Author Topic: Reader Case Study - Pensions, Social Security, and Early Retirement  (Read 6404 times)

fallstoclimb

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I've been around this site for a while, focused on the debt-payoff portion of MMMing.  I've projected that at the end of the year we should FINALLY pay off my student loans (expect an exuberant celebratory post in December), so I'm starting to think about the next step, which is preparing for a flexible "early retirement".  I'm married and we are both 29, still unsure on kids so let's leave that out of the equation.

Income 
I make 80K, DH makes 46K

Current expenses
About 4,200/month, or 50K a year, not including money sent to student loan payoff.

Expected ER expenses 
Obviously health insurance, and eventually possibly long term care, but I expect the long term care environment to be drastically different by the time we are old. 

Assets
30K in TSP fund.  I recently upped my contribution to 7% and there is an additional 5% agency match.
10K in 403(b) fund.  DH contributes I think around $80/paycheck to this.

Liabilities
20K in student loans at 6.5%, I am prioritizing this payoff and should be done by the end of 2014
~280K mortgage at 3.75%.  Mortgage payments are reasonable and I'm really not concerned about this.  (Mortgage may seem high to many of you but its the norm for the area, actually somewhat on the budget side)

Goal
To be able to transition out of the formal full-time working world by our mid-40s, if we want to.  I would like the freedom for us to take on low-paying jobs, part-time jobs, possibly take time off to travel, volunteer, etc.  We may opt to keep our current jobs but I want it to be a choice if we do!


Specific Question:
Basically, I'm wondering what to do with our extra money once the student loans are paid off.  I think the typical advice is to max out your 401(k), and then a Roth account, and then non-tax-sheltered accounts.  I've seen the numbers on how much stronger a pre-tax dollar is worth invested and I'm pretty much sold on that, and I know there are some ways to get money out early if you want to. 

If we didn't have pensions, I would just fund our 401(k) equivalents as much as I could and move on from there.  But today I was wondering about those pensions.

[Specific Question 1] We are both vested, so I THINK we can have our stop work age be whenever and then it is just accounted for in the pension via the years of service adjustment.  Does this sound right?  He is on a state teacher pension plan, I am on FERS (federal employee). 

I made some calculations with an absurdly-low assumption that our high-3 salaries match our current salaries, and we both retire in our early 40s with 20 years of service, our combined pensions will bring in $2,713/month, 32.5K a year, if we begin withdrawing at age 62.

I also calculated our social security benefits, assuming an average pay of 50K for DH between now and then, and an average pay of 90K for me between now and then - still very very very much on the conservative side.  If we stop work at 43 and begin withdrawing at age 62 our combined social security will bring in $2035/month, 24.4K a year.

So, combined, a very very conservative estimate of our combined social security and pension payments is $4748/month, 56,980 a year.  This will theoretically be COLA-adjusted.  This implies that we really don't need to save a ton for retirement as it is enough to cover our current spending, and by the time we are 62 the house will be paid off so our spending (in today's dollars) should drop to around 3,000.

However, obviously neither of these funds (pensions or social security) are a guarantee given the current environment of state and federal governments.  [Specific Question 2] How in the world do you plan for retirement with HUGE caveats like this one?  I imagine the pensions can't go away entirely because we do pay into them (DH pays a pretty significant 7% into them, I pay a pretty insignificant .08%), and we do have unions, but then again who knows!

If I CAN count on the pensions and social security, I would still want more saved for age 62+ but it seems like we wouldn't need a TON more.  It seems like the bigger financial gap is for that age 42-62 range.  If we don't need to save more during that range we can take a pretty major paycut but given that our part-time/low-paying/flexible jobs will be much much less secure than our current jobs I think we would need the ability to access investment cash flow during this time before we felt comfortable jumping ship.

[Specific Question 3]   Given all of this information, does it still make sense to put the cash freed up when our loan payoff is over into our tax-sheltered TSP and 403b accounts?
« Last Edit: March 04, 2014, 06:57:41 AM by fallstoclimb »

Cheddar Stacker

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #1 on: March 03, 2014, 02:38:52 PM »
I'm married and we are both 29, still unsure on kids so let's leave that out of the equation.

