Tag Archives: pension series

The Pension Series (Part 14): Pension Risk Transfer

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The Prodigal Series Returns

Welcome back to the Pension Series everyone! I hope you didn’t interpret my several month hiatus (from the series) as a lack of interest in the intersection between pensions and Financial Independence (FI). If you did, then let me assure you that I remain committed to the topic. In fact, my Facebook Group members can attest that I typically post one or two articles a week to prompt discussion on the topic of pensions and FI. That said, I must admit after the rush to write and publish parts 11 through 13 of the Pension Series, it took me a while to find more content that met my standards. At this point in the series, I look for topics that I haven’t already addressed; that help my readers navigate the Golden Albatross decision; and/or enable planning for FI using a pension.

The Search Is Over

Luckily, I recently found a few more topics which deserve examination. Several of the latest topics stem from articles I posted in my Facebook Group. In fact, it wasn’t until I posted an article about FedEx transferring a large portion of its pension fund to Met Life in my Facebook Group, that I realized the topic of pension risk transfer deserved an entire article itself.

In the past few months I’ve noted several stories from both the U.S. and U.K. about companies transferring some or all of their pension funds to insurance companies. The FedEx story started a conversation in my Facebook Group about winners and losers in risk transfer scenarios where a pension fund transfers obligations to an insurance company. Between the company who owns the pension fund, the insurance company, and the plan participants; most of the respondents from my group seemed to think the plan participants (i.e. current and future pensioners) lost. I must admit that I agreed.

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The Death Binder!

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I am ready to meet my Maker. Whether my Maker is prepared for the great ordeal of meeting me is another matter. — Winston Churchill

Death Binder

Death and Binders

I did something different this week for work. I deployed to a foreign country for a military exercise. I’m writing this post from that country as a matter of fact. It’s the first time since my Afghanistan tour in 2013 that I’ve deployed abroad with all my gear. It’s also the first time since my financial awakening that I’ve deployed. Granted, I traveled multiple times on official orders since Afghanistan and was also stationed overseas for multiple years. However, except for our Permanent Change of Station (PCS) move from Europe to Hawaii, I consider my travel comparable to business trips. There’s something different about packing up all your combat gear that sharpens the mind. As a result, while not a tour to a combat zone, I used this military exercise as an excuse to build my “Death Binder”.

Just for the record, Mrs. Grumpus hates the term, Death Binder. In fact, she won’t let me call it the Death Binder in the house. Instead, we call it the “Financial Binder” or “Financial Folder”. However, I call it the Death Binder when she’s not around. I do that partly because of my love of heavy metal. There’s something about the term Death Binder that makes me want to throw the devil sign up in the air and bang my head while shouting “DEATH BINDER” in my loudest metal voice.

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The Golden Albatross Financial Philosophy

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The Request

Golden Albatross

Professor X enjoying his lunch break.

A few months ago a military member from a mid-career service school approached me through my blog with a request. He’s an instructor, so let’s call him Professor X. One of Professor X’s topics is personal finance as it relates to effective management of one’s career. He’d read my blog and believed several of my articles were appropriate material for his students. As a result, he asked me to speak via video to his class. After we exchanged a few emails on proposed topics, legal conflicts of interest, and technical hurdles; I agreed to appear in uniform as a military member, smart in the ways of finance, but without mention of my blog.

With this scheduled event now only a few days away, I thought it prudent to script my remarks. I also thought it would be worth turning those remarks into a blog post. Since Professor X’s request forced me to distill numerous blog posts into one coherent speech about my financial philosophy, I figured some of my readers might find it useful. As a result, this post doesn’t cover any new territory. It simply synthesizes a lot of what I’ve written previously in one place. Who knows? If I ever write a book, this article might form a good basis for the first chapter.

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The Golden Albatross vs. The Insurance Industry (Part 2): Annuity Valuation Case Study

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Insurance Annuity Valuation Question

Annuity Valuation

What me worry?

