Author Topic: FERS deferred annuity question  (Read 1246 times)

dabighen

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FERS deferred annuity question
« on: December 14, 2018, 05:34:33 PM »
Hi all,

I am leaving the federal government after about 6 years of service (so I am vested in a small annuity).  I have around $11,000 in cash i could withdraw.  I am 33 years omd but am torn weather to pull it to invest.  Since I cant collect until 62, i figure inflation will half the real value, and if I pull the money the 11k will likely compound to 88k should it double every 10 years in a total stock index fund.  I am about 50/50 on what I should do ....thoughts?  May also be worth keeping it in FERS just to keep grandfather status in case i return to fed service someday, though unlikely.

If it matter s i am 33 years omd and have around $350,000 in retirement accounts in addition to that.  Thank you for your thoughts,

Matt

sol

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Re: FERS deferred annuity question
« Reply #1 on: December 14, 2018, 05:58:29 PM »
You only get to withdraw your personal contributions, right?  Not the employer contributions?

If that's the case, it's usually worthwhile to leave it in.  I have a net present value spreadsheet for my federal pension, that first calculates what it will pay me at age 62 (which is easy because it's just years of service times 1% of high 3, with no inflation adjustment), and then depreciates that value backwards in time to see what today's value of that future payment would be.

Instead of using the compounding rate of a total stock fund to do that depreciation, as you suggested, I have used the compounding rate of the G-fund.  The G fund is where those dollars are actually located, and it has a near zero risk profile and a correspondingly lower compounding rate.  You also need to assume a SWR that the pension fund uses to pay people (which is probably at least 6% for the federal retiree system, based on population averages).

So for example, if your high-3 was 100k and you worked exactly 6 years and are 33 years old, then you would receive 6k/year of pension starting in 29 more years.  So you need to figure out the NPV of 6k/yr starting in 29 years.  If they're paying out 6% per year then 6k/yr is worth 100k of total account value when they start paying it.  Then you depreciate that 100k by the G fund rate of ~2%/yr for 29 years to get a Net Present Value, suggesting it is worth about $56k today.

Those numbers change dramatically, of course, if you can reliably put those funds somewhere that does better than 2%/yr the gov gets on the G-fund.  If you were confident you could get 9% per year for the next 29 years, then you would only need $8,200 today to reach 100k in 29 years to generate the same payout, so your pension's NPV today would only be $8,200.

If you count your employer contributions, the real value of your pension today is probably closer to 56k than 8.2k.  This is just a matter of recreating the same accounting process that the federal government is already using to calculate pension payments.  In your shoes, I would leave it in and just hope inflation stays low.

DoNorth

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Re: FERS deferred annuity question
« Reply #2 on: December 14, 2018, 06:02:14 PM »
I have the same predicament.  I left after one year of fed. service in 15', withdrew my contributions for the year and rolled them into an IRA.  Now, I'm in a federal term position overseas so i will likely get to five years, but after running a few different simulations, I think you still come out ahead taking the lump sump.  The government does give you the interest that your contributions accrued and you do have the buyback option if you return to fed. service so you can reverse the decision if you pay the withdrawal and interest, but I think in my case, the annuity value would be $400/month which as you mentioned, will only be worth about half in 2040 year dollars.

dabighen

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Re: FERS deferred annuity question
« Reply #3 on: December 14, 2018, 06:46:19 PM »
You only get to withdraw your personal contributions, right?  Not the employer contributions?

If that's the case, it's usually worthwhile to leave it in.  I have a net present value spreadsheet for my federal pension, that first calculates what it will pay me at age 62 (which is easy because it's just years of service times 1% of high 3, with no inflation adjustment), and then depreciates that value backwards in time to see what today's value of that future payment would be.

