Author Topic: Super big decision. $132,000 now or alternatively larger raises later?  (Read 1099 times)

crazy jane

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I am retiring in June from teaching. I will be receiving a pension and have the opportunity to take a $132,000 one time payment if I give up 3 percent compounded raises later. I will still get raises, just a fixed amount that will start when I turn 67. The compounding raises would start at age 61.

I mathed out the cumulative difference if I invested the one time payment at a conservative 5 percent. It breaks even when I turn 80. I plan to put the money in my Vanguard 403b if I take it. VTSAX

Some other information. I'm financially independent without the money or the pension and do not have any debt. Thank you MMM.

I'm leaning towards taking the payment and investing it.

Am I missing something?

Thoughts appreciated.

swashbucklinstache

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #1 on: February 20, 2021, 05:26:13 PM »
What's the funding like on the pension? Any risk from Illinois' budget/tax situation?

Sibley

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #2 on: February 20, 2021, 05:51:12 PM »
Illinois is broke. At some point, the strain will become too much and they'll be forced, collectively, to address the root problems. Pensions are a good chunk of it. Compounding is something that would be comparatively easy to slash later. And I suggest you don't hold your breath about the raises either.

Congrats on your soon to be retirement :)

Wolfpack Mustachian

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #3 on: February 20, 2021, 06:10:52 PM »
For it taking that long to break even, I'd always take the money up front as I don't remotely trust the government to actually do what they say they will in the long run (or a private company with a pension either for that matter).

crazy jane

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #4 on: February 20, 2021, 06:11:52 PM »
Thank you for the replies. I'm well aware of Illinois's potential issues. It's part of the reason I took matters into my own hands and saved on my own. Bird in the hand seems like the way to go.

Finances_With_Purpose

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #5 on: February 21, 2021, 02:17:38 AM »
Get out while you can in a state like Illinois.  You'll end up taking a large haircut otherwise--that risk outweighs all other considerations. 

red_pill

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #6 on: February 21, 2021, 06:14:46 PM »
Your kids can inherit the lump sum, but not the 3% raises.   There's something to be said about cash money in your pocket.

Dicey

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #7 on: February 21, 2021, 06:18:39 PM »
Congratulations!

Take the money now and do what you've been doing with it. 5% is a very conservative estimate.

crazy jane

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #8 on: February 21, 2021, 07:39:25 PM »
Your kids can inherit the lump sum, but not the 3% raises.   There's something to be said about cash money in your pocket.

Excellent point.  Thanks.

FIPurpose

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #9 on: February 21, 2021, 07:49:45 PM »
I'll take the other side of this and say that at least for the Oregon teacher pension issues. The state courts told the legislature to stuff it. They promised x dollars to teachers in their pensions and now the state is going to pay out.

If this is money that you are going to depend on having a small chunk in an annuity can be a really great stabilizer in retirement.

There's absolutely no shame in taking the option that results in less money for a reduced risk. Simply put, the terms of your pension are as is. The Illinois pension issues will have to be solved somewhere else in their budget. (Likely they'll put the squeeze on current teachers or maybe start using some of that sweet sweet toll money you guys have everywhere).

crazy jane

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #10 on: February 22, 2021, 06:42:02 AM »
I'll take the other side of this and say that at least for the Oregon teacher pension issues. The state courts told the legislature to stuff it. They promised x dollars to teachers in their pensions and now the state is going to pay out.

If this is money that you are going to depend on having a small chunk in an annuity can be a really great stabilizer in retirement.

There's absolutely no shame in taking the option that results in less money for a reduced risk. Simply put, the terms of your pension are as is. The Illinois pension issues will have to be solved somewhere else in their budget. (Likely they'll put the squeeze on current teachers or maybe start using some of that sweet sweet toll money you guys have everywhere).

It does say "shall not be diminished or impaired" in the Illinois constitution. Changes have already been made shifting the cost to new teachers.

I appreciate your input, this is why I have been struggling with the decision.

FLBiker

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #11 on: February 22, 2021, 08:49:07 AM »
Personally, as someone who has no future pension coming my way (other than SS, potentially) I'd probably keep the pension.  My thinking is -- if I'm already FI anyways, I like the idea of diversifying my asset types, particularly if it's a (relatively) small % of my total NW.

Sibley

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #12 on: February 22, 2021, 09:13:30 AM »
I'll take the other side of this and say that at least for the Oregon teacher pension issues. The state courts told the legislature to stuff it. They promised x dollars to teachers in their pensions and now the state is going to pay out.

If this is money that you are going to depend on having a small chunk in an annuity can be a really great stabilizer in retirement.

There's absolutely no shame in taking the option that results in less money for a reduced risk. Simply put, the terms of your pension are as is. The Illinois pension issues will have to be solved somewhere else in their budget. (Likely they'll put the squeeze on current teachers or maybe start using some of that sweet sweet toll money you guys have everywhere).

