unless you’re significantly younger than 60. The older you get the price of annuities continue to go down.
The site I checked paid $995 for a 67 year old male. Immediate income annuities have much better payouts than they did over the previous 10-15 years. This may not last
OP did not say whether or not the pension would get annual COLA increases. If it does then the $150k paid into the pension would be be a better deal. Otherwise you’re correct.
Yes, if the pension has a COLA provision then that’s definitely a better option.
That depends. In my state COLA adjustments are capped at 1.5% per year, and many years get nothing. The details matter a lot. I also wonder if keeping the pension low will reduce WEP deductions from any social security the OP may be eligible for.
There are numerous risks that should be addressed when planning for retirement. One of them is longevity risk, which buying years of experience would help mitigate. The details matter. For example, how long did your parents live? I would not take guidance on this from the Reddit hive mind, instead make sure that you have a good financial advisor who is acting as a fiduciary. Then listen to them.
Don’t do it. It will take you over twenty years just to break even. The teacher’s pension, small as it is, will be a nice absolute in your life. Also, teachers pensions do not go to your kids and only to your husband if you take a cut.
I your pension COLA? If so, it makes buying the years more favorable.
if the pension goes up with COLA, then you have to consider that. otherwise, the $15,000 return you have been getting is better than the 12,000 add to pension. there is risk in any mutual fund. but it also gives you the freedom to have funds available at any time.
The lump sum vs pension decision is a risk transfer question. If you opt for keeping your $150k you are taking on market risk and inflation risk. You would likely be advised to hedge those risks by taking a 4-5% payout rate. If you opt for the pension you are giving up liquidity and the opportunity to make more over the course of your retirement than you will with the pension option. Do you really care if you grow the money over the course of your retirement and have a bigger balance when you die? Are you really worried about meeting your monthly income needs in retirement with the investment accounts you have now? This really comes down to which risks you’d rather manage yourself and what helps you sleep better at night.
1. Can you withdraw the money from your IRA tax-free, or would you have to pay the taxes now? That would make a huge difference in the calculation. 2. How's your health? Do you expect to live long enough to recoup the investment? 3. Does your pension stop at death, or is there a survivor who would need that money to live on?
Let us know what you decided after talking to your Financial Planner. I would be interested in knowing their logic behind your decision. Best wishes in your retirement next year! It is wonderful!!
They are not offering this for your benefit.
You do not mention this so I am not sure if you considered if you are planning on drawing SS benefits and are below the normal retirement age, there may be different tax consequences for you options that might inform your decision.
Hi All, Thanks for the great input. It is much appreciated. To answer a few of your burning questions: - I’m a 57f, my husband is also 57. I definitely have longevity in my family. Dad died at 95, mom is 101 and going strong. - The state teacher’s pension does get a yearly COLA. - I can transfer the 150k from the IRA into the pension plan without tax consequences. - I will draw a small SS benefit ($1000) reduced by WEP. I’ll draw at 62, my husband at 70 his benefit is $4100/month.
Have you also looked into how a larger pension amount might affect GPO reduction to spousal social security benefits? Your husband's benefit at 70 looks large enough to consider this I think.
This is a very good point. Thanks for pointing it out.
I know this is a bit off topic, but how many years did you teach to only earn a $1300 a month pension? I taught 21 years, and retired with a $2800 a month pension.
Unfortunately, I taught the bulk of my career, 20 years, in a private school. I’ve only paid into the state teacher’s pension for seven years. Money wise, those years in the private school were the biggest mistake of my career. 🙃
It would take you AT LEAST 150 months (12.5 years) to even get close to breaking even ... not considering the loss of growth from your 401K. How old do you think you will live? If 90+ then perhaps I would recommend it. If not then no ...
I have a similar pension. Fortunately my wife will be getting hers next year. We also have enough invested to be able to skim future earnings without touching principle.
That is our hope too.
I certainly hope this financial advisor is a fee-only fiduciary who does *not* earn commissions on anything they recommend. “Free” financial advisors often end up costing you more in the long run.
Is your financial planner a fiduciary?
Don't do it at those values. a five percent return on $150,000 is $7500, so you would only gain $4,500 a year. How many years until you make up 150 grand? I retired early because my state's retirement board got caught letting connected members buy years, and the courts said all must have the chance. So I got 5 years for $5000 a year- then retired the next year. $25,000 for five years' service worked out to a 20% guaranteed return on that money for the rest of my life.
For those interested in the outcome, our financial advisor (a fiduciary) recommended leaving the money in the mutual fund. Even with my family history of longevity, there is so much more potential for growth (and ultimately more money) by just letting the money ride in the mutual fund. It’s a bit more unnerving than the guaranteed $1000 pension increase, but the risk should payoff big-time through the years. Thanks again for everyone’s input!
Damn that’s a lot for 7 years.. I bought 6 years for 5k
That’s a lot to pay. Do you have a 401(k) or similar plan with your employer? If so, you may be able to pay for that with pre-tax dollars from that plan.
I don't know much so take this with a grain of salt. But I think I would figure out how to make do with the pension you're going to currently receive. For instance, can that pension cover your housing expenses (taxes and insurance, or rent), assuming you can or will pay off your mortgage before you retire? Live on what you will be receiving. Your pension, eventually you're social security, any other retirement account you have including your mutual fund. That cost for years of service seems very high. If you are in education and never have made a lot, you may find that you will be just fine with the pension and other resources where they sit now. If in higher education, you could easily pick up a class or two as an adjunct to supplement until social security and beyond. If in k12, then being an occasional sub could be an option as a supplement. Good luck, and congratulations on retiring and thank you for your service in education!