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Sunday, June 06, 2010

Watching and Waiting

The old email bag is overflowing with questions from (mostly) Tier 1 members eligible for retirement. The theme of most of the questions is "should I retire before the Legislature convenes near the end of January 2011".

This is not an uncommon question for me and so I've given this a lot of thought. I generally don't offer advice on when people should retire as there are so many individual variables involved. That said I can share my own thought process on this matter. Before doing that I always raise a crucial question that bears on what you do. My question is this: in an ideal world when would you retire? If the answer lies beyond 2011, then you should stop reading right now. Go on with your life. Retiring earlier makes no sense and the financial risk is greater in retirement than in not retiring. The rest of this essay is for people already eligible for retirement and planning to retire during 2011.

Retiring in 2011 carries with it a lot of uncertainty. This uncertainty arises principally from the fact that this is a legislative year. There is tremendous pressure on the legislature to "fix" PERS again. This pressure is coming from the media (Oregonian, Statesman-Journal, Register-Guard, Corvallis Gazette, Bend Bulletin), from private citizens on both sides of the political spectrum (E.g. Phil Keisling, Gary Coe), from public employers frothing at the prospect of another rate increase, from hundreds of concerned citizens throughout the state who write nasty anti-PERS letters to the editors of the above-mentioned newspapers, and both legislators(e.g Dennis Richardson) and legislative candidates alike. The political environment right now is made more complex by a very unfavorable economic climate and a prolonged recession, making additional PERS reform an extremely large target. I think it is fair to speculate that PERS will be reformed yet again in 2011.

I've discussed the likelihood of reform in certain ways in previous posts, especially my public response to Gary Coe (previous post) and to Phil Keisling this past fall. While the unions will fight like hell against any changes to current benefits, they are more or less helpless to defend against changes that apply prospectively, I.e. to benefits accrued after the effective change date. Retroactive changes are risky and the Oregon Supreme Court has taken a pretty firm stand against such changes so far. But the stakes are even higher in 2011 than they were in 2003. The economic climate is much worse this time around and the legislature may be willing to take more risks than in 2003. The unions are less powerful now than they've been in the past, and many see labor unions as the cause of our economic woes rather than the haven from them. With budgets being cut right and left, with more layoffs, furloughs, and wage freezes or cuts looming, the unions coffers are not as full as before. They will have to spend their money wisely this fall and in their lobbying efforts in the legislature. All of this points to a rocky session ahead for PERS members and prospective retirees.

So the bottom line for members thinking about retiring in 2011 after the legislature convenes is this: what might you be risking by waiting the legislature out versus getting out ahead a bit and retiring sooner? It is A very tough decision, but one where an earlier decision might end up being more beneficial than gambling. It is certainly something you ought to put in your analytical engine and reflect upon carefully.



25 comments:

mrfearless47 said...

To put this another way, if you were planning to retire in 2011 anyway, what reductions in benefits would you see if you went at the end of 2010 instead. No assurances exist that the Legislative changes will necessarily change anything for anyone this close to retirement, but can you afford to gamble. What do you gain by waiting and winning versus what do you lose by waiting and losing versus how both decisions compare by bailing a few months earlier than planned. If you are retiring under Money Match, as most Tier 1 members still are, your risk is the contribution of earnings to your Tier 1 regular account and the prospect of staggering losses in your variable account, if you have one. If you have any doubts about what direction this is going, wait until the November election results are in. Then you will know the composition of the Legislature and will have some idea of the platforms the winners ran on. If there is a wholesale shift in the balance of power in Salem, I expect seismic changes in PERS, or at least seismic attempts to change PERS. I don't consider the party not currently in power to be very friendly to PERS and its members and, more especially, to the unions and their supporters.

So, this may become the year during which politics becomes an essential part of your daily reading.

Just my 2 cents here.

Joe said...

After almost 30 years with the state I will be eligible to retire this September. I was planning to work until mid 2011 but the risks may outweigh any benefit and waiting may have real consequences. What those may be are not yet known but this state has shown that it has no love of state workers.

I have talked to so many people that have the concept of PERS as a great retirement. We get 100% plus of ending salary and fully paid health care. This is just not the case. I will be getting 52% of my ending salary once I pay for my health care. So it is not lap of luxury that most Oregonians think it is.

But by retiring I hope to close the door on those that can't seem to honorer an agreement that was made years ago.

Rich said...

Mrfearless47,

I really appreciate your insights on all this. A couple of questions though. If changes are going to be made, wouldn't we be given notice so we could bail before they take effect? Also, is there a specific time of year when changes typically take place? ie. 1st of July or 1st of the year? Or can they be implemented at anytime immediately?

thanks: Rich

mrfearless47 said...

