Jump to content
Sign in to follow this  
MNGopher

To accelurate defined benefit pension, or not?

Recommended Posts

Although I'm still 3-4 years from retirement (when I will be 57-58), I recently met with a counselor from the Minnesota Teacher's Retirement Association, so that I could weigh some options.

One area that I could use some feedback on is the option to accelerate my pension.  I will have the option to accelerate my pension pay out to 62 or 67 (or anywhere in between), and then for the rest of my life the payout would be lower.  They ran several projections, and I assume the numbers are actuarially neutral, for normal life expectancy.  I am leaning towards not accelerating, because a.) I am in in good health and have a longer than average life expectancy based on my relatives, and b.) I have enough saved between my taxable and tax advantaged accounts that I don't need the extra pension income for my life style.

Is there any good reason to accelerate in my situation? Has anyone else had this decision to make?  Of the two retirees that I have talked to that did accelerate, one was happy with it and one regretted it, but they didn't explain further.  The stats say that only about 1/3 of Minnesota retirees choose the to accelerate their payout.  Anything I'm not thinking of?  I will probably wait to take SS until at least my full retirement age.

 

Share this post


Link to post
Share on other sites

MN GOPHER

Good to hear from you. 

I am just offering my two cents not based on math or logic so I may be off because I am not familiar with accelerated payment concept. In Virginia, you can take a lump sum payment upfront  upon retirement  with a lower pay out through the life of your pension. Many teachers do that.I assume those that do  don't have much retirement  savings .    And some make unwise decisions with it like buying new  flashy expensive cars or taking expensive vacations with it.. I think they are rolling the dice.But if it were me I would not accelerate your pension if you are healthy and are taking good care of yourself through exercise and good nutrition and regular doctor visits.  I guess if you truly plan to call it quits at a fairly young age of 57, you will  possibly need  more money to live on but  since you have saved money  in retirement accounts you could count on that or work part time. Also if you are married or have a partner that might be extra support.  I bet if I had math skills the numbers would clearly show that an accelerated payout is not a good deal for you.But i will let the math gurus on this site correct me if i am wrong.  

You seem well covered with social security (you can take it early at 62) and retirement accounts and a pension so whatever you chose I think you are going to be O.K. I would hope you will have medical coverage through your school system at a group rate until you reach medicare age. That would also be a consideration. Now if you are  in poor health, had to pay higher premiums for independent health insurance and didn't qualify for Social Security in your state than I might have a different opinion.

I hope I understood your post correctly and I hope I have helped. Let us know what you decide.

Tony

Share this post


Link to post
Share on other sites

Thanks Tony, I'm not a math whiz either, but my thinking is much the same as my social security thinking, that being that if a person is healthy and doesn't need the extra money right away, well, you might as well let it sit and get a higher lifetime benefit by delaying.

We don't have a lump sum option in Minnesota, and there are a bunch a different options on survivorship % payout for the beneficiary.  If I just look at the No Refund (no survivor benefit) as a baseline it's basically...Option A: 4,050/mo. for life,  Option B: 6,350/mo. until age 62 and 3,100/mo. beyond 62,  Option C : 5,800/mo. until 67 and 2,100/mo. there after.  I'm rounding numbers off, and all 3 of these projections assume retirement at age 57 with 33 years teaching.  The beneficiary options are also good and the monthly amount only drops off about $100-200/month depending on if you choose 100%, 75%, or 50% survivor payout.  There is also a "bounce back" so that if your spouse/beneficiary dies first, you automatically bounce back to the highest amount.

I'm leaning towards not accelerating the pension.  I want some low income years between age 57 and Social Security, where I might be able to take capital gains at 0% and do some Roth conversions from my 403b.

 

 

 

Share this post


Link to post
Share on other sites
28 minutes ago, MNGopher said:

I'm leaning towards not accelerating the pension

Life is certainly unpredictable  and no decision looking into the future is ever 100%,but you and me are in agreement. Your state pension is much more generous than Virginia's.

Share this post


Link to post
Share on other sites
5 hours ago, tony said:

Life is certainly unpredictable  and no decision looking into the future is ever 100%,but you and me are in agreement. Your state pension is much more generous than Virginia's.

It's not as good for younger teachers.  I was fortunate to start paying in to the pension fund when I did.  People who started teaching just a few months after me will have to work many years longer to get the same benefit.

 

Share this post


Link to post
Share on other sites
3 minutes ago, MNGopher said:

It's not as good for younger teachers.

yea , same here, they now  pay much more in and get much less out. Eventually, educational pensions may be a thing of the past. Maybe maybe not.

