May 18, 2009

The Countdown - End of Year (and Retirement)

If all the educators that read this blog are like my wife, she has been on The Countdown for a couple of weeks now. She actually just has 3 days left "with kids" including today, so the finish line is just a step or two away. I hope you are just as close or within a couple of weeks at the most.

Anyway, I have received a few questions about impending retirements, and the questions have run the gamut from pension to social security to life insurance. One of the main things to remember here is to talk to the various agencies involved (and a advisor if you wish). I can give some basic steps to take, but these are serious issues.

I would suggest making an appointment with TRS and Social Security to discuss the options you have. One important item to remember is that once you make a choice on how you want your pension paid, it is binding.

For most people, the best option will be a joint payment with retiree and spouse retaining the same payment (with COLA increases) for whomever lives the longest. This is important especially if a non-educator spouse is involved (unless they have substantial retirement assets).

One reader had a very good question that I wanted to share. Essentially, I was asked about taking the highest payout option for your pension and getting a life insurance policy with the extra benefit. I know this sounds like a great option, but I promise it is not 99% of the time. The issue here is that the pension grows about 3% per year every year. This is no small amount especially when you think that today's 50 year olds have a good chance of reaching at least 90 years of age. To give you an idea of the numbers we are talking about here, let's look at a hypothetical situation.

If an educator retires at 54 years of age, 30 years in the system, and has an annual salary of $66,666, we will guess that they live to be 95 years old (41 years of monthly pension payments). In year one, they should receive a $3,333.33 monthly pension (40,000 annual pension). In year 10 the benefit should have grown to about be $4,489 a month. In year 20, the monthly benefit has climbed to $6,045. In year 30, the benefit will be about $8,142 a month. Finally, in year 41 the last monthly payment made would have been for $11,131. This is almost 3.5 times as much as the first monthly payment!

Here is the kicker, if the retiree died in year 15, and the spouse continued to live the next 26 years, the pension benefit is gone. Zero, nada, zilch. The last monthly benefit would have been about $5,209, and it is now GONE. It would need to be a BIG life insurance policy to even begin to replace the income, and then the future payments are not guaranteed (by state law) like your pension.

By the way, for those wondering how much money would have been paid out over this retiree's life (to age 95), the answer is $5,530,540.55. Also, if the retiree had wanted to try to fund this option alone, they would have needed $1,214,370.46 on day one and made a steady 4.5% every single year. These are big numbers, and that is why I have continued to say that your pension is your biggest asset.

I know times are tough, and many retirees are thinking that if they choose the high option payout and save the couple of hundred dollars a month, in the end, they will be better. I completely disagree. There are few cases where it works, but you will never know unless you talk with TRS and an advisor. TRS will give you the breakdowns and answer some questions for you, but they will not give you advice on which option to take. An advisor will hopefully point out all of the benefits and not just be trying to sell you some product.

It is really sort of late to be having this discussion for those retiring this year, but I will try to remember to bring it up earlier next school year. Sorry to not have been thinking ahead that far to poke and prod everyone. For those retiring in a year or two, now is the time to start planning!

As I have said before in this blog, the more information you have, the better (and easier) your decision will be.

As for Social Security, hopefully Obama and Congress will eliminate the Windfall Elimination Provision (WEP), but with the current crunch on Social Security and national debt, don't bet on it this year.

Finally, life insurance is a big topic. How much? Why have it? The main reason to have at least a basic policy ($50,000 to me is basic policy) is to help those that you leave behind help pay for any final expenses and at least have something for a "transition" period. Beyond that, it is really a discussion to have with an advisor since your debts, income needs, etc. will play a part.

I hope this helps those that are looking for some guidance, and I cannot stress enough how important it is to find out about your benefits and options.

Now, let the countdowns continue, and I wish you all a great summer!

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