A reader, whom I’ll call Lady J, recently asked me if I could value her future insurance annuity scenarios vs. her current cash-out value. She wanted an annuity valuation done in the same manner as the Pension Lump Sum Case Study I wrote for the Pension Series. The question intrigued me. My initial reaction was, yes, I could. Since a Defined Benefit Pension (DBP) is just another phrase for an annuity; I didn’t think it would prove too hard if she could provide the appropriate details. I told Lady J as much, and she promptly supplied me with details I needed.

Surprisingly, the annuity valuation proved both easier and harder than I initially thought. Easier in the sense that based on the numbers provided by Lady J, my Master Pension Value Calculator spit out an answer to her question in no time. Harder in the sense that once I reviewed the terms of her annuity policy, and the facts surrounding her initial investment, it forced me to ponder numerous “what if’s”. Thus, consider this article in two parts. First, I walk through the facts surrounding Lady J’s situation and the process of annuity valuation. Second, I address a few different issues, both good and bad, I noticed with this annuity. Continue reading →

The Pension Series (Part 12): More Pension Lump Sum Analysis (Updated)

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Nerd Alert!

This article is a follow-up on the lump sum case study I conducted for the ChooseFI listener, Tess, in Part 11 of the Pension Series. If you missed it, that case study also aired as Episode 58R on the ChooseFI Podcast. I mentally debated if I should make this Part 11a considering the links between the two articles.  However, given this article’s length, and the alternate pension lump sum analysis method it outlines, I decided it warrants its own part in the series.

I’ll warn you now, this article is another deep dive into the world of pension lump sum offers. It won’t be my last either. Pension lump sum analysis is a rabbit hole. As I pointed out in my previous article, there’s no one correct method. A lot depends on what the pensioner values and the questions they are trying to answer. Proper analysis is also based on the strings attached to either the lump sum or the annuities.

pension lump sum analysis

Hello? Can anyone up there hear me? I got stuck down here analyzing my pension lump sum!

Fortunately, as a result of my appearance on ChooseFI 58R, several people reached out to discuss methods of calculating pension value and conducting lump sum analysis. We are currently in the process of compiling a spreadsheet with many of those methods baked in. It’s not quite ready though. So, for now, you have to put up with another wordy pension lump sum analysis from yours truly. Forewarned is forearmed. Continue reading →

The Pension Series (Part 5): Survivorship (Updated)

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Substantive Correction

This is an updated version to my article originally posted 04 October 2017. This version includes a substantive correction. The previous version of the article failed to accurately describe all the calculations required when comparing a pension with an inflation-linked Cost of Living Adjustment (COLA) to life insurance. I noticed my omission today and reworked the affected paragraphs. I also took the opportunity to clean up some grammar. You will see substantive changes noted in red text. I believe the changes make the comparisons between life insurance and survivorship more competitive.

The incomplete calculations I described in the previous version of my article appeared weighted towards survivorship. That was not my intent. Since the intent of the article changed, and I believe in full disclosure with my readers; I felt this mistake warranted a revision with new publish date.

This is a first for me in the blogging sphere, although in the military we routinely  strive for this level of transparency when an official report, memorandum, or instruction contains a major mistake. The primary purpose for issuing a correction is to prevent anyone from acting on erroneous information. It’s also important that the historical record reflect accurate information. I’ve decided to hold myself to the same standard on this blog.

As a result, I advise anyone who read and used the methods described in the previous version of this article to read this update and adjust your calculations accordingly. While I apologize for the inconvenience, and always strive for 100% accuracy in my articles; I would remind everyone I’m not a professional. Nor am I considering your case specifically. No matter how comfortable you are with your retirement numbers and plan; it’s always best to run your them by a professional like a fee-only Certified Financial Planner who adheres to the fiduciary standard.  Again my apologies.

Survivorship

KJH, we honor the fallen in the Grumpus Maximus family.

Death Sucks

In late Summer 2003, a member of my unit and one of its seasoned mentors was killed in the early days of the Insurgency in Iraq. We were both part of a tight-knit group of young officers that worked and played hard. While I would not have called him a close friend, many in our group did, and I often sought advice and guidance from him. His death was a blow to everyone in our group and the unit as a whole. Nothing was the same after it. Most of us were not prepared mentally and we all took it personally. Each of us dealt with his death in our own way, and I am sad to say it splintered the group in ways I never could’ve foreseen. Continue reading →

The Gap Number Method in … ACTION!

