Anonymous wrote:Don't forget that if you take the deferred annuity at 62, you'll be eligible to buy into FEHP at subsidized employee rates. Of course, the value of that is questionable but is not zero.

Wrong. You can only buy into the health plan if you are retirement eligible when you leave the government and defer retirement then. You leave before you are retirement eligible and you are SOL. It is one of the most valuable pieces of retirement. When I went to a retirement seminar 10 years ago they said value of having the federal health plan in retirement was about 300K.

Don't forget that if you take the deferred annuity at 62, you'll be eligible to buy into FEHP at subsidized employee rates. Of course, the value of that is questionable but is not zero.

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:If scenario #1 is a lifetime annuity and scenario #2 is based on an investment balance, wouldn’t it also depend on how long you line? (Not that anyone can predict that.)

Yeah it might not have ben clear but scenario #2 I had the protagonist purchase a lifetime annuity at age 62, using the IRA money

One source of risk is market returns. I agree 2.5 percent real is conservative, but I wouldn't be surprised if future returns were much lower than past returns. The last 50 years were atypical for many reasons.

But the other question is what the annuity will cost you at age 62, which will depend on changes in life expectancy and on prevailing interest rates.

Personally, I would take the annuity. $5K/year guaranteed is a nice fallback to have, especially as, if the new job were in the private sector, your post-government retirement savings will give you plenty of exposure to the market.

NP here - Spoken like a true government lifer. No one who gets #s would hold onto a 5k annuity and let 22k just sit with the government for 27 yrs. Take it and grow it. Sure returns may be lower going forward, but they've been at 9.9% (with dividend reinvestment) since 1965. Even accounting for returns being cut in 1/2 or being cut by 2/3, you STILL come out ahead. And BTW how nice of a fall back is 5k/yr -- with the purchasing power of about 2.5k/yr. That $200/month is not going to make huge differences for you esp 27 yrs from now when everything is more expensive.

http://www.nber.org/digest/jul97/w5901.html

"The United States has had by far the highest uninterrupted real rate of return at 4.73 percent a year. In sharp contrast, the median real appreciation rate for the other [38] countries is only 1.5 percent annually."

So the median return is actually well below 2.5 percent. So 2.5 percent real guaranteed looks pretty good to me.

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:If scenario #1 is a lifetime annuity and scenario #2 is based on an investment balance, wouldn’t it also depend on how long you line? (Not that anyone can predict that.)

Yeah it might not have ben clear but scenario #2 I had the protagonist purchase a lifetime annuity at age 62, using the IRA money

One source of risk is market returns. I agree 2.5 percent real is conservative, but I wouldn't be surprised if future returns were much lower than past returns. The last 50 years were atypical for many reasons.

But the other question is what the annuity will cost you at age 62, which will depend on changes in life expectancy and on prevailing interest rates.

Personally, I would take the annuity. $5K/year guaranteed is a nice fallback to have, especially as, if the new job were in the private sector, your post-government retirement savings will give you plenty of exposure to the market.

NP here - Spoken like a true government lifer. No one who gets #s would hold onto a 5k annuity and let 22k just sit with the government for 27 yrs. Take it and grow it. Sure returns may be lower going forward, but they've been at 9.9% (with dividend reinvestment) since 1965. Even accounting for returns being cut in 1/2 or being cut by 2/3, you STILL come out ahead. And BTW how nice of a fall back is 5k/yr -- with the purchasing power of about 2.5k/yr. That $200/month is not going to make huge differences for you esp 27 yrs from now when everything is more expensive.

I am an economist, so I like to think I understand numbers. I can give you many instances where real market returns have been below 2.5 percent over 27 years. Not from the US, but from other countries. The kind of countries that would have a senile lunatic as their President. Of course, it could never happen here...

Anonymous wrote:

Anonymous wrote:This is very helpful. Can one of the experts give me their thoughts on this scenario?

My DW is a GS 15 10, making $163,000 per year. She's been a federal employee (attorney) for 18.5 years.

She's thinking of switching to the private sector in a few years. She likes working and so plans to work until 65 or later.

Should she wait until after she has 20 years of federal employment to make the switch to the private sector, since she's only 1.5 years away?

And if she doesn't feel strongly about making the switch to the private sector, what about just staying in the current job, which she likes well enough? Thank you.

The salary tables do not indicate that GS 15-10 is paid 163k. Regardless of that, leaving before getting 20 years in would be monumentally stupid.

PP Here. OK, I just asked her and she said her annual salary is $164,200.

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:If scenario #1 is a lifetime annuity and scenario #2 is based on an investment balance, wouldn’t it also depend on how long you line? (Not that anyone can predict that.)

Yeah it might not have ben clear but scenario #2 I had the protagonist purchase a lifetime annuity at age 62, using the IRA money

One source of risk is market returns. I agree 2.5 percent real is conservative, but I wouldn't be surprised if future returns were much lower than past returns. The last 50 years were atypical for many reasons.

But the other question is what the annuity will cost you at age 62, which will depend on changes in life expectancy and on prevailing interest rates.

Personally, I would take the annuity. $5K/year guaranteed is a nice fallback to have, especially as, if the new job were in the private sector, your post-government retirement savings will give you plenty of exposure to the market.