Instead of using the compounding rate of a total stock fund to do that depreciation, as you suggested, I have used the compounding rate of the G-fund.  The G fund is where those dollars are actually located, and it has a near zero risk profile and a correspondingly lower compounding rate.  You also need to assume a SWR that the pension fund uses to pay people (which is probably at least 6% for the federal retiree system, based on population averages).

So for example, if your high-3 was 100k and you worked exactly 6 years and are 33 years old, then you would receive 6k/year of pension starting in 29 more years.  So you need to figure out the NPV of 6k/yr starting in 29 years.  If they're paying out 6% per year then 6k/yr is worth 100k of total account value when they start paying it.  Then you depreciate that 100k by the G fund rate of ~2%/yr for 29 years to get a Net Present Value, suggesting it is worth about $56k today.

Those numbers change dramatically, of course, if you can reliably put those funds somewhere that does better than 2%/yr the gov gets on the G-fund.  If you were confident you could get 9% per year for the next 29 years, then you would only need $8,200 today to reach 100k in 29 years to generate the same payout, so your pension's NPV today would only be $8,200.

If you count your employer contributions, the real value of your pension today is probably closer to 56k than 8.2k.  This is just a matter of recreating the same accounting process that the federal government is already using to calculate pension payments.  In your shoes, I would leave it in and just hope inflation stays low.

This is a really thorough recommendation.  Thank you.  To answer yoir question, I would only keep my contributions not any government ones.  Even reading your thughts, it still sounds 50/50.  May leave it in out of lazyness then.  Haha.

mcneally

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Re: FERS deferred annuity question
« Reply #4 on: December 15, 2018, 04:11:04 PM »
You can't have a formula estimating the value of a FERS pension that doesn't include the inflation rate. I know you have to just guess what it will be, but whether it's 2% or 6% will change the estimated NPV by 300%. I'd calculate the value of this pension as follows:
Assumptions: 6 years of service and 100K salary = $6k nominal pension @62, age 33 when leaving service, 3% inflation, 4% *real* investment returns
$6,000 x (1.03 inflation^29 years) = $2,547 pension in 2018 dollars
$2,547 / 4% SWR = $63,675 is what the pension will be worth, in today's dollars, when you are 62
$63,675 / (1.04 real investment returns ^29 years)= $20,417 my estimate of the value of this pension

If you use 7% real investment returns as many people here like to do, that puts the value of this pension at $9,090.

Sure the pension/ G fund is essentially guaranteed and higher return investments aren't, but there's no way you'd put all your money in the G fund for 29 years, so I think you'd drastically overstate the value of the pension by using that as your investment return assumption.

sol

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Re: FERS deferred annuity question
« Reply #5 on: December 15, 2018, 04:40:19 PM »
You can't have a formula estimating the value of a FERS pension that doesn't include the inflation rate.

Sure you can!  It actually makes the math much easier in this case, since there is no inflation adjustment on the pension anyway.  But you do know the exact number of literal dollars you will get in retirement, no assumptions necessary.  You just don't know how much those dollars will buy in the future.

Quote
but there's no way you'd put all your money in the G fund for 29 years, so I think you'd drastically overstate the value of the pension by using that as your investment return assumption.

The government does put your pension contributions in the G fund.  That's literally where they are stored today.  I'm not sure it makes sense to estimate the value of those dollars based on what they might be worth if you put them somewhere else.  Like I have a car that's worth $5k today, and it doesn't make sense to estimate the value of that car in ten years by assuming I could invest $5k in the stock market for a decade when I am instead going to keep the car until then.  The car, like the pension, will be worth a different amount in ten years than a stock investment will be.  For the same reasons, I might add.

edit:  I'm not trying to be a dick, honest.  I agree that there's not necessarily a clear cut answer as to which is better in all situations.  Personally, I had about ten years in and I left mine in the pension.  I consider it something akin to a bond portion of my investment allocation, because it's basically like a low-return guaranteed annuity that will pay a known amount on a known schedule.
« Last Edit: December 15, 2018, 08:26:59 PM by sol »

marion10

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Re: FERS deferred annuity question
« Reply #6 on: December 15, 2018, 07:31:01 PM »
Pretty sure once you are vested- you can withdraw government contributions as well. I will do some research later. I would be inclined to just leave it because the fees are so low. And you never know if you might return to Federal Service. You can withdraw it up until you are eligible for a deferred annuity.

