What would you do in this retirement situation?
So my mother is poised to retire in the next year. She has been working as a teacher for 19 years in the state of Georgia, and she will be receiving a pension which increases for each year you are a state employee.
She also has 5 years that she worked as a teacher in the state of Nevada, for which she will not be receiving a pension. However, she has the option of "buying years" in Georgia. She could spend about $60,000 now to transfer those 5 years to the Georgia pension system. By having 24 years in the pension system rather than 19, her pension would be paying her about $500 more per month in her retirement.
She thinks that this it is a no-brainer that she should spend the money to earn the higher pension. It would take 9-10 years before she breaks even on the initial $60,000.
However, I tried to explain to her that it may be a bad idea because that money might be more valuable to her now. My parents are about to buy a house, and I told them that instead of paying Georgia that $60,000, they should use it to furnish their house and to pay down more of their mortgage to avoid being in debt later.
I tried to point out that although her pension would be paying out a higher amount in nominal terms, the real value of that $500 per month that she'd be earning will almost certainly decrease due to inflation. Keep in mind that it is at least 9 years of waiting before she breaks even on the $60,000 that she has now. 9 years is quite a long time for the government to continue running deficits which will destroy the value of the dollar.
She did not understand the point that I was trying to make, because all she sees is higher number=more money. I would like to present the case to you good people to see if you agree with me that investing into the pension system is a lost cause and will only result in her throwing away money. Please tell me what you would do in this situation, am I wrong, or if I am right how do I better explain the point that I am trying to get across?
Another mathematical point
Another mathematical point of view regarding the mortgage...
$350k home
$50k down
30 years
5.25%
Payment would be around $1,657 monthly (mortgage $ only, not including the other stuff, ins, taxes, etc).
You can reduce that payment by $500 if the $60k pension money was added to the down payment and instead of a $350k home buy a $320k home. Then the mortgage payment would be $1,157 monthly, effectively replacing the extra pension money but keeping it out of the government's grasp. Added benefit is that your family retains the principle regardless of lifespan, etc.
...
that's a great point, i just
that's a great point, i just quickly read over your last two posts but i will think about that more deeply and respond later.
For the mortgage stuff I
For the mortgage stuff I used http://www.bretwhissel.net/amortization/amortize.html to do the calculations. For my other post I used formulas in Excel. The amortization calculator is pretty easy to use and you can try different options to see what works best, etc.
...
I'm going to present a
I'm going to present a mathematical point of view...
To set the basis of comparison, we'll use 6% as the interest rate and use monthly compounding.
If your mother invests the money instead of spending it, then it will take just over 15 years for the $500 pension money being added to the investment each month before the pension investment exceeds her just keeping the $60k initially and investing it herself. At the end of 20 years there would be 232175 from the pension $ invested versus 198612 from the $60k invested directly. Investing yourself is better for the first 15 years, but pension is better for any years beyond the first 15.
If your mother invests the money and takes out $500 monthly, the money will last until the 183rd month, just over 15 years.
If she spends $300 monthly, she will always have the $60k if she invests directly ($59,300 left at the end of 20 years) and with the pension investing the $200 monthly ($500-$300) it will take 15 years to match the $60k investment and beyond that the pension is better. Even investment at 15 years and roughly $93k versus $60k at the end of 20 years (pension being the $93k). The pension is more beneficial after 15 years almost regardless of how much is spent from the money each month.
Other things to consider would be worst case scenario type and/or expected lifespan. What happens to the pension if your mom passes in 5 years? Does your dad get it? Or 1/2 of it?
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Adding to Gil's post below regarding putting pensioners
into a rubber dingy during a gale....
Here's a site tracking the looming pension disaster/Georgia Region
Try http://www.pensiontsunami.com/regions.php?type=state&id=16
That which can't be paid-won't be paid as they say
http://en.wikipedia.org/wiki/Real_versus_nominal_value_(economics)
Understanding Real versus Nominal Value
and then there's the back up PBGC which is already sea sick
http://features.csmonitor.com/politics/2009/05/20/trouble-fo...
