Retirement Salvage

[capngeo]

I work for County Government, and am in the Florida State Retirement. Sweeping changes are in the offing, which if all are implemented I could see my retirement reduced by as much as 60%.

At the present I have 3 choices:

1. "Traditional" pension with a monthly stipend
2. Transfer to an "investment program" like a 401(k)
3. Take a lump-sum payout (and get hit with a bunch of income tax)

At the moment, option #1 has a COLA and stability, BUT the handwriting is on the wall that the poilticos want to spend out the "fund"; I worry about waking up one day 20 years from now with a "sorry" letter instead of a check. The likelihood of the current system surviving as it is the 29 months I have left to normal retirement, are slim. I can retire early (with penalty) to lock in the current system... but just how "locked" is it? For instance if the COLA were eliminated inflation would eat the monthly stipend to nothingness eventually. Also in option #1 the principle is retained by the State upon my death. If we ever got to 1909 Germany and needed a wheelbarrow of banknotes to buy a loaf of bread.... well so much for the monthly stipend

Option #2 has all the inherent investment risks/gains BUT the principle is mine and can be passed on.... The problem is the retirement program is top-loaded and if I were to leave early, I would miss out on the best gain years. Also I'm not sure I trust the financial system right now.

#3 comes with about a 38% hit for taxes and penalties, but at that point the money is mine to do with as I see fit.

My financial/investment savvy is about zero; that said.... I have made good money investing in real estate, and understand that one area well. Being a landlord and cruising are difficult to manage at best... but doable with a good local manager and timely communications and transportation.

My quandary is

1. Retire today before the legislature guts the program
2. Wait 29 months and hope for the best (if no changes it means about $1000/month more in the stipend)
3. Wait 29 months, convert to investment
4. convert to investment now
5. take lump sum cash now at reduced amount
6. Wait 29 months for cash lump sum which will be about 33% greater than today

[skipmac]

In the same boat (rhetorically speaking), or at least my wife is. A bit more that 29 months to retirement and sweating out what the new administration is going to do. The state employees retirement plan is an easy target and easy to call it fat in the budget. The other side of the story is state employees in most positions are paid a lot less than they would get for the same job in private industry. The retirements and other benefits are all that make it worthwhile for many. Take that away and see who wants to stay. Sure for a while until economy recovers most will not want to risk the departure but later.

We are taking a wait and see for now. The tax hit for option 3 is just too big a hit to take. Option 2 I'm also very uncertain at the moment which way the economy will go. Keep your money in stocks and either earn a bit or lose a lot. Anyone that says they know for sure which way it's going right now I think is fooling themselves or trying to fool you.

Option 1, agree here as well. Don't trust the state long term to not screw us over, at least not the way it stands today.

Wish I could give you some ideas you didn't already cover.

Good luck.

[Cormorant]

If you roll over into a 401k, have they told you how much you would have in the account to make it equivalent to the defined benefit plan you're giving up? Then you could do some basic math with assumed returns over X years, etc.

[CSY Man]

I am also in the same boat.

I would take the money and run...
Florida is not doing to good and they are slashing all over.
There must be something you can do to minimize taxes..Balloon IRA payment or some such thing.?

Have put all my money into cheap real estate in Fort Lauderdale, and that seems to pay off, but the fat lady has not sung yet.

Have to wait another 3 years before I can take my lump sum, but will go for early retirement before bankruptcy...Go sailing at 57 with less cash instead of working as a greeter at Wal-Mart when I am 72 because I gambled and lost.

[Capt.Don]

If you cash out your pension, the general rule of thumb is you can take out 4% of your principle, which "should" leave the balance intact. With $500,000 account balance, this gives you $20,000 / year income.

Perhaps you need to determine your cash-out amount and your retirement living expense. Financial planners often quote 80%-100% of your current expense; however, with kids in college, high property taxes, ..... I found this misleading. Instead, look at how much you spend, add in new retirement expense such as boat purchase/maintenance, golf memberships, travel.... take away the non-retirement related expense (e.g, kids college). Divide this by .04, see if your cash out is sufficient to cover.

This assumes some sort of balanced investment, with a portion (say 30%+) in stocks etc. instead of 1/2% returns in the money market! The only other option is to bury the money in the back yard and hope the dog doesn't dig it up (or inflation)!

Note, standard disclaimer - I am not a financial planner, nor do I give financial advice. The above thoughts are based on my retirement analysis and setting savings goals.

[SabreKai]

I think no matter where you are, pensions are going to go in the toilet. I'm up in Canada, my company just switched over to defined contributions for all new employees. They tried to con the old guys into it as well with a smoke n mirrors presentation but most of us stayed with Defined benefits. So what did they do? A phased in cancellation of all benefits. IF you haven't retired by December of 2013 you will have no benefits at all. They chop 33% a year starting last december. Retire this year and get 66%. Wait til after 2013, get zip.

For me it doesn't matter, I started late with the company and won't get 25 years in no matter how log I stay. My pension at this moment works out to about $580/month steady or $1065/month til I'm 65 and then it drops to $100.

I sold my townhouse, banked the money, and have a few dollars in RRSPs. At the rate of inflation, I'm losing money no matter what I do. Even GICs pay next to nothing.

So I took some money and bought 300 oz of silver. Paid $33 an ounce, its now up to $45 and change.