Income 
I make 80K, DH makes 46K

Goal
To be able to transition out of the formal full-time working world by our mid-40s, if we want to.  I would like the freedom for us to take on low-paying jobs, part-time jobs, possibly take time off to travel, volunteer, etc.  We may opt to keep our current jobs but I want it to be a choice if we do!

Specific Question:
Basically, I'm wondering what to do with our extra money once the student loans are paid off. 

[Specific Question 1] We are both vested, so I THINK we can have our stop work age be whenever and then it is just accounted for in the pension via the years of service adjustment.  Does this sound right?  He is on a state teacher pension plan, I am on FERS (federal employee). 

However, obviously neither of these funds (pensions or social security) are a guarantee given the current environment of state and federal governments. 

[Specific Question 2] How in the world do you plan for retirement with HUGE caveats like this one?  I imagine the pensions can't go away entirely because we do pay into them (DH pays a pretty significant 7% into them, I pay a pretty insignificant .08%), and we do have unions, but then again who knows!

[Specific Question 3]   Given all of this information, does it still make sense to put the cash freed up when our loan payoff is over into our tax-sheltered TSP and 403b accounts?

I left certain items in your quote since I thought they were the highlights that should be addressed. First, I think you are doing the absolute best thing by getting rid of the 6.5% SL so keep that up.

Kids-I would accelerate all plans right away in the off chance you might have kids. This will derail your earning potential/savings rate very quickly. Nice income, and I left it in again to highlight the point I just made about the potential kids. You might as well either wipe out one of those wages or add a huge amount for daycare.

Goal-Have the freedom to RE in 15 years, this will give you about 18 years to bridge between working and SS/Pension. If you will have no (or almost no) income during that time, it's the perfect opportunity to do a slow Roth conversion and pay very little tax. You also need to accumulate as much as possible over the next 15 years to fund that 18 year period, and as you mentioned the tax deferred methods will lead to the quickest accumulation, so that's where I'd put as much as possible after SL debt.

Specific Question-Max out all tax deferred vehicles as soon as the SL debt is gone.

Specific Question 1-I'm not sure about the technical pension question, but what you said at the end is my biggest worry about your plans. I don't know where you live or how "funded" either of these plans are, but I would pay close attention to this. I'm actually glad I don't have a pension, as I don't want any false sense of security/reliance on others to fund my retirement.

Specific Question 2-I think you plan a safe retirement without considering anything coming in from your pensions (and SS for that matter) and let these plans act as your safety margin. If you want to include them, maybe only include half of your projected amounts in case they don't survive.

Specific Question 3-Yes. Circle back to your goal above. It's the quickest way to accumulate a large sum, which you need within 18 years to RE, or sooner if you have kids.

GregO

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #2 on: March 03, 2014, 03:02:47 PM »
I recently upped my contribution to 7% and I believe there is an agency 1% match on top of that.

We are both vested, so I THINK we can have our stop work age be whenever and then it is just accounted for in the pension via the years of service adjustment.  Does this sound right?  He is on a state teacher pension plan, I am on FERS (federal employee). 


You need to do some research into FERS and make sure you know the details.  I'm a former federal employee and here is what I remember:

A) You get an automatic 1% contributions to your TSP no matter what.  You get 100% matching on your contributions up to 3%.  You get 50% matching for 4-5%.  So if you are now contributing 7%, you are getting a 5% match.

B) I am not positive, but I'm pretty confident that you cannot withdraw any money from your TSP until you reach retirement age.  Also, I'm pretty sure you cannot roll your money over to a traditional IRA or Roth IRA unless you quit your federal job(and forfeit the pension).  Now, the TSP program has recently introduced a Roth TSP portion, but I'm not sure what the rollover options are there.  You'll have to investigate.

C) As with the TSP, you cannot withdraw from your pension until you reach retirement age.  Retirement age varies depending on how many years of service you have.  If my memory serves me right, the earliest you can receive pension is 55.

So all this to say, you are going to have to do a lot of research.  And you may be right, it may not be a good idea to fully fund your TSP if you want to retire early.  You may have to fund a traditional IRA instead. 

fallstoclimb

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #3 on: March 04, 2014, 06:51:59 AM »
You need to do some research into FERS and make sure you know the details.  I'm a former federal employee and here is what I remember:

A) You get an automatic 1% contributions to your TSP no matter what.  You get 100% matching on your contributions up to 3%.  You get 50% matching for 4-5%.  So if you are now contributing 7%, you are getting a 5% match.

