Reply to Please explain the federal annuity

Forum Index » Money and Finances

Reply to "Please explain the federal annuity"

Subject:

Emoticons





More smilies

Text Color: Font: Close Marks

[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]I’m totally confused about determining what age you “retire” at. Say you worked for the government from age 31-35 (5 years total) then left for the private sector.  To make the math easy, say your high 3 average was $100,000. If you file for benefits when you are 62, what benefits, if any, are you entitled to?[/quote]

5% of 100k (which have been eroded by 27 years of inflation so probably won't cover 5% of your living expences)[/quote]

NP - So then wouldn't it be better to pull out the contributions when you leave the gov't at 35 and then invest them so they have some growth? At 100k over 5 yrs contributing 4.4%, you would have put in 22k, which would be a sizeable chunk to put into an IRA. In contrast the payouts from the annuity would be $5000/yr or about ~$400/month. Is the value of the annuity the fact that that $400/month would be in perpetuity? (Just figuring out how to compare these things against each other.)[/quote]

Very good question and astute analysis.  Employees classified as FERS-FRAE and FERS-RAE should have their pension contributions refunded in this scenario and invest them into an IRA.   Meanwhile, regular FERS employees should [i][b]not[/b][/i] have their pension contributions refunded and defer the pension until 62 no matter how far that is away because they paid a pittance for it (0.8% of salary).[/quote]

It's an interesting question.  Let's make some reasonable assumptions based on the above hypo -- someone who worked for fed. govt. for 5 years from 31-35 under FERS-FRAE, with a high-3 of $100k, and then leaves federal government and works until age 62 before retiring.

Scenario #1 -- they leave the money in the FERS system.  At age 62, they can start collecting a lifetime annuity of $5k/year.  Adjusting for 27 years of inflation, that's worth about $2.5k per year in [i]today's dollars[/i].

Scenario #2 -- they take out their contributions and invest in an IRA.  The contributions would be $22k.  If they invest that for 27 years, adjusting the return for inflation, a reasonable estimate is they will have between $50k and $100k in the IRA in [i]today's dollars[/i]when they turn 62.  That is enough to buy a lifetime annuity of $3k-$6k (again, in today's dollars).

So, I agree scenario #2 (taking out the FERS-FRAE contributions and investing them is likely the better option.

Of course, it also carries some risk -- if the real (inflation adjusted) return on the IRA is less than about 2.5%, they would have been better off keeping the money in the pension.  A long term REAL return of 2.5% is way lower than the historical average, but it's definitely a significant possibility.  You can't just assume that scenario #2 will always come out ahead.  There is some risk.  (That said, personally, I'll gladly take a bet that the stock market will beat 2.5% over the course of a 27 year period.)[/quote]

Options

	Disable HTML in this message
	Disable BB Code in this message
	Disable smilies in this message

Review message

Search Recent Topics Hottest Topics