Author Topic: Should we cash out of my wife's pension?  (Read 1956 times)

tyd450

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Should we cash out of my wife's pension?
« on: February 20, 2020, 11:18:27 AM »
I need some help with the math on this.  My wife was a teacher for 12 years in Illinois and she is vested in the teacher's pension.  She is now a stay at home mom with our kids and has no desire to ever go back.

Cash value if we pull it out today:  $40,250 and we would roll that in to an IRA and avoid all taxes and penalties

Annual benefit at age 60:  $12,750.24
Monthly benefit at 60: $1,062.52

She is 35 years old so these payments above would start in November of 2044

there is an annual inflationary increase of 3% to the numbers above starting in 2046

Keep in mind that this is the Illinois Teacher's Pension which I believe is the most poorly funded public pension in the USA.

Any help is appreciated, thanks!

Fuzz

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Re: Should we cash out of my wife's pension?
« Reply #1 on: February 20, 2020, 02:57:31 PM »
So I plugged your wife's stats into the Schwab annuity calculator. If a 35yo female gives Schwab $40K and asks for a life annuity starting in November 2044, Schwab will pay out ~$350/month forever, starting in 2044. There is also an option if your wife takes a lower payment of $331 and dies within 20 years of 2044, then Schwab will then pay $70K to the heirs, or something.

https://www.schwab.com/public/schwab/investing/accounts_products/investment/annuities/income_annuity/fixed_income_annuity_calculator

I do not believe these types of income annuities have the same excessive fees as other products. So a smart finance company doing a complicated NPV and expected return calculation values the income stream of a investment of 40K now at a bit less than 1/3 of the annuity on the table.

Your wife's annuity of $1062/month is substantially more. I would keep that annuity.

But yeah, all kinds of risk with IL pensions. No idea how you price that. Plus there is the option value of spending the cash.
« Last Edit: February 20, 2020, 03:02:09 PM by Fuzz »


tyd450

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tyd450

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Re: Should we cash out of my wife's pension?
« Reply #4 on: February 21, 2020, 06:47:56 AM »
it seems odd that they don't start adjusting for inflation until 2046 right?

Xlar

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Re: Should we cash out of my wife's pension?
« Reply #5 on: February 21, 2020, 01:14:49 PM »
Does your investment plan include an annuity? If it does then the math Fuzz posted shows that the pension compares well to an annuity. Depending on how you account for the poorly funded nature of the pension...

How about if you compare it to stocks?

First let's look at how much the pension would be worth in 2020 dollars.
If there is 0% annual inflation between now and 2044 then it'd be worth the entire $12,750.24.
If there is 3% annual inflation then in 2020 dollars then it is worth $6,272.27
If there is 6% annual inflation then in 2020 dollars then it is worth $3,149.04

3% is a reasonable amount to use based on historical data. So what would stocks do?
If you get a 4% annual return above inflation between now and 2044 then the $40,250 would be worth $103,172.99. Using the 4% "rule" this would provide $4,126.99 per year.
If you get a 7% annual return above inflation between now and 2044 then the $40,250 would be worth $204,162.77. Using the 4% "rule" this would provide $8,166.51 per year.
If you get a 10% annual return above inflation between now and 2044 then the $40,250 would be worth $396,451.74. Using the 4% "rule" this would provide $15,858.07 per year.

Historically 4% above inflation is a reasonable return rate. So if we compare that to the pension with the reasonable inflation of 3% we have $6,272.27 for pensions vs $8,166.51 for stocks.

Honestly that's not a huge difference. I'd think about what you feel more comfortable with and how you'd evaluate the risk of the lack of funding in the pension.

tyd450

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Re: Should we cash out of my wife's pension?
« Reply #6 on: February 21, 2020, 03:15:01 PM »
Does your investment plan include an annuity? If it does then the math Fuzz posted shows that the pension compares well to an annuity. Depending on how you account for the poorly funded nature of the pension...

How about if you compare it to stocks?

First let's look at how much the pension would be worth in 2020 dollars.
If there is 0% annual inflation between now and 2044 then it'd be worth the entire $12,750.24.
If there is 3% annual inflation then in 2020 dollars then it is worth $6,272.27
If there is 6% annual inflation then in 2020 dollars then it is worth $3,149.04

3% is a reasonable amount to use based on historical data. So what would stocks do?
If you get a 4% annual return above inflation between now and 2044 then the $40,250 would be worth $103,172.99. Using the 4% "rule" this would provide $4,126.99 per year.
If you get a 7% annual return above inflation between now and 2044 then the $40,250 would be worth $204,162.77. Using the 4% "rule" this would provide $8,166.51 per year.
If you get a 10% annual return above inflation between now and 2044 then the $40,250 would be worth $396,451.74. Using the 4% "rule" this would provide $15,858.07 per year.

Historically 4% above inflation is a reasonable return rate. So if we compare that to the pension with the reasonable inflation of 3% we have $6,272.27 for pensions vs $8,166.51 for stocks.

Honestly that's not a huge difference. I'd think about what you feel more comfortable with and how you'd evaluate the risk of the lack of funding in the pension.

Thanks for the explanation and breaking it down like that.  I just confirmed that there is no inflationary adjustment at all until 2046.  So it will in fact be $12,750 per year exactly starting in 2044.  I am definitely leaning towards pulling it out now and tossing it in VTSAX in a rollover IRA.  I don't trust the IL teacher's pension due to the under funding or the state of IL to manage anything for me in general.