Rich:

There is no obligation for warning by the Legislature if they choose to make changes. You'd have to watch them very closely to see what was under consideration. After those of us who retired between April 2000 and April 2004 got screwed more or less after we had already retired, I wouldn't counsel gambling if you're seriously considering retiring.

As far as effective date, the legislature can declare the act an emergency and make it take effect the day the Governor signs it, or it can have an effective date like July 1. The Tier 3 took effect on August 29, 2003, so there is no guarantee that you'd have enough time to bail.

I'm just counseling from the experience of those of us who were trapped in 2003 well after we retired and are still waiting for the judicial gavel to fall finally on several cases that could cost us considerable money.

My post is a general warning of the sort: better safe than sorry.

TruthSeeker said...

Can we still count on Kitzaber for support as PERS retirees and actives? I do hope he has not become a DINO (Democrat In Name Only) like Kulongoski.

mrfearless47 said...

Whether Kitzhaber is a DINO or not is one of my central concerns. We have a choice between a devil I know and don't like, and a devil I don't know and don't trust. Is there really an option here?

Rich said...

Thanks for the reply mrfearless:

I have been debating on getting out at the end of 2011 or 2010. I've never been much of a gambler, so the end of 2010 it is. I'll have 33 years as a PERS member by then.

Rich

Papi De La Playa said...

I lived in Brazil 1987-90... State workers pensions mostly evaporated when they had a severe economic crisis.. most people think that could never happen to PERS... but a legislature and a judge can do "anything" really... my point being... to be super super safe, take the lump sum and stash it where you can see it.. what are your thoughts?

mrfearless47 said...

Papi. I understand your line of thinking, but the statistics on people taking the PERS double lump sum are disheartening - PERS does these surveys all the time. The vast majority of them have lesser lifestyles, lower standards of living, and more than 2/3 have had to return to the workforce in some capacity to make "ends meet". I just don't see how this ends up being a better strategy, given its own inherent risks.

If you take a huge sum of money (let's say $500,000) out at one time you have to do something with it, roll it into an IRA or what. If you're under 55, you can't touch it all, and if you're over 55 but under 59.5, you have another set of regulations to deal with. Finally, even if you have strong investing skills, which few really have, you're going to pay a money manager to do something with those funds. Where are you going to get a NET return of 8% or even close without taking some pretty big risks. Do you want to be responsible for managing your own portfolio in your 80's, nursing it along so that it lasts as long as you do? There are ways to annuitize a large lump sum payout, but I defy you to find one that will net you even 7% risk-free including the cost of the insurance you have to purchase to get a large annuity.

I'm quite comfortable with the notion that even in bankruptcy, PERS will be at the front of the line. In fact, local property becomes a lien to pay for PERS in a municipal bankruptcy.

So, while it might be the obvious thing to do - to bail completely and fully from PERS - I'm not sure it is for very many people, and the risks attached are staggering in this economy.

Papi De La Playa said...

I agree that safe returns of more than 4% or so are highly unlikely. And the PERS managed annuity is a nice return if you live past the age they predict you will die... But imagine this scenario which happened in Brazil in 1989... annual inflation goes double digit, like say 15%, 30% or as in Brazil, 200% yes!.. And the COLA is repealed by Republicans... now you have after 2 years a very small monthly check,... adjusted for inflation. Of course having the cash in hand is not a solution, it has to be invested... and during inflationary times, real estate or gold or some foreign curency would probably hold value... in Brazil in those days people would buy actual US dollars and stash them until they needed to sell them... their value held steady with inflation every month... it was a very wild and instructive experience for me to say the least. Plus I think that most people who cash out totally are not very level headed, by definition, and any study of their success would reflect that... But just imagine the stress of having to watch a monthly check stay the same size while everything you buy doubles in a year? It would make the current issues pale by comparison...

mrfearless47 said...

Which investment firm do you work for? Even if the repubs were to repeal the cola, the way the statute is written it would only apply to members who retired after the effective change. And it wouldn't stand up to a court challenge I think your ideas and theories are just nutty, but if you are actually eligible for a Pers pension perhaps you can lump sum it and head for Peru. I heard there were one or two retirees down there. Me? I'm not losing sleep over this. I've already made my decision and you will be hard pressed to convince me that the average or above average Pers retiree would be better of taking a double lump sum. I think that is an errand for fools and paid financial advisers with a product to sell.

MollyNCharlie said...

Thanks for such a lively and wide ranging discussion, Marc. It can in no way change my life after 6.5 years on full PERS retirement, but it's been interesting enough that I've been skimming, even reading!

peg

Jackie said...

Mrfearless47,
What do you mean when you say "....the financial risk is greater in retirement than in not retiring."
Jackie

mrfearless47 said...