5-20-2009
"Imagine an insurance company that is facing today a deficit of billions of dollars. But its board of directors has not had a meeting since February 2008. Meet the Pension Benefit Guaranty Corp., a federal agency that takes over underfunded pension funds from bankrupt companies and pays their retirees. Going into this year, the PBGC was running a deficit of $10.7 billion as the premiums set by Congress and paid by on-going companies were less than the payments to retirees. Then, on Wednesday it said for the first half of 2009, the deficit had ballooned out to $33.5 billion, the largest in PGBC history. Now Congress, who has oversight over the entity, is worried about what might happen if some really large corporation—think auto industry—dumped pension liabilities on the PBGC. Some outside experts can envision a future deficit as high as $100 billion. “This is going to blow up, it’s just a question of when,” says Douglas Elliott, a fellow at the Brookings Institution in Washington."
Thank you for that link,
Thank you for that link, that looks interesting, i am going to read that later.
I don't know how old your mother is
but I am almost 53 and my husband is 66. There is NO WAY we want a mortgage of any kind, if we can help it. All of the retirement advice out there will tell you to get out of debt before you do anything else. A Fixed income is a fixed income. Anyone can do the math and realize that the cost of living (inflation) has gone through the roof since we were kids. The best thing anyone can do to hedge against it is get out of debt.
And, you are correct, $500 is not going to be worth anything 10 years from now. Only God knows exactly what is going to happen. We know the worst that could happen and the best ain't much better. However, your mother doesn't sound like she thinks about the real math involved. Has she looked at how much she is going to pay for that house she is planning on buying in the long run? Why pay $600k for a house when you can pay $400k if you pay more up front? Why aren't your parents in a better position to own a home outright, if they are at retirement age? Georgia is not California; homes can be bought for a song out there.
These are dangerous times. I know a lot of people my age who are hurting because they are so debt laden. The only ones who are not hurting are those who chose to live more simply and get out of debt. My brother is a retired fireman in California. He is the president of the firemen's union so he still gets a little paycheck. He and his wife have excellent pensions. BUT, he still sees the writing on the wall and has scaled back on so many things. He used to think I was nuts because I was so focused on getting out of debt. Now he wants to do the same.
Good luck.
Healthnut4freedom
"Trust in the Lord with all thine heart; and lean not unto thine own understanding. In all thy ways acknowledge Him, and He shall direct thy paths." Proverbs 3:5,6
Healthnut4freedom
The lip of truth shall be established forever: but a lying tongue is but for a moment...Lying lips are abomination to the LORD: but they that deal truly are His delight. Prov 12:19,22
I'm not advocating taking on more debt.....
I'm certainly not taking on debt, and I've paid off all but a relatively small mortgage remnant.
However, with interest rates below 6% and real inflation at about 10%, borrowing makes perfect sense. You actually MAKE an effective 4%. Of course this is over-simplified, and doesn't factor in alternative investments etc....
I used this strategy when I was a young 'un during the Carter nonsense, er, administration.
This was before Voelker put the hammer down and raised interest rates (a bold and proper move on his part).
So, inflation was running at 15%, and my loan was at 7%. NO BRAINER!
I ended up with a cheap house, with a dirt cheap mortgage.
They will be buying the
They will be buying the house in Florida. In the neighborhoods that they have been looking at, the seller's asking prices have dropped about $50,000 in the last year. Whenever I say that the prices are probably going to continue to fall, that there is no reason to believe that the market has bottomed out, and that the true value of their house is probably going to decrease after they buy it, they just disregard all of that.
They don't discuss their money and their savings with me honestly, but I think they could pay at least 50% down on any house they are looking at buying if they wanted to.
I think that you are hitting an important point by asking about the real math. They don't seem to believe that the interest payments add any noticeable amount to the price. They have always bought cars by financing them for at least 4 years, even when they had enough money to buy it outright in the first place. They always say that there is no reason to throw your money away now when you can spend it slowly.
Undoubtedly, they have had to pay several thousands more because of these actions. I have tried to ask how much more they paid for cars because of the interest, and they will say "not very much, only a few dollars a month." It is not a factor that they have ever even considered and apparently it hasn't mattered in the past. The added money which you are throwing away to interest on a 30-year mortgage will certainly have much larger consequences than a 4-year car payment, but they are pretty set in the belief that the interest doesn't matter because it doesn't add up to being that much money.
Ouch.
but they are pretty set in the belief that the interest doesn't matter because it doesn't add up to being that much money.
A $300,000.00 mortgage at 5% fixed (lol) on a 30 year note ends up a total of $737,267.35. If you figure in a modest 1.25% property tax and do not include home insurance.
