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Friday, October 13, 2017

Rattle That Lock

I’m getting lots of emails from members eligible to retire, but undecided.  The primary issue is related to whether the change to the assumed rate and the mortality tables will adversely affect members in the near term.  The short answer is that any change to the assumed rate has an impact on not-yet-retired members who plan on retiring via money match, Full Formula with beneficiaries, and Formula plus Annuity.  For inactive members eligible to retire, the answer to me is a no brainer.  Rattle the lock, break the chains and get out by December 1, 2017.  If you wait any longer you’ll lose money, plain and simple.  There is no way to recover the loss because you aren’t earning an offsetting PERS-employer based salary.  If you are working for a non-PERS employer, you have no constraints on your ability to work, so there is no incentive to stay in PERS past December 1, 2017 so long as you are eligible to retire from the Tier you were in at the time you worked for your PERS employer.  For all others, the calculus is much more complicated.  If you are still working for a PERS-covered employer, you have to consider factors such as lost earned income, health care benefits, and future growth in the IAP account, not to mention growth in your Tier 1 or Tier 2 account due to earnings or the assumed rate.  The 2018-19 Actuarial Equivalency Factors (which combine mortality factors, salary growth, inflation, and the assumed interest rate) won’t be known until the end of October or the early part of November (so I’m told).  Thus, the PERS Online Calculator will give inflated estimates of retirements past December 1.  Matt Larrabee, PERS’ Principal Actuary from Milliman, told me after the July meeting that the “setback” for members would be approximately 4 months.  To understand this, you need to appreciate the concept of a “crossover” point.  Basically, if you estimate your benefits for a December 1, 2017 retirement and then estimate your benefits for a 2018 retirement (using the new AEFs, not yet available), it will take you until April 1, 2018 to recover benefits lost from the change to the assumed interest rate.  Thus, on or after April 1, 2018 (approximately, depending on age and other factors), your benefit will the same as it was on December 1 using a different assumed rate and a different set of mortality factors.  If it were this simple, the advice would be obvious.  If you weren’t planning to retire until April 1, 2018 or later, you’d be no worse off than you would be retiring on December 1.  However, this ignores some things that really need to be considered.  1)  Are you ready to retire (a not-insignificant factor for many people)?  2) Can you afford to retire (this has a bunch of subquestions, including the healthcare question, made infinitely more complicated in the past two days by actions at the Federal level)?  3) if you continued to work, what risk does the 2018 short legislative session pose (at this point, minimal, but things can change although I doubt it)? 4) Is the reduction in overall benefit from retiring later, rather than earlier (Dec 1), offset by the additional income you’d make by continuing to work, getting healthcare benefits, and contributing further to your retirement plans?

All these questions should be filtering through your decision matrix about now.  I will have my hands on the new AEF tables as soon as they are made public.  While they are voluminous and difficult to assess globally, I will post them here so that people will be able to see their precise impact.  I can’t advise anyone what to do, and don’t do it.  I make an exception for inactives.  Just keep in mind that nothing good will come your way by waiting past December 1.  While your account may grow, the growth rate will be lower, your life will be (presumably) shorter, and the end result will probably leave you no better off than you’d be just taking what you have on December 1, 2017 and getting yourself out of the cross hairs.  As Pink Floyd said, ‘rattle that lock; break those chains’.  For the rest, the decision is complicated, and you need to think your answer through carefully; it isn’t an obvious one.