You are right, I don't know why I left that out!  I am in essence currently putting 12% into my TSP, with the agency's match.  However, the $17,500/yearly limit only refers to the employees contributions, correct? 

B) I am not positive, but I'm pretty confident that you cannot withdraw any money from your TSP until you reach retirement age.  Also, I'm pretty sure you cannot roll your money over to a traditional IRA or Roth IRA unless you quit your federal job(and forfeit the pension).  Now, the TSP program has recently introduced a Roth TSP portion, but I'm not sure what the rollover options are there.  You'll have to investigate.

C) As with the TSP, you cannot withdraw from your pension until you reach retirement age.  Retirement age varies depending on how many years of service you have.  If my memory serves me right, the earliest you can receive pension is 55.

Yes, the plan would be not to count on the pension until age 62.  My understanding though is that I don't forfeit the pension regardless of when I quit since I am already vested.  It didn't even occur to me TSP rollover might have different rules than a typical 401k rollover.  Any early retirement former feds want to chime in?? 

fallstoclimb

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #4 on: March 04, 2014, 06:56:47 AM »
I left certain items in your quote since I thought they were the highlights that should be addressed. First, I think you are doing the absolute best thing by getting rid of the 6.5% SL so keep that up.

Kids-I would accelerate all plans right away in the off chance you might have kids. This will derail your earning potential/savings rate very quickly. Nice income, and I left it in again to highlight the point I just made about the potential kids. You might as well either wipe out one of those wages or add a huge amount for daycare.


Yeah, basically if we have a kid I think our ERE plans will go out the window.  At the very least it would obviously delay it significantly.  I figure I may as well start the ball rolling, because currently what better use of the money is there anyway, and if we have a kid then we will pull back as necessary.   

Specific Question 1-I'm not sure about the technical pension question, but what you said at the end is my biggest worry about your plans. I don't know where you live or how "funded" either of these plans are, but I would pay close attention to this. I'm actually glad I don't have a pension, as I don't want any false sense of security/reliance on others to fund my retirement.

Yeah it's a little alarming, and a real bummer considering how much DH is paying into his.  So we live in Maryland, which is one of the wealthier states but the pension system is underfunded like it is everywhere.  I've heard less about this recently but I doubt it's been corrected.  I'm a federal employee, I think for my pension to disappear we would have to be in an austerity situation like Greece, but given that it's 40 years until I would begin drawing on it a lot can happen between now and then.  I guess we should just assume that we are not going to get them, although that inefficiency bothers me since if they do come through we will have way too much money from age 62 on!

GregO

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #5 on: March 04, 2014, 10:06:34 AM »
However, the $17,500/yearly limit only refers to the employees contributions, correct? 

Yes, I believe so.

Yes, the plan would be not to count on the pension until age 62.  My understanding though is that I don't forfeit the pension regardless of when I quit since I am already vested.  It didn't even occur to me TSP rollover might have different rules than a typical 401k rollover.  Any early retirement former feds want to chime in??

If there's one thing the fed does well, it's help their employees plan for retirement.  There should be someone you can talk to about retirement that will be able to give you a lot better answers than we can.  Rules are complex and changing.  It shouldn't be hard to find someone within your organization who can answer these questions for you.  Ask around, I'm sure you'll be able to find the retirement adviser pretty easily.

MKinVA

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #6 on: March 04, 2014, 10:25:23 AM »
Another thing to consider is using what you call your 401K equivalent. If you are a government employee, it is probably a 457. The significant difference between a 401k and a 457 is that a 457 can be accessed prior to 59 1/2. So, even if you can't receive your pension until 55 (as mentioned by another federal employee), you will also at that time be able to access your 457 money. So I guess you are looking at a savings plan to cover you between 45 and 55.


ZMonet

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #7 on: March 04, 2014, 10:34:33 AM »
Yes, once you are vested you will get a pension (likely 1% per year worked x the average of your high 3 years of salary) when you hit the minimum retirement age.  The minimum retirement age differs depending on your years of service and your age.  People can retire earlier if their is an offer of "early out" but I think most of those offers are still 55 or older.

My understanding of the TSP is that you can either keep the money in there or roll it over to an IRA.  If you retire from service at 55 or over (doesn't sound likely in your case), you can start withdrawals without penalty...Basically like a 401k.