Peachtea

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Re: Should we cash out of my wife's pension?
« Reply #7 on: February 21, 2020, 05:52:38 PM »
Cash out and rollover. Not only does the average rate of return and 4% rule put her ahead of the pension eaten up by inflation, but, as you noted, the IL teacher pension is terribly underfunded and unstable. Id trust a Vanguard index fund over the state of IL with that money, hands down.

tyd450

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Re: Should we cash out of my wife's pension?
« Reply #8 on: February 23, 2020, 12:45:12 PM »
Cash out and rollover. Not only does the average rate of return and 4% rule put her ahead of the pension eaten up by inflation, but, as you noted, the IL teacher pension is terribly underfunded and unstable. Id trust a Vanguard index fund over the state of IL with that money, hands down.

Thanks and I'm pretty set on doing this next week!

tyd450

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Re: Should we cash out of my wife's pension?
« Reply #9 on: February 24, 2020, 10:16:44 AM »
I would appreciate any other opinions out there before I pull the trigger!

Here4theGB

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Re: Should we cash out of my wife's pension?
« Reply #10 on: February 24, 2020, 10:27:56 AM »
Cash out and rollover. Not only does the average rate of return and 4% rule put her ahead of the pension eaten up by inflation, but, as you noted, the IL teacher pension is terribly underfunded and unstable. Id trust a Vanguard index fund over the state of IL with that money, hands down.
Another vote for this, which is what I've done myself when offered.  Too much can happen in 2+ decades.  I'd take what I could get now and have it under my control.

DeniseNJ

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Re: Should we cash out of my wife's pension?
« Reply #11 on: February 24, 2020, 10:35:28 AM »
Even if the pension netted more in the end or over time, that's too long a time to have your money in someone else's hands.  A lot can happen between now and then.  Invest yourself and you will have control over it.  If you need it it's there and if you don't it stays invested.  Too many unknowns not to have your money in your own hands for 20 years.

tyd450

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Re: Should we cash out of my wife's pension?
« Reply #12 on: February 24, 2020, 11:21:32 AM »
Even if the pension netted more in the end or over time, that's too long a time to have your money in someone else's hands.  A lot can happen between now and then.  Invest yourself and you will have control over it.  If you need it it's there and if you don't it stays invested.  Too many unknowns not to have your money in your own hands for 20 years.

Cash out and rollover. Not only does the average rate of return and 4% rule put her ahead of the pension eaten up by inflation, but, as you noted, the IL teacher pension is terribly underfunded and unstable. Id trust a Vanguard index fund over the state of IL with that money, hands down.
Another vote for this, which is what I've done myself when offered.  Too much can happen in 2+ decades.  I'd take what I could get now and have it under my control.

Thanks to you both!  I am going to do it.  25 years is a long time to have someone else controlling our money, especially when that someone is the state of IL!

Jon Bon

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Re: Should we cash out of my wife's pension?
« Reply #13 on: February 24, 2020, 11:38:20 AM »
Well I am not going to comment on the NPV of this or the way they got there. I am just assuming that they are correct.

Assuming that with historical interest rates its a wash between leaving it in and pulling it and dumping into the market I would 100% pull the money out asap.

Hell even if it was approximately a 25% loss I would still pull it out. It would make me super uncomfortable to leave it in the hands of a state controlled pension for 25 months, let alone 25 years...

tyd450

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Re: Should we cash out of my wife's pension?
« Reply #14 on: February 24, 2020, 01:33:57 PM »
Well I am not going to comment on the NPV of this or the way they got there. I am just assuming that they are correct.

Assuming that with historical interest rates its a wash between leaving it in and pulling it and dumping into the market I would 100% pull the money out asap.

Hell even if it was approximately a 25% loss I would still pull it out. It would make me super uncomfortable to leave it in the hands of a state controlled pension for 25 months, let alone 25 years...

agreed, it will be nice to just get the lump sum payout and throw it in the IRA and move on.... one less thing to worry about!

MaggieD

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Re: Should we cash out of my wife's pension?
« Reply #15 on: February 26, 2020, 03:40:40 AM »
Is there a chance she might go back to work somewhere eligible for the pension?  It could be even more valuable if she did, depending on the pension formula.

tyd450

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Re: Should we cash out of my wife's pension?
« Reply #16 on: February 26, 2020, 12:06:03 PM »
Is there a chance she might go back to work somewhere eligible for the pension?  It could be even more valuable if she did, depending on the pension formula.

no definitely not, things would have to go very wrong for us for her to consider going back.  I think the only thing she would want to do is substitute teach occasionally when the kids are older and all in school all day long. 

partgypsy

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Re: Should we cash out of my wife's pension?
« Reply #17 on: February 26, 2020, 02:17:39 PM »
Id normally say keep the pension, but because of Il handling of the pension and it's funding, also suggest pulling. The issue with my mother the amount she pulled out was not enough to live on, so she ended up spending it.
« Last Edit: February 27, 2020, 07:40:04 AM by partgypsy »

Linea_Norway

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Re: Should we cash out of my wife's pension?
« Reply #18 on: February 26, 2020, 02:50:27 PM »
Is there a chance she might go back to work somewhere eligible for the pension?  It could be even more valuable if she did, depending on the pension formula.

no definitely not, things would have to go very wrong for us for her to consider going back.  I think the only thing she would want to do is substitute teach occasionally when the kids are older and all in school all day long.

Your wife should consider the Ds, which I heard about in the Afford Anthing podcast I listened to today: divorse, death, disabled. I think there was another one that I don't recall. But if something happens with you or your marriage, will she have to go back to work? And what consequences would that have?