It certainly does add up to a ~little~ more money.
~Live life to its fullest, with an open heart, open arms and most important... an open mind~
Two Things
1) Peace of mind was important to me when I retired. Regardless how the numbers crunched out I wanted to be debt free.
2) With possible hyper-inflation on the way, shouldn't we keep our investments short term? Your mother is investing long term, just a thought, no answer.
Pensioners are about to be cast out
to sea on a rubber dinghy during a gale. I don't expect your parents to understand that and, if they can't understand it, they won't accept it. I have been visiting with my mother, who is 74 and retired, every week for many years and I've been calmly and patiently explaining the situation to her for the last 2 years. She still doesn't own any gold and still anxiously awaits her next quarterly pension account statement. The notion of our currency being destroyed and the consequences are just too difficult for most people to accept. I understand what you're going through, but all we can do is patiently hope they "get it" before it's too late. And right now it looks like "too late" will be after the 4th quarter of 2009. Good luck.
Well at least it will be a
Well at least it will be a good chance for the people of our generation to learn a lesson from their mistakes.
I agree wholeheartedly with
I agree wholeheartedly with what you are saying here Gil but I do wonder about something. If and when our currency is destroyed and our national bankruptcy becomes acknowledged, what happens to debt incurred under that dead and gone currency? Will debts be wiped out along with savings and investments? Will our society just devolve in to chaos and you will own whatever you are strong enough to defend?
Just wondering and speculating because, as you said, its pretty hard to understand what will happen.
Pat
BOHICA!!
Pat
BOHICA!!
Is
Is nesara looking like its not so crazy after all ???
"Obamney care," Nuff said.
with $60K
I would increase the down payment on the house.
It will likely help get a better interest rate on the rest of the mortgage
250K mortgage @ 7% = 1663.26/ month
190K mortgage @ 5.9% = 1126.96/ month
also, she still has the equity, instead of having given it to her state's government.
if i had sixty thousand
if i had sixty thousand dollars, i would buy rhodium.
i think you are on to
i think you are on to something, but i think that there is a 0% chance that i could convince them to buy rhodium.
i didn't think that many
i didn't think that many people were going to respond, you all bring up good points though.
I think their new house would be in the $350,000 or lower range. Their mind is pretty much made up that they should take out a 30 year and try to pay as low as possible for as long as possible. I don't know what their interest rates would be, but I'd assume they'd be putting less than $50,000 down up front.
To the question of what she else she would do with the 60,000 now. Because some people are saying to get a fixed rate and ride it out rather than paying down on the house right now, maybe it would be better not to put it into the house. However, if they invested it, they'd probably just put it into some conservative stock portfolio or government bonds, which could be just as big of a waste as the pension plan.
Buying gold or investing with euro pacific are basically ideas that they would laugh off, so that isn't even worth bringing up. They are rather heavily invested in the idea that everything will be fine and that the recession won't affect their retirement plans. She believes that as soon as they buy it, their house will appreciate in value over time.
oh yea they're both 60
Forget retirement and dependence on a pension!
Pensions are promises.
We are entering a time when promises will be mostly broken, particularly when they are from government. Doesn't she know not to rely on the promises of politicians which are consistently broken.
If she what to survive, then she should forget about retirement and get as much land as she can to garden and to provide firewood, at a minimum. Get to work with real work.
Retirement is a delusion soon to be proven so. What other animal gets to quit taking care of herself and is taken care of by strangers? Get real!
Paper promises are paper.
"The deepest sin against the human mind is to believe things without evidence." Thomas H. Huxley
This is a woman who voted
This is a woman who voted for Hillary Clinton solely because of the equation: woman + democrat = good. She was unable to elaborate a single one of Mrs. Clinton's policies, but did not care.
She told me that we get a lot of services from our federal government. I asked her to name one program that they run correctly, and she said that isn't a fair question. Then she said traffic lights and stop signs. When I reminded her that those aren't federal programs, she walked away.
She has been complaining for many years about how much worse her job has become due to no child left behind and other federal education programs. Essentially, she has had to fill out more forms every year and jump through more needless hoops, but the quality of the education actually decreases. When I presented to her the idea that she should support abolishing the department of education, her response was "but just because they make bad programs doesn't mean we should get rid of it."