I think it is a little extreme to not factor in your TSP/state pensions/Social Security into your retirement plan.  I think the more efficient thing would be to factor it in at 75-80% and have a "backup plan" of that you will need to go back to work or scale back if it comes through at a lower rate or not at all.  That kind of flexibility has to be built into everyone's plan (i.e., if a 3-4% withdrawl rate fails) so I see it as an additional variable, but not a crazy concern.

Awesome job plotting this all out at such a young age.  Good luck!

beltim

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #8 on: March 04, 2014, 11:32:49 AM »
Although you can roll over your TSP into an IRA, if you're happy with the investment choices there's little reason to do so.  You can take 72(t) distributions directly from your TSP starting whenever you retire.  And at 50K expenses per year I don't think a Roth pipeline is worth it. 

fallstoclimb

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #9 on: March 04, 2014, 11:45:10 AM »
Although you can roll over your TSP into an IRA, if you're happy with the investment choices there's little reason to do so.  You can take 72(t) distributions directly from your TSP starting whenever you retire.  And at 50K expenses per year I don't think a Roth pipeline is worth it.

Yes - this is what I know very little about now, but it looks like there is no reason the 72(t) distribution won't work for us.  I like the idea of having an investment that pays x amount in dividends each month and watch as that approaches our living expenses (the old YMOYL approach), but it seems that the increased value of a pretax dollar/ other tax benefits of TSP/401k is more important to focus on. 

beltim

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #10 on: March 04, 2014, 11:52:42 AM »
Sorry, I provided a detail before really answering your questions.

SQ1: With FERS you are correct.  I don't know specifically about the MD teacher retirement system, but this is typically the way it goes.

SQ2: Why not plan a worst case scenario?  The Federal government and Maryland are worlds better than the Detroit pension system, which under bankruptcy reduced pension benefits by 34% (http://www.pionline.com/article/20140303/PRINT/303039997/detroit-bankruptcy-plan-puts-buzzsaw-to-pension-benefits).  So how about using that number as a guaranteed minimum, with the other 33% of your pensions as a margin of safety?

SQ3: It's definitely worth contributing to your TSP and 403(b) to maximum your employer match.  After that, you need to do a somewhat more difficult calculation.  72(t) payments allow you to withdraw, at age 42 and current interest rates, about 3.2% of your portfolio per year.  If you can save enough in these accounts to live on 3.2%, then you're set.  If you don't have enough in your TSP and 403(b) at age 42 to live on 3.2% of those balances per year, you'll have to either:
1) withdraw more, taking a 10% penalty
2) take the money from a non tax-advantaged account.

At 126K income, you're solidly in the 25% Federal tax bracket.  At 50K expenses in retirement, assuming 50K income that would be the 15% tax bracket.  A 10% penalty means that you won't save any money on taxes, but it's also no worse than investing in a taxable account, since at the 15% tax bracket the long-term capital gains and qualified dividend tax rate is 0%.  So, basically, at current tax rates, it doesn't matter.  If you have a view on what tax rates will do at your income level over the next 20 years, that may be the deciding factor.  Alternatively, this is a case where the relative tax rates on where you current live versus where you live in retirement may be the deciding factor.

I hope this helps, and please ask any further questions.

beltim

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #11 on: March 04, 2014, 11:55:50 AM »
Actually, I used the wrong interest rate.  It's actually about 3.6% that you could withdraw from your TSP starting at age 42 and current interest rates, based on:

http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx
and
http://www.irs.gov/pub/irs-drop/rr-14-08.pdf

Catbert

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #12 on: March 04, 2014, 12:07:52 PM »
Retired federal employee here (old style CSRS rather than FERS though).  If you leave Federal service you can roll TSP to an IRA.  However, don't do it unless there is a compelling reason (like needing 72t option).  Fees on TSP are the lowest in the business - even lower than Vanguard.  Decent selection of plain vanilla funds.

17.5K limit on contributions is just your contribution not the agencies.  (Don't worry, payroll won't let you overfund.)  The match is made/computed pay check by pay check so don't go crazy and fund all 17.5K in the first 6 months of the year.  You'll miss part of your match.