I'm not aware of Oregon's budget status. Are they in bad shape?

Just because the courts decided something doesn't mean they can't decide it differently in the future. An argument could be made that by refusing to adjust pensions and are thus favoring the elderly, they are discriminating against younger individuals. The worse shape the state is in the more compelling that argument could become.

YttriumNitrate

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #13 on: February 22, 2021, 09:33:56 AM »
I'm not aware of Oregon's budget status. Are they in bad shape?

One big difference between Oregon is that in the last 5 years Oregon's population has gone up by about 6% while Illinois' has gone down by 1.7%. Extrapolating that out over the next 20-30 years paints very different pictures for the states' abilities to pay pensions.
« Last Edit: February 22, 2021, 10:20:29 AM by YttriumNitrate »

trollwithamustache

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #14 on: February 22, 2021, 09:59:53 AM »
I'm a take the money and run kinda guy, but gotta ask... do you have a spouse? and what would keeping the $$ in the pension do to survivor benefits?  Does this move the dial enough to change what you do?

crazy jane

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #15 on: February 22, 2021, 10:28:29 AM »
I'm a take the money and run kinda guy, but gotta ask... do you have a spouse? and what would keeping the $$ in the pension do to survivor benefits?  Does this move the dial enough to change what you do?
Yes I have a spouse. He is already retired as he is a bit older than I am. He gets a small pension from being a teacher's aide and gets social security. I will not get social security as Illinois is a WEP offset state. I will get half of his pension if he goes first and he will get half of mine if I go first.

FIPurpose

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #16 on: February 22, 2021, 10:35:15 AM »
I'll take the other side of this and say that at least for the Oregon teacher pension issues. The state courts told the legislature to stuff it. They promised x dollars to teachers in their pensions and now the state is going to pay out.

If this is money that you are going to depend on having a small chunk in an annuity can be a really great stabilizer in retirement.

There's absolutely no shame in taking the option that results in less money for a reduced risk. Simply put, the terms of your pension are as is. The Illinois pension issues will have to be solved somewhere else in their budget. (Likely they'll put the squeeze on current teachers or maybe start using some of that sweet sweet toll money you guys have everywhere).

I'm not aware of Oregon's budget status. Are they in bad shape?

Just because the courts decided something doesn't mean they can't decide it differently in the future. An argument could be made that by refusing to adjust pensions and are thus favoring the elderly, they are discriminating against younger individuals. The worse shape the state is in the more compelling that argument could become.

There is simply just no way that a state can not pay out its pensions. They are legally protected entities. And no, a court will not just randomly "decide differently" in the future. The best the state can do is change the contracts on new teachers to the state. So there is no "discriminating" everyone is getting the same new hire contract.

A state would likely have to default on its bonds long before it can just decide to change the terms of its pensions. The state is nowhere close to anything like that. If anyone can show many proof of any state changing the terms of its public pensions in the past 50 years, that would be news to me.

Sanitary Engineer

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #17 on: February 22, 2021, 10:44:21 AM »
I would also be interested in where States have been able to change the terms of public pensions.  My State is currently entertaining eliminating COLA for some portion of actives and changing retirement eligibility rules and employee contributions.  The Treasurer seems to think she has the flexibility to make these adjustments with the Legislature's approval.

OP,  I believe my public pension program is not ethically managed and I would like to think I would take the payout if offered, but even with reduced benefits the pension is going to be more beneficial to me than a cash payout. On the other hand, I am not yet vested and am really hoping for a benefit change that gets me out of the pension.  I much prefer monetary compensation over a promise of future payment.
« Last Edit: February 22, 2021, 10:48:12 AM by Sanitary Engineer »

crazy jane

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #18 on: February 22, 2021, 11:09:53 AM »
I would also be interested in where States have been able to change the terms of public pensions.  My State is currently entertaining eliminating COLA for some portion of actives and changing retirement eligibility rules and employee contributions.  The Treasurer seems to think she has the flexibility to make these adjustments with the Legislature's approval.

OP,  I believe my public pension program is not ethically managed and I would like to think I would take the payout if offered, but even with reduced benefits the pension is going to be more beneficial to me than a cash payout. On the other hand, I am not yet vested and am really hoping for a benefit change that gets me out of the pension.  I much prefer monetary compensation over a promise of future payment.

I also would have preferred the monetary compensation. For decades roughly 10 percent was taken out of my paycheck to fund the pension system and retired teacher's health insurance. Invested, this would have gotten us to financial independence even sooner. However, I am grateful I will be eligible to buy the health insurance. It is the most reasonable option.

ericrugiero

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Re: Super big decision. $132,000 now or alternatively larger raises later?
« Reply #19 on: February 22, 2021, 11:57:56 AM »
If it's close I would tend to take the cash now so you have control of it and it can be passed on if something happens to you.