Pension - Employee Portion

[Frugal Mammaw]

I am retiring in the next year at the age of 55 with a pension from the state for work with local government.  Trying to decide whether or not to annuitize 85,000 that has accumulated in the employee paid annuity savings account portion with the state.  The state is paying almost 7000.00 per year if I use the option with joint survivorship for the annuity savings account.  My husband is 56.  I believe that the payment is at a rate of 7.5% return.  I am inclined to annuitize with the state rather than roll over into an IRA.
 
I also have the option to roll in a 29,000 403b account into the state annuity, also at 7.5%.  This will amount to another 2385.00 per year. 

We will be spending the money to pay for medical insurance.  I have always carried the medical insurance, which I will continue to carry, but will lose employer fringe.  Annuitizing will cover most of the 10,000 per year cost of the medical insurance.  If I did not need the money, then probably would not annuitize, but we will need it for this medical insurance.  In addition, I have the regular pension and we each have a fairly large Roth IRA account.  My husband is self-employed and will have enough to cover most of his wage when he retires around the age of 65.

Just wondering if anyone has any insight to whether or not it would be wise to annuitize one or both of these accounts at 7.5%.  We have always invested on our own and have done very well in our Roth accounts but also understand the risks of losing our principle.  It seems like 7.5 percent would be safe.  The state is not very generous though with cost of living raises (none at all for the past years and 1% on some years past), so a little worried about the effects of inflation.  What would you do?  Thanks.

[Debbie M]

A guaranteed 7.5% return which sometimes gets adjusted for inflation sounds pretty sweet to me.

I'm a fan of diversification, so having some money annuitized and some invested by you also sounds good to me.

You don't say how much you have in your Roth accounts.  If it's way way more than 114,000, then I'd annuitize both the employee-paid pension money and the 403b.  Otherwise, perhaps just the employee-paid pension.

Another question is whether you can do something about your insurance.  It seems kind of pricy to me--I'm 50, so not that munch younger than you.  So if you're getting deluxe insurance, would you consider a high-deductible insurance?  Also, when you are not working you will be able to get private insurance and you cannot be charged or denied based on pre-existing conditions.  Have you checked out the new plans available through the Affordable Care Act?

Another factor is that you will qualify for Medicare at age 65, only 10 years after retirement.  At that point, any cost for supplemental insurance should be lower than what you're paying for full insurance.  So maybe you don't need quite as much stability as you think.

[Frugal Mammaw]

I thought maybe 7.5 was pretty good, not as much as the average market, but no risk.

All together, our Roth accounts will be about 255,000 after we make this year's contribution.  How does the 114,000 figure come into play?

I don't think we can do anything about the insurance for now.  The 10,000 for insurance is the 12,700.00 family out of pocket max with 5000 deductible.  The plan pays copays and so is not qualified for HSA's.  It is the cheapest that I can get through the employer.  I checked out the Affordable Care Act plans and they were over 11,000.  Our state is high priced.  Our employer may get a plan that qualifies for HSA next plan year for 2014.  I am thinking that maybe in a future year, since my pay will be lower, that we could contribute to a regular IRA instead of a Roth and to an HSA so as to get the MAGI below the 62000 cliff so we could be eligible for the subsidies .  I am a little afraid to leave the employer coverage, because once we leave, we cannot get back on it.  I am afraid that if the election results change, they will do away with the Affordable Care Act.  We are going to have to play the medical by ear.

I have three more months before a decision must be made about annuitizing.  I feel like annuitizing would probably be best, but just wanted to see what others thought.  I thought the diversification would be good too.  I like the idea of a steady income.  Thanks for your help.

[Debbie M]

The 114,000 figure is your 85,000 pension plus 29,000 403b.  So if you put all that in your annuity, you'd still have 2/3 of your money in Roth accounts.  If you just put the 85K in your annuity, then you'd have more like 70% of your money outside it in more flexible but more risky accounts.  Both options sound reasonable.  Given what you've said, I'd think you'd be happiest with all 114,000 in your annuity.

[Another Reader]

At 7.5 percent, I would annuitize both if the pension system is sound.  However, you should be aware that as what is called a "pre-Medicare retiree," your pension provider may elect to discontinue your medical insurance and kick you to the exchange curb at some point.  That is especially likely if your insurance is through the employer's plan for current employees.  Local government employers with plans that include pre-Medicare retirees find that cost savings are significant by removing the pre-Medicare retirees and the word is getting around.  Segregation into separate plans contracted for by the retirement system happened at my employer even before ACA.  Our premiums skyrocketed as a result of the change in the pool of insured.  The retirement system did not force the pre-Medicare retirees into the exchange this year because of the uncertainty, but I'm expecting that next year.  Medicare retirees are already buying plans through a private exchange.

[Frugal Mammaw]

Thanks for the replies.  Yes, I would probably be happiest to annuitize.  Medical insurance is a problem for sure.  I thought the ACA would be more affordable.   I hope my employer doesn't kick the retirees to the curb.