I'd say take the hit, pay the taxes and put your money in silver. Its going up in leaps n bounds. But don't buy paper silver, buy the real solid metal. Otherwise you may find that when you want it, it won't be there. Seems some of the larger sellers of silver are selling paper to silver they don't really have. (do a google search on it if you don't believe that banks and such are not the pinnacles of virtue they say they are)

I suspect that in the near future paper money is going to be useless. Get real metal in you hand, and keep it close. I'm going to go out and get some more. Silver is real, it has value. Money is just pretty paper that we are all sucked into believing has value. Until people suddenly decide they won't accept it.


Sabre

[Skylark]

I would take option 1 and retire now. Learn to live well on less, its the new way of doing things.

[chris_gee]

There are some distinct issues here.

Pension schemes may change however despite the example above, normally existing members are protected. That is their provisions are governed by a contract and can't be unilaterally changed.

The stability of the fund may vary, normally there would be some form of trust so you are not reliant on the firm continuing.

Tax laws vary from country to country and time to time. Normally pension funds work on getting a return of 8% after tax pa over a ten year period. Of course there are times they do better and worse as recently and this return may not be realistic. However in a defined benefit scheme with COL that is what the figures are based on.

The ordinary bloke very likely lacks the skills and knowledge to get a return like that. Sure some made money in housing tulips or whatever and some lost it. I suggest option 1 on that basis.

Option 2 is okay but probably requires your funds to be managed at a cost. The benefits are presumably those achieved not as with 1 those higher ones they thought they would achieve.

Option 3 seems a bad idea in that you immediately lose the tax advantages presumably applying to longterm saving.

If under 1 you lose any money remaining after you die that is not a big deal because it is a pooled risk. You live a long time you get more at the expense of those who die early. You make that trade off in exchange for certainty. However long you live you get something. That doesn't apply to the other options. The money goes, tough.

At 60 odd your life expectancy is roughly 20 years. If you were pretty sure that it would be less as you already have cancer are overweight smoke and have a bad family history then you might say you will not go anything like 20 years so take the money in option 2 as you know for you the odds are not the same as for the pool. However unless that is clear I wouldn't guess.

The thing is you have paid for the pension thus far via contributions and secondly the employer's contributions are really deferred pay over the years, normally offset by lower wages and to buy your loyalty. If any change is required eg greater employee contributions that should not effect what you have already earned and paid for.

I don't know the ins and outs of your scheme or the US system but I am confident that these basic points are pretty accurate.

[capcook]

You can roll a lump sum payout into an Ira. Doing so will defer taxes until it is withdrawn you need to consider that tax rates are going up but you are still better off deferring. Also because interest rates are at historical lows right now the discounted value of your future pension payments (lump sum) are as large today as they will likely ever be. Somewhere in the fine print it will say your lump sum is subject to changes in prevailing rates (read will go down as rates go up). You have also already realized another important reason to take the lump sum in that if you get hit by a bus on day 2 at least your kids will get to go sailing on your money.

I have looked at this option too and if I don't live at least 25yrs (and the co continues to make the payments) I am better off with the lump sum even at a 3prct return. I have always been able to generate far higher returns so for me it is a no brainer to take the lump sum. However, I advised my sister who teaches in fla to stay in the govt plan as I know she would blow the lump sum in no time.

Hope this helps.

[capngeo]

Originally Posted by Chris

Pension schemes may change however despite the example above, normally existing members are protected. That is their provisions are governed by a contract and can't be unilaterally changed.

I've gotten similar advise, BUT if what I fear is true (the politicos want to get their hands on the trust and spend out the principle to balance the state budget), there may not be as much security as they promise. I have a LOT of trouble believing ANYTHING the government says these days.

Originally Posted by capcook

if I don't live at least 25yrs (and the co continues to make the payments) I am better off with the lump sum even at a 3prct return

IF I make it to "normal retirement" in 29 months without catastrophic changes to the plan.... and assuming no investment of the lump sum, my break even is 9 years. I'm 52 (almost) and my grandparents all made triple digits... Parents are still very active in their 80's. POTENTIALLY, I can live another 50 years. IF I were to retire now and lock in the current system I would make out the best with the monthly stipend over the long run... almost 10x as well as lump sum now! BUT it seems one legislature vote away from vaporizing and leaving me working at walmart!

[lorenzo b]

The New York Times business section in yesterdays paper had an article suggesting the precious metals bubble was due to burst.

[hpeer]

Heard the same thing myself today.

Everyone is getting on-board which makes it a good time to get out.

Out to where is a different matter.

I'm not liking the financial situation one bit, but damned if I know what to do.

I already eat anything I can catch.

[lorenzo b]

The stock market is doing nicely, and I believe will continue to do so because there really is nowhere else to put all that wealth. It's a good idea to have someone do all that for you, we use UBS, but there are many other good people out there.

[hpeer]

Jenny Montgomery Scott for us, although it is not really all that much.

However, that being said we have an investment property and some land and of course the boat. All alternative investments.

[sww914]

Originally Posted by lorenzo b

The stock market is doing nicely, and I believe will continue to do so because there really is nowhere else to put all that wealth. It's a good idea to have someone do all that for you, we use UBS, but there are many other good people out there.

I don't know anything about investing but that's what they told me about real estate when I bought a house in '05. I don't own it now but that house is for sale again for 60% of what I paid, after a new remodel.