DoNorth

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Re: FERS deferred annuity question
« Reply #7 on: December 15, 2018, 08:02:37 PM »
you don't ever get the government' contributions on your behalf when requesting a refund of contributions.  This article is still applicable except that you can now buy back your time after requesting a refund.

https://www.fedweek.com/reg-jones-experts-view/getting-your-money-back/


mcneally

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Re: FERS deferred annuity question
« Reply #8 on: December 15, 2018, 11:26:20 PM »
The government does put your pension contributions in the G fund.  That's literally where they are stored today.  I'm not sure it makes sense to estimate the value of those dollars based on what they might be worth if you put them somewhere else.  Like I have a car that's worth $5k today, and it doesn't make sense to estimate the value of that car in ten years by assuming I could invest $5k in the stock market for a decade when I am instead going to keep the car until then.  The car, like the pension, will be worth a different amount in ten years than a stock investment will be.  For the same reasons, I might add.

edit:  I'm not trying to be a dick, honest.  I agree that there's not necessarily a clear cut answer as to which is better in all situations.  Personally, I had about ten years in and I left mine in the pension.  I consider it something akin to a bond portion of my investment allocation, because it's basically like a low-return guaranteed annuity that will pay a known amount on a known schedule.

Eh, I don't think you're being a dick in this case. I just think you're wrong. Pretty much the only reason to calculate the NPV of a deferred pension is to estimate the value of those dollars based on what they might be worth if you put them somewhere else.

marion10

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Re: FERS deferred annuity question
« Reply #9 on: December 16, 2018, 03:04:07 AM »
I stand corrected on the government contributions part.

dabighen

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Re: FERS deferred annuity question
« Reply #10 on: December 16, 2018, 09:40:13 AM »
You can't have a formula estimating the value of a FERS pension that doesn't include the inflation rate. I know you have to just guess what it will be, but whether it's 2% or 6% will change the estimated NPV by 300%. I'd calculate the value of this pension as follows:
Assumptions: 6 years of service and 100K salary = $6k nominal pension @62, age 33 when leaving service, 3% inflation, 4% *real* investment returns
$6,000 x (1.03 inflation^29 years) = $2,547 pension in 2018 dollars
$2,547 / 4% SWR = $63,675 is what the pension will be worth, in today's dollars, when you are 62
$63,675 / (1.04 real investment returns ^29 years)= $20,417 my estimate of the value of this pension

If you use 7% real investment returns as many people here like to do, that puts the value of this pension at $9,090.

Sure the pension/ G fund is essentially guaranteed and higher return investments aren't, but there's no way you'd put all your money in the G fund for 29 years, so I think you'd drastically overstate the value of the pension by using that as your investment return assumption.

Thanks all for your great comments!  I am following your logic on the depreciation on NPV of pensions worth until the 20,400 and 9090 number.  Do you mean the pension is worth  around $2000 less than the 11k i have in there now?  It still sounds relatively 50/50 on best course of action, in which case i would be inclined to leave it to the dudes point about treating it like a bond allocation.

mcneally

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Re: FERS deferred annuity question
« Reply #11 on: December 17, 2018, 03:48:58 PM »
You can't have a formula estimating the value of a FERS pension that doesn't include the inflation rate. I know you have to just guess what it will be, but whether it's 2% or 6% will change the estimated NPV by 300%. I'd calculate the value of this pension as follows:
Assumptions: 6 years of service and 100K salary = $6k nominal pension @62, age 33 when leaving service, 3% inflation, 4% *real* investment returns
$6,000 x (1.03 inflation^29 years) = $2,547 pension in 2018 dollars
$2,547 / 4% SWR = $63,675 is what the pension will be worth, in today's dollars, when you are 62
$63,675 / (1.04 real investment returns ^29 years)= $20,417 my estimate of the value of this pension

If you use 7% real investment returns as many people here like to do, that puts the value of this pension at $9,090.