If you leave early your retirement will be there when you turn 62 (I don't think there is an earlier option for separated employees) and is indexed for inflation once you start collecting.  Where inflation eats it up is the time gap between when you leave the Fed and when you collect your pension.  For example if you high-3 salary and years of service computation results in a $1,000 pension then it's still $1,000 when you go to collect it 20 years later.  But that $1,000 is worth a lot less.  Once you start collecting there is a COLA. 

fallstoclimb

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #13 on: March 04, 2014, 12:11:14 PM »
Retired federal employee here (old style CSRS rather than FERS though).  If you leave Federal service you can roll TSP to an IRA.  However, don't do it unless there is a compelling reason (like needing 72t option).  Fees on TSP are the lowest in the business - even lower than Vanguard.  Decent selection of plain vanilla funds.

Wait - so I thought from another commenter that 72t was an option with TSP.  Are you saying it is not? 

If you leave early your retirement will be there when you turn 62 (I don't think there is an earlier option for separated employees) and is indexed for inflation once you start collecting.  Where inflation eats it up is the time gap between when you leave the Fed and when you collect your pension.  For example if you high-3 salary and years of service computation results in a $1,000 pension then it's still $1,000 when you go to collect it 20 years later.  But that $1,000 is worth a lot less.  Once you start collecting there is a COLA.

I hadn't thought about the inflation issue between quitting time and collecting time, so thanks for bringing that to my attention.  Still not worth working in a cubicle until 62 but it's another good thing to plan around. 

Catbert

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #14 on: March 04, 2014, 12:27:22 PM »
Retired federal employee here (old style CSRS rather than FERS though).  If you leave Federal service you can roll TSP to an IRA.  However, don't do it unless there is a compelling reason (like needing 72t option).  Fees on TSP are the lowest in the business - even lower than Vanguard.  Decent selection of plain vanilla funds.

Wait - so I thought from another commenter that 72t was an option with TSP.  Are you saying it is not? 

I don't *think* you can do 72t directly from TSP account.  If/when that's a big issue poke around the tsp.gov website.  I doesn't really matter at this point though, because you definitely can roll to an IRA and then take 72t distributions from there.

wtjbatman

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #15 on: March 04, 2014, 11:06:39 PM »
I just want to throw it out there that the chance of losing both pensions, and having our social security system collapse, is probably as close to zero as you can reasonably expect considering our country, its economy, and its place in the world (pessimistic joking aside). If all of the above happens, you likely will have more to worry about than early retirement. Even the few cities in our country that are literally bankrupt (Detroit), simply negotiate reduced pensions/benefits for retirees and current employees. None of these pension systems is being completely scrapped AFAIK.

So I wouldn't automatically assume that you won't have that money at retirement (62+). Pretending you won't get 50-60k a year when, in fact, you very very likely will, is kind of silly.

That said, it wouldn't hurt to figure benefits may be reduced in the future. Do the math thinking you will actually only receive 75% of your expected benefits. Adjust that percentage as you feel comfortable.

fallstoclimb

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Re: Reader Case Study - Pensions, Social Security, and Early Retirement
« Reply #16 on: March 05, 2014, 07:09:46 AM »
I just want to throw it out there that the chance of losing both pensions, and having our social security system collapse, is probably as close to zero as you can reasonably expect considering our country, its economy, and its place in the world (pessimistic joking aside). If all of the above happens, you likely will have more to worry about than early retirement.

Ha!  Thanks, this is a good point and is reassuring. 

One other thing I've been thinking about is funding my TSP vs. my husband's accounts.  He can contribute to either a 403b or 457b (not sure what that is!) through work, but receives no match for either.  Currently he contributes a little to the 403b, but I'm wondering what his fees are - pretty sure whatever they are will be significantly higher than my TSP fees, since TSP has just about the lowest fees there are. 

I'm going to look around for the paperwork this morning to check, but if he does pay say a 2% fee (isn't that fairly standard?), I'm thinking about stopping our contributions to his fund and putting the extra money into my TSP.  Is there any reason NOT to do this that I'm not thinking of? 

My understanding is that in Maryland retirement accounts are considered joint property in the event of a divorce, so its not like this would be putting him on financially vulnerable terms, right?  I guess I just always assumed that since we are both working we should both contribute to our individual funds, but since he doesn't get a match, probably has higher fees, and we're not yet maxing out my TSP I wonder if it makes sense to put more of our eggs in that basket.