NP here - Spoken like a true government lifer. No one who gets #s would hold onto a 5k annuity and let 22k just sit with the government for 27 yrs. Take it and grow it. Sure returns may be lower going forward, but they've been at 9.9% (with dividend reinvestment) since 1965. Even accounting for returns being cut in 1/2 or being cut by 2/3, you STILL come out ahead. And BTW how nice of a fall back is 5k/yr -- with the purchasing power of about 2.5k/yr. That $200/month is not going to make huge differences for you esp 27 yrs from now when everything is more expensive.

np - you got some anger issues? you do you bro

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:If scenario #1 is a lifetime annuity and scenario #2 is based on an investment balance, wouldn’t it also depend on how long you line? (Not that anyone can predict that.)

Yeah it might not have ben clear but scenario #2 I had the protagonist purchase a lifetime annuity at age 62, using the IRA money

One source of risk is market returns. I agree 2.5 percent real is conservative, but I wouldn't be surprised if future returns were much lower than past returns. The last 50 years were atypical for many reasons.

But the other question is what the annuity will cost you at age 62, which will depend on changes in life expectancy and on prevailing interest rates.

Personally, I would take the annuity. $5K/year guaranteed is a nice fallback to have, especially as, if the new job were in the private sector, your post-government retirement savings will give you plenty of exposure to the market.

NP here - Spoken like a true government lifer. No one who gets #s would hold onto a 5k annuity and let 22k just sit with the government for 27 yrs. Take it and grow it. Sure returns may be lower going forward, but they've been at 9.9% (with dividend reinvestment) since 1965. Even accounting for returns being cut in 1/2 or being cut by 2/3, you STILL come out ahead. And BTW how nice of a fall back is 5k/yr -- with the purchasing power of about 2.5k/yr. That $200/month is not going to make huge differences for you esp 27 yrs from now when everything is more expensive.

Anonymous wrote:

Anonymous wrote:If scenario #1 is a lifetime annuity and scenario #2 is based on an investment balance, wouldn’t it also depend on how long you line? (Not that anyone can predict that.)

Yeah it might not have ben clear but scenario #2 I had the protagonist purchase a lifetime annuity at age 62, using the IRA money

One source of risk is market returns. I agree 2.5 percent real is conservative, but I wouldn't be surprised if future returns were much lower than past returns. The last 50 years were atypical for many reasons.

But the other question is what the annuity will cost you at age 62, which will depend on changes in life expectancy and on prevailing interest rates.

Personally, I would take the annuity. $5K/year guaranteed is a nice fallback to have, especially as, if the new job were in the private sector, your post-government retirement savings will give you plenty of exposure to the market.

Anonymous wrote:If scenario #1 is a lifetime annuity and scenario #2 is based on an investment balance, wouldn’t it also depend on how long you line? (Not that anyone can predict that.)

Yeah it might not have ben clear but scenario #2 I had the protagonist purchase a lifetime annuity at age 62, using the IRA money

If scenario #1 is a lifetime annuity and scenario #2 is based on an investment balance, wouldn’t it also depend on how long you line? (Not that anyone can predict that.)

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote: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?

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

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.)

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 not 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).

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 today's dollars.

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 today's dollarswhen 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.)

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:This is very helpful. Can one of the experts give me their thoughts on this scenario?

My DW is a GS 15 10, making $163,000 per year. She's been a federal employee (attorney) for 18.5 years.

She's thinking of switching to the private sector in a few years. She likes working and so plans to work until 65 or later.

Should she wait until after she has 20 years of federal employment to make the switch to the private sector, since she's only 1.5 years away?

And if she doesn't feel strongly about making the switch to the private sector, what about just staying in the current job, which she likes well enough? Thank you.

The salary tables do not indicate that GS 15-10 is paid 163k. Regardless of that, leaving before getting 20 years in would be monumentally stupid.

Why? What happens with 20 year’s service if you are leaving well before retirement age anyway? Isn’t it just a straight calculation based on number of years?

After 20 years, your pension under FERS is calculated as 1.1% for each year of service rather than 1.0%

you only get the 1.1% if you wait to take the annuity until you are 62.

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:This is very helpful. Can one of the experts give me their thoughts on this scenario?

My DW is a GS 15 10, making $163,000 per year. She's been a federal employee (attorney) for 18.5 years.

She's thinking of switching to the private sector in a few years. She likes working and so plans to work until 65 or later.

Should she wait until after she has 20 years of federal employment to make the switch to the private sector, since she's only 1.5 years away?

And if she doesn't feel strongly about making the switch to the private sector, what about just staying in the current job, which she likes well enough? Thank you.

The salary tables do not indicate that GS 15-10 is paid 163k. Regardless of that, leaving before getting 20 years in would be monumentally stupid.

Why? What happens with 20 year’s service if you are leaving well before retirement age anyway? Isn’t it just a straight calculation based on number of years?

After 20 years, your pension under FERS is calculated as 1.1% for each year of service rather than 1.0%

Anonymous wrote:Does the high 3 include locality + base pay, or only base pay?

base+locality. Hence why folks from now around here try to get to DC towards the end of their career to boost their high-3 (to take advantage of the relatively higher locality pay)

If you can, take the retirement training class offered by your agency. Lots of information, I've been in the fed for 30+ years and never heard anyone come back from the class and say they didn't learn from it or that it wasn't worthwhile.