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Thursday, September 17, 2015

Sticky Fingers

Those of you contemplating retiring between now and December 1, 2015, and those who have to stay past December 1, 2015 may find yourselves asking the same question.  At some point you will need to  know how the new Actuarial Equivalency Factors(AEF) come into play with your retirement.  The new AEF tables will be available for your consideration in draft form by no later than November 1, 2015, according to my sources at PERS.  These new tables will take into account the reduction in the Assumed Interest Rate from 7.75% to 7.5%, as well as the newer, more modern, mortality tables based on actual experience of PERS members and retirees, as well as the more broadly applied tables from the IRS.  We know that the “setback” for the 25 basis point reduction in the Assumed Interest rate is approximately 3 months.  If you are able to retire on 12/1/15, but choose to continue working, you will need to work until at least March 1, 2016 before your benefit would be the same as December 1, 2015.  However, we have not yet learned how the new mortality factors will play into the AEFs.  Most information suggests that people are living longer than the last time the tables were iterated.  I can’t tell you how much longer, but every month longer a person is EXPECTED to live, the longer PERS is EXPECTED to pay.  This means that at retirement, your benefit is fixed (except for COLA) and it has to last as long as you are expected to live (it has to as long as you live, at the least, but the expectations are based on mortality tables).  Lengthening of mortality means that your fixed benefit has to be spread out over a longer period of time, thus lowering your monthly benefit.  This year is especially tricky for retirees on the cusp of retirement.  Those in the situation of being able to retire based on age, service time, or a combination of both, will have to run the numbers to see whether going on December 1, 2015 or waiting makes the most economic sense.  If you are in that situation, you are going to want to pay close attention to the new AEFs when they are available on November 1, 2015.  You have a short month in which to decide whether to retire, or continue, and how much longer you’ll have to work before you cross over the benefit setback.  I have been advising about 6 months, which seems about right, but PLEASE don’t take my word for it.  Pay attention and get your hands on the new tables and do the figuring yourself.

Once the tables are out, I will be putting some example calculations here, and on the PERS newsgroup to show how the numbers are run.  There will also be others available at the newsgroup to help newcomers and oldsters who aren’t retired to figure out the “cost” of the changes.  I can assure you that this change will be non-trivial, and if you don’t pay close attention, you may allow sticky fingers to grab a piece of your retirement that you didn’t think carefully about.

3 comments:

Bill Hamann said...

Thanks for the informative heads up, I fall into the about to retire group and am tentatively targeting Feb 1, 2016 as my retirement date (though Dec 1 is not out of the question). From what I can discern, as a full formula retiree, my benefit should not be affected (other than a possible small change as I am choosing option 3a for my slightly older than me spouse). Just wondering if you have any new information or insight on the upcoming adjustments affect on full formula folks since you did not differentiate this in your blog. Signed, Confused Sort Of

Bill Hamann said...

Thanks for the informative heads up, I fall into the about to retire group and am tentatively targeting Feb 1, 2016 as my retirement date (though Dec 1 is not out of the question). From what I can discern, as a full formula retiree, my benefit should not be affected (other than a possible small change as I am choosing option 3a for my slightly older than me spouse). Just wondering if you have any new information or insight on the upcoming adjustments affect on full formula folks since you did not differentiate this in your blog. Signed, Confused Sort Of

mrfearless47 said...

Bill. The Option 1 Full Formula people aren't affected by the changes to the assumed rate, but the mortality tables might have an effect on how the benefit is paid out. If you are choosing a beneficiary option (3a, as you indicate), the the full force of the mortality tables will have an impact because they are based both on joint mortality and on the age difference between you and your beneficiary. I would say that you're probably OK going Feb 1, although you might want to consider March 1 to fully offset one of the impacts - assumed rate or mortality. It isn't possible to guess out any further since the tables aren't yet available to me or to PERS. Once I get my hands on them, I will post some examples based on some real people who've offered to share their data with me.

It is hard to determine the impact on full formula people because most people don't understand how PERS actually computes the full formula benefit. To the individual, it appears that it is based on years of service x 1.67% x Final Average Salary. That is entirely correct to get you to your option 1 benefit, but for actuarial purposes PERS has to generate a "fake" account balance that yields the benefit you've earned. Obviously, if your account balance were higher, you'd retire under Money Match, but since you've fallen into Full Formula territory, the account balance needed to generate that benefit has to be "created" for the system to be able to make actuarial calculations for the purpose of employer rate setting. Once you add a beneficiary to the mix, the impact of newer AEFs come into play. It is no longer simple at that point.

Hope this is clearer than before. I'd certainly hold out until November 1 or longer before making a final commitment since you don't want to have your job gone before you've actually retired.