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I’M IN EXCELLENT health. I avoid overindulging on sugar and carbohydrates. I exercise every day. I hope to live well into my 90s, if not longer.
What if I don’t live nearly that long? From a financial perspective, it makes little difference if I pass away before I tap my retirement funds. The value of most of my accounts wouldn’t be affected by my premature demise. My husband would simply inherit my 403(b) and Roth IRA accounts.
My state pension, however, is a different beast. I became vested in the pension when I was in my 20s. It’s a lucrative benefit. The funds are guaranteed to earn a minimum 7% interest each year. Some retired employees end up receiving as much as 130% of their final salaries from their pension payouts.
My pension consists of two separate accounts. The employee account makes up about 40% of the overall value, while the employer account holds the balance of the funds.
My plan is to hold off taking any payout from my pension until I’m 70 years old, which is 14 years’ away. At that point, I’d be eligible to receive approximately $1,400 a month for the rest of my life. In lieu of a monthly payout, I could opt to take a lump sum benefit worth approximately $165,000. Those payouts are based on a complicated formula that includes the value of both the employee and employer accounts.
Here’s where things get tricky. What if I were to die before drawing any pension benefit? My husband would receive a survivor benefit. But as beneficiary, he’d be entitled to receive only those funds held in my employee account.
So how could I make the best of a situation that isn’t fun to contemplate? If I’m diagnosed with a terminal illness in the next 14 years, I’ll likely take a lump sum payment from my annuity. Doing so would guarantee that the full value of my pension would be passed along to my husband, instead of just the 40% employee portion.
Just a warning about pension inflation adjustments/COLA’s. I retired with a full pension from the State of New Jersey in 2010. Generally, COLA adjustments started 2 years after retirement. In 2011, then Governor Christie signed legislation suspending the COLA adjustments until the pension funds reached a certain level of funding. I believe approx. 80 % of being fully funded. After 12 years my gross pension amount remains the same. I’m fortunate to report that none of my other expenses have gone up in that time (sarcasm). So for those lucky enough to have pension COLA’s be aware that they can be suspended/taken away. I am certainly grateful for the pension I earned but wouldn’t mind having the COLA also.
That sounds like a really sweet deal – my pension pays about 40% of my final year’s salary. Do I gather that the monthly pay out is currently growing at 7%/year? Or is that only while you are working? And you will have a 2% inflation adjustment but no other growth when you start drawing on it?
It’s a ridiculously generous benefit. It would have been even better if I hadn’t lost half of it to my ex-husband.
The entire account balance (employee+employer) is growing at 7.2% a year. It used to be a minimum of 8%, but that was lowered a few years ago. Prior to the 8% minimum, the account grew at the actual rate of return. In the late 90’s, there was a year when we earned 28% interest. Needless to say, they’ve had to significantly revise the ‘rules’ of the pension since the state was going broke trying to fund it.
I became vested when I was 28 years old and it’s been earning at least 7% since then. Once I begin drawing it down, I will only be eligible to get the 2% inflation adjustment, no additional growth.
Even a two percent inflation adjustment is a rare beast, as I believe the majority of pensions (including mine) are fixed. If the Federal Reserve gets back to it’s target for inflation you will be golden