One time she told me that she saw an editorial from Dr. Paul in the newspaper. I asked if he made a lot of intelligent comments and suggestions. She said "no, he just talked about getting rid of things because they cost too much and he kept saying we can't afford them." When I asked why we shouldn't get rid of programs that we can't afford, she said "because they help people."
I told her that the New Deal prolonged and worsened the depression by allocating resources to wasteful programs, and in the case of the agricultural efforts, actually destroyed valuable resources in order to artificially keep prices high. Her response was, "that's not what I was taught." When I asked what particular New Deal policies worked, she basically said that FDR inspired everybody and united everyone under a common goal.
I said that raising taxes on rich people would cause increased unemployment, and that job loss due to globalization over the past 20 years is the direct result of taxes and regulations which are already too strict. Her response was "Rich people can afford it. Taxes aren't enough to make somebody move their company to India because they have taxes in India too."
She described Bill Clinton's presidency as being a time of peace and prosperity.
She does not think that inflation is something to worry about, because although inflation has had horrible consequences in the past, you can't just assume that it will in the future.
i'm out of examples for now, but i think you can see that, in fact, after 60 years, she still trusts the government's official story. She would actually probably be keen to the idea of doing some gardening in retirement, I should suggest that to her.
oh man i just thought of
oh man i just thought of another one:
I told her that social security is bankrupt and that the government won't actually have the money to pay its beneficiaries in a couple of years because they wasted the surpluses every year in the past. She said, "they wouldn't let that happen."
Well, at least she has
Well, at least she has enlightened offspring!
Pat
BOHICA!!
Pat
BOHICA!!
retirement alternative
It is possible to purchase an annuity that would provide a lifetime income as well as a death benefit. A 60 year old woman living in Georgia with $60,000 to invest would receive a lifetime income of $349 per month with up to 10 years of payments to beneficaries. I would trust a private insurance company more than a state pension system
that's not a bad suggestion,
that's not a bad suggestion, i'll look into that
I think you are totally right
and the way to explain it is that the pension plan is willing to take the $60,000 and give your mother $500 a month. The plan is not doing it for your mother's benefit, they are looking out for themselves. So she should do what the plan is doing, they know the better deal is to have the $60,000 now.
First I doubt if she will
listen to you, she may act like she's listening but it sounds like her mind is made up. She has probably thought about this for years and this is her plan so I wouldn't bother her or drive yourself nuts. Wouldn't you feel bad if you talked her out of something she wanted to do and she for some reason was right. She would kick herself for listening to you. If you are correct you can always say I told you so. She is an adult and she probably wants to make the decision. You can show her options but to avoid conflict don't push her. How would you feel if people came at you telling you what to do?
I know you mean well but you could open a can of worms.
Prepare & Share the Message of Freedom through Positive-Peaceful-Activism.
i think that you are right,
i think that you are right, and it probably will be better off just to ignore it and let them decide for themselves.
But the very problem with their thinking is exactly that they likely have had the same plan in their head for 20 years. They don't think that the recession is really that serious and that it will not have any negative impact on the plan.
I certainly can't tell her what to do but I do feel like I should try to help them. I don't think they have the big picture in mind when investing their money and I would hate to see the meager sum of wealth that they've worked for all these years to save just disappear because it wasn't wisely invested.
It sounds like they
are so off base I don't see how you can even meet in the middle. If they plan on getting a big mortgage and they only have sixty grand. Son I have a feeling you will have to plan to take them in when they become homeless. I talked to my husband about this. He said they would never listen to someone younger than they are. Find someone about their age with the same point of view as you and get them to talk to that person. That will take the pressure off of you as well. Good luck, you are a good son to want to help them. They love you but they think of you as a little kid.
Prepare & Share the Message of Freedom through Positive-Peaceful-Activism.
You're correct that...
the real value of the 500$ per month extra will be worth less due to inflation as time goes on.
But you have to look at it from the perspective of what is she going to do with the 60,000 grand instead of that?
(500 / month) = (6000 / year) = (10% * 60,000)
She's getting a 10% annual return on her investment. If she's smart and invests wisely she might be able to beat that, but its probably not that bad of an idea to dump the cash into the pension fund.
Though I, being a younger guy who could survive loosing 60k, would probably dump it into stocks as I personally think that's a better bet as far as risk/reward/(inflation won't screw me) sort of way.