Jackie: the context in which I said that was referring to the situation where someone, who *was NOT* planning on retiring during 2011, decides to accelerate retirement to late 2010. What I meant was that the financial risk in not having enough assets to live on during retirement is greater if you rush a retirement decision than if you just continued to work. There is a relatively small group of people this post refers to -- a group of people who were *already planning to retire DURING 2011*. This group has already done the essential thinking an analysis and has determined that 2011 is the time to retire. For these people, moving the retirement date earlier by a few months isn't going to make a significant difference in standard of living and they've already thought carefully about retiring. I just don't want anyone to conclude that I'm encouraging anyone eligible to retire to just bail now. It makes no sense to do so. There are only a few thousand people who have already decided to go in 2011. Those are the people I've targeted in this post. Is that clearer?

Jackie said...

Yes, thank you.

I was planning to retire sometime in 2012 but I am so afraid of what the legislature will do. Will they eliminate money match? That would be very bad for me. I just don't know. As you suggest, will wait and see the election results.

Thanks for your help,
Jackie

Bill R said...

I came across this post for a lawsuit filed by the State of Alaska against MERCER, the PERS actuary!! Not a good sign! http://www.pionline.com/apps/pbcs.dll/article?AID=/20100614/DAILYREG/100619959/1034/PIDailyUpdate01&issuedate=20100614

Randy said...

I keep hearing that next week (July 1, 2010) will see new actuary tables. But I can't find confirmation of that. Is it true? If so, I'm starting to get tired of watching my 7/1/11 retirement date monthly estimates going down. If I retire before the 7/1/10 or before the next ax falls, am I held harmless from actuary changes?

mrfearless47 said...

New actuarial tables went into effect on January 1, 2010. There is no way to avoid their impact.

mrfearless47 said...

New actuarial tables went into effect on January 1, 2010. There is no way to avoid their impact.

estabon said...

In order to avoid the potential risk associated with a 2011 retirement, how late could I push my retirement date? I was thinking Jan 1, 2011 (last day worked Dec 31, 2010). I'm actually hoping to hang around until July 1, 2011 (or later if conditions allow) but am keeping the eject lever very close at hand! Thanks for all the info.

mrfearless47 said...

To be perfectly safe (as safe as is possible in these uncertain times) I've been suggesting december31,2010 for a jan 1 2011 retirement. The legislature convenes in mid January and the new governor takes office in early January. While you would probably be safe if you retired march 1, July 1 seems to be skating on very thin ice. If you have and doubt about the wisdom look at the history of the last Pers reform in 2003. All the major reforms had been passed by early may and most took effect on July 1 unless they became effective on the day of the governors signature. In my opinion, July 1 is too risky if major changes arise.

kneedferspeed said...

Mr. Fearless: thanks for all the great info in this time of uncertainty.
I currently have enough money to retire, but love my job and would like to work another 2 years or so. I sounds like your advice would be to go ahead and work, but I am concerned with a repeat of the 2003 rip off where my money match benefits were considerably reduced. I can't afford to take another hit like that and even though I love my job am not interested in effectively working for nothing in 2011-12. At age 54 and 35 yrs. in PERS as a FF I am seriously considering giving in and retiring basically against my will to protect what retirement I can now count on. HELP!

kneedferspeed said...

With 35 yrs in PERS at age 54 I have enough time and money to retire, but still enjoy working. I am however not interested in working for nothing for the next 2 years as I was planning to retire in dec 2012. I am not interested in taking another hit like 2003. any advice would be appreciated.

mrfearless47 said...

kneedforspeed: A couple of comments. How do you know that you will retire under FF instead of Money Match or Formula + Annuity? If you are certain that you will retire under Full Formula (and I mean double, dog certain, positive, no chance for mistake), it is unlikely that the changes made would be that significant for you. Second, recall that my post says NOTHING about people who were planning to go after December 31, 2011. If you weren't planning to retire in 2011, why would you accelerate your retirement so extensively. Also, if you are certain of Full Formula, have you looked at the actuarial tables for the size of the hit you take at your age for retiring. I know you have 35 years in and are eligible to retire without extra actuarial penalty, but there is still a significant penalty for retiring at your age. Only the money match eludes some of that hit because it is based on account balance.

Personally, I would rethink your position. I also would verify that you would retire under Full Formula. Usually it is so close that Tier 1 members, by and large, still retire under the Match.

Finally, let me reiterate that your accrued benefits are safe, the only risk is prospective and they fall into several categories including the assumed rate.

Robert said...

Well, PERS is on a furlough day so hopefully you can help me? Today I received my "official" benefit estimate in preparation for a pre-retirement meeting in two weeks. My monthly "full formula" benefit, for a January 2011 retirement dropped $500 from what it was a year ago! If I go online and change the retirement date to December of 2010, I gain the $500 back.

What's changing effective 1-1-11?!