Share this post


Link to post
Share on other sites
20 hours ago, MNGopher said:

Although I'm still 3-4 years from retirement (when I will be 57-58)...I will have the option to accelerate my pension pay out to 62 or 67

So you’re going to be retired and NOT receive a pension for several years?

20 hours ago, MNGopher said:

I assume the numbers are actuarially neutral

I think I’d basically ignore what is or isn’t actuarially neutral for them and think entirely about my circumstances.

The most naive approach is to estimate when you’ll die and calculate (in inflation adjusted terms) which payout gave you more money. Of course this is incomplete because you’d have to model opportunity cost. Delaying will lower your taxes now, but increase them later. Delaying might mean that you can’t take the early pension payouts and invest them for a nice return. I’m sure there are more opportunity costs.

If you want to be precise you’d have to build them all into a model and see what looks better. Of course at that point you’d want to tweak your assumptions (like life expectancy) to see how much they affect the end result...that’ll allow you to better account for risk/uncertainty. For example it probably wouldn’t be worth delaying to get an extra dollar if your assumptions are right, but risk 100k if your assumptions are wrong.

 

 

Share this post


Link to post
Share on other sites

You didn't say why you want to do this? Do you think you are going to get a higher return in the market by reinvesting the added benefit? I would stick with your benefit plan.

The vast majority of so-called non-fiduciary financial advisers would highly recommend that you accelerate because we all know why! They want to manage that fund for you. Also, the benefit decreases to about half for option A and about 2/3 for option C! That's a huge decrease. 

Here is where it might make sense for someone with a lucrative pension benefit such as an administrator. If you had 40 years service and had a lucrative pension benefit, acceleration might be a way to lower your income taxes in the future by converting the accelerated money into a backdoor Roth. But this is assuming your benefit is tax-deferred (mine is) and you can convert that money into a Roth (not sure of the regulations). 

 

Share this post


Link to post
Share on other sites
On 6/24/2019 at 2:25 PM, MNGopher said:

I want some low income years between age 57 and Social Security, where I might be able to take capital gains at 0% and do some Roth conversions from my 403b.

MNGopher,

I absolutely agree!!! Because you would  no longer be employed, you could roll your entire 403b into an IRA. You could then supplement your Option A ($4050/mo. for life) with withdrawals from your IRA. At the same time, once a year compute your most favorable amount for a Roth conversion. Perhaps you could do this until age 70 and then take your maximum SSA benefit.  Everybody's arithmetic is different but, personally, I prefer to pay the tax and take advantage of compounding on a tax-free basis.  I like what you're doing. Bob

Share this post


Link to post
Share on other sites
On 6/25/2019 at 8:22 AM, EdLaFave said:

So you’re going to be retired and NOT receive a pension for several years?

 

 

 

No, I would get a pension as soon as I retire.  It's just that we can choose to take a higher amount early in retirement and less later.  But as I mentioned, I am leaning against doing the acceleration.

 

Share this post


Link to post
Share on other sites
On 6/25/2019 at 3:19 PM, sschullo said:

You didn't say why you want to do this? Do you think you are going to get a higher return in the market by reinvesting the added benefit? I would stick with your benefit plan.

 

 

I don't think that I want to do it (the accelerated pension payout).  I was wondering if anyone had a good reason why I should do it.  It is an option offered by our state pension, and about one third of Minnesota retirees choose to do it.  I assume the reason being they want the extra pension income as a bridge to Social Security.

 

Share this post


Link to post
Share on other sites
12 hours ago, MNGopher said:

I don't think that I want to do it (the accelerated pension payout).  I was wondering if anyone had a good reason why I should do it.  It is an option offered by our state pension, and about one third of Minnesota retirees choose to do it.  I assume the reason being they want the extra pension income as a bridge to Social Security.

 

You would have to run additional calculations to make a good decision. As I said before, for somebody with a very high pension benefit, yes this would be a good idea. But not sure of your situation. However, If your social security matches the decrease in your pension and you use the "extra" benefit to convert to a Roth in the meantime, I think it would be a good deal. You lower your taxes in the long term (not in the short term). I think that is why some people do this, but we don't know their situation. Perhaps they were high paid administrators with very lucrative pension benefits, we just don't know.

In my situation, I would not do this because my pension benefit is only 49% of my teacher's salary. In fact, I could have taken out $24000 in a supplemental pot but I chose to let CalSTRS manage it. At my age, I am risk-averse for good reason. I have experienced two of the biggest stock market crashes in history. The first required me to work longer which set me up to come out of the 2nd (2008) relatively unscathed (My free book Late Bloomer Millionaires chronicles my story). 

Run the numbers and pay attention to taxes. Last year, with my meager pension and SS I paid the highest taxes ever in my life because of the RMD! 22%! 

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

×
×
  • Create New...