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Click Bait

Like what I did there with the title? I created what’s called click bait. Most of the time my titles are boring, other times they are obscure. This time though I created an “action” title to capture readers’ interest in the Gap Number Method, because it gained some recent publicity. That’s about as creative as I get, adding the word “action” in all caps to a title.

Gap Number Method

How’s that for action? Mrs. Grumpus hiking in Kauai

Yes, I know. You’re wondering how, with only two readers who aren’t related to me, did I gain any publicity? Well, it turns out I have a face built for radio — or podcasting as the case may be.  Not so sure about the voice though.

In any case, on a recent (and so far my only) podcast interview on ChooseFI, the hosts asked me to explain my concept of the Gap Number. For those of you who need a refresher on the Gap Number, you can find the post where I coined the term here. In general, the Gap Number is the difference between your fixed income in retirement and your expenses. Expressed mathematically it looks like: Continue reading →

The Pension Series (Part 9): Pensions and U.S. Federal Taxes

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***This is an updated article. See Post Script at the bottom***

Today’s topic comes from one of my Facebook group followers.  I recently solicited my Golden Albatross group on subjects to research and write about, and Mr. Yankee responded with the following question:

Has there been discussion of how to shelter your pension benefits from federal tax? When I retire I expect to receive about $60,000 a year from my pension I’d hate to give a large portion of it back to the government.

I told Mr. Yankee I would look into it since I’d yet to conduct an in-depth analysis of pensions and taxes. It’s a bit premature considering the fact that U.S. tax law is undergoing its first major overhaul since the 1980s. Currently, the House and the Senate are working on reconciling their two different bills into one in order to approve and send to the President for signature. However, my research only shows one proposal in the House bill with the potential to impact this conversation in any meaningful way, and I believe I can address it appropriately. If something radical happens in the reconciliation process, I will simply update this article when the dust settles. Continue reading →

The Pension Series (Part 8): Deciding to Take a Pension Lump Sum

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We Interrupt Your Previously Scheduled Program …

Great news! You don’t have to read me waffling on about analyzing your pension lump sum offer this week at GrumpusMaximus.com. I published Part 8 of the Pension Series as a guest post for Darrow Kirkpatrick’s blog, CanIRetireYet.com, so you can read my waffling there instead.  Check it out at the following link.

Darrow’s site is a long time favorite of mine.  It is the one sight, more than any other, that inspired me to make the calculations and determine if early retirement was possible for myself and my family. Avid readers of my blog may already be familiar with his work as I reference it quit a bit. Luckily a mutual friend put Darrow and I in touch, and I now get to consider him a mentor and a friend.  Many thanks to Darrow for providing me the opportunity to write for his site, and gain exposure for the Golden Albatross message and GrumpusMaximus.com.  Darrow does not allow comments on his website, but feel free to post them to this article and let me know what you think.

Enjoy!

— GM

 

The Pension Series (Part 7): How to Create Your Own COLA

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St. George’s Thesis

Build Your Own Cola

“Cry — God for Harry! England and Saint George!”

How was your week? Productive I hope.  I spent most of my spare time drafting my pièce de résistance for the Pension Series as a guest post for one of my favorite blogs and bloggers. I’m excited, so stay tuned for the announcement as to when and where you can find it. Unfortunately, it means I’m short an article because I (stupidly) don’t keep any posts in the bank.

However, I am about to let you in on a little blogging secret.  Facebook provides an endless amount of material to write about. As proof of this point, about 10 days ago George, one of my awesome Golden Albatross Facebook Group members, asked the following sizzler of a question related to pensions and inflation-adjusted Cost of Living Allowance (COLA):

Basically, if my pension is say $50k [a year] with no COLA provided by my employer, what do I have to have saved in an IRA to be able to grow my pension with cost of living for the next 30 years? (50k+4%)+4%)+4%)etc. For 30 years…)
 Continue reading →