Currently there is no doubt the value a pension with an inflationary increase brings to someone’s retirement planning deck of cards. So you might ask, why would any teacher decide not to pay the extra 3% today to maintain their higher pension benefit later? Let’s take a look at one more hypothetical example:
Mr. About-to- Retire is divorced and has one child. Unfortunately he recently found out he has a terminal illness. He plans to retire from Bright school district in 1 year. His final average compensation will be $73,300 and he currently has 30 years of service. Mr. About-to-Retire has a substantial amount of assets that he accumulated during his lifetime and has always had a frugal lifestyle. He has no debt and plans to need only $25,000 to live on each year.
Seeing that Mr. About-to-Retire now knows he will likely not live beyond 11.6 years he does not have a need for a spousal-survivor benefit. He has decided to freeze his pension today and go with option 4. Rather than contributing 4% to the state defined benefit plan he will instead put 4% into his new personal 401(k) and receive a 4% match from his employer. By doing this Mr. About-to-Retire will maximize the amount of money he plans to pass on to his child as his child cannot receive a survivor benefit from the pension.
In addition to what Tim Wyman and Melissa Joy outlined in an earlier blog post regarding the Ford Buy-Out, following are decision points to consider when making elections:
- Affect of the increased contribution on your current cash flow (i.e. decrease in take home pay)
- Income needed in retirement to sustain your current/desired lifestyle
- Life expectancy
- Break-even age for recovering contribution cost
- Break-even rate of return on 401(k) account
- Unique Circumstances
Please refer to our previous posts on the MSPERS changes:
This is a hypothetical illustration. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Investments mentioned may not be suitable for all investors. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.