Sure the pension/ G fund is essentially guaranteed and higher return investments aren't, but there's no way you'd put all your money in the G fund for 29 years, so I think you'd drastically overstate the value of the pension by using that as your investment return assumption.

Thanks all for your great comments!  I am following your logic on the depreciation on NPV of pensions worth until the 20,400 and 9090 number.  Do you mean the pension is worth  around $2000 less than the 11k i have in there now?  It still sounds relatively 50/50 on best course of action, in which case i would be inclined to leave it to the dudes point about treating it like a bond allocation.

dabighen- are you saying you understand how I calculated the future value of $63,675, but don't get why you'd need to discount that down to $20,417 present value? Say instead a pension it was a regular investment account that would have $63,675 when you are 62. It will be worth that in 29 years but it's not worth that now. You need to discount by whatever investment returns you expect in those years.

Personally I'd say the value is a bit higher in keeping it in the pension, but it depends on what assumptions you have for investment returns, as well as the likelihood that federal pensions aren't changed without you being grandfathered in. I certainly wouldn't stay in out of "laziness" though, as you'll need to make sure your paperwork is in order 30 years from now. Also if we get 1980s inflation long term, then the pension won't be worth much.

Fomerly known as something

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Re: FERS deferred annuity question
« Reply #12 on: December 20, 2018, 05:55:05 AM »
Are you old contributions or new (post 2013 hire).  Meaning were you grandfathered in at 1% contributions or are you at one of the higher ones.  I think this does make a difference.  I think for new hires paying 3-4% with shorter tenures far away from age 62 it makes a difference in favor or withdrawing and investing.

dabighen

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Re: FERS deferred annuity question
« Reply #13 on: December 20, 2018, 06:42:58 PM »
I was hired a week after they changed to the 3%from .8%.  Hard luck eh?  Haha.

sparkytheop

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Re: FERS deferred annuity question
« Reply #14 on: December 21, 2018, 12:16:32 AM »
I may be wrong on this, but something to ask about or look into...

We were told to never cash out that pension money (Cumulative Retirement, box 19 on your LES).  As it was explained to us (it's been years, so this is why it could be fuzzy)-- Once you cash it out, it's gone.  Unlike military time, you cannot "buy it back" (I could be wrong here, but I swear that's what he said).  If you cash it out, you lose that time as "years of service" if you do come back to the government later. 

What are the chances of you going back to federal service?  Is $11k worth losing 5 years toward your pension?  (and not just five years of money, but 5 years of service-- that could mean the ability to retire at MRA of 57, or having to work later to get a full pension because your years of service are too short).

It may also eliminate your time toward leave.  The more years you have in, the more annual leave you accumulate.  5 years already worked would get you a lot closer to that 8 hours/pay period.

If you know you'll never return to government service, the above doesn't matter near as much.

DoNorth

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Re: FERS deferred annuity question
« Reply #15 on: December 21, 2018, 01:14:14 AM »
Congress reversed this rule some years back.  You can buy your time back as long as the FERS withdrawal came after October 2009 https://www.opm.gov/retirement-services/benefits-officers-center/webcast-presentations/civilian-redeposits.pdf



"I may be wrong on this, but something to ask about or look into...

We were told to never cash out that pension money (Cumulative Retirement, box 19 on your LES).  As it was explained to us (it's been years, so this is why it could be fuzzy)-- Once you cash it out, it's gone.  Unlike military time, you cannot "buy it back" (I could be wrong here, but I swear that's what he said).  If you cash it out, you lose that time as "years of service" if you do come back to the government later. "