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Hi

I asked this question at the end of the retirement Seminar and it was suggested that I ask it here. This is the question with the first response:


I am vested in a local gov't retirement plan. I have not worked for the city for about 13 years. When I turned 50 - three years ago - I was eligable to start receiving payments. I have not yet elected to do so. As in other plans, the later I start receiving payments the higher they will be. Once I start the amt is essentially fixed, except for a cola. Current distribution will of course be taxed at my current marginal rate, which should be lower after I really retire.

I thought I understood how to do this analysis.... using the discounted value of the payments... but now I'm even more confused. Can you offer some guidance or some calculator that can help me.

Thanks

Leo


Author: L2J Replied
Subject: Re: Q: When to start retirement plan distributio

Hi Leo, you may not get much response on this board any longer, with the seminar closed. But take your question to the "retired fools" or "retirement investing" boards. My only thoughts regarding taking a distribution prior to age 59 1/2, you could possibly be subject to a 10% penalty on top of the tax. If you have the option for a lump sum (for purposes of rollover into an IRA - self directed investing), make sure the check is not directly made out to you. Must be made out to the IRA custodian to avoid taxes and/or penalty. Good luck.

HaGD, L2J


eliezer36
Subject: Q: When to start retirement plan distributions?


The retirement system does a matching of dollars, adds that to my contributions, and uses that as the base for actuarially determining the monthly payments. If I elected a lump sum distribution I would only get my contributions out. As far as I know there is not a penalty for receiving funds before age 59.5.

Still looking for a way to determine how to proceed.

Thanks

Leo
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Greetings, Leo, and welcome. You asked:

I am vested in a local gov't retirement plan. I have not worked for the city for about 13 years. When I turned 50 - three years ago - I was eligable to start receiving payments. I have not yet elected to do so. As in other plans, the later I start receiving payments the higher they will be. Once I start the amt is essentially fixed, except for a cola.

There is no easy or pat answer to this question. You are correct that essentially you could do a present value analysis of the two income streams based on your life expectancy. In your case, the annuity provides a COLA increase, so just assume a rate of return equal to the inflation rate you choose. I don't know where you could find an online calculator to solve for the present value of an annuity due, but any financial calculator will work.

N = your life expectancy at the time the annuity starts
Pymt = annuity amount
Return = assumed inflation rate
Future Value = 0

Solve for the present value of an annuity due.

One set of computations will be for the annuity starting today, and the other for the one starting at normal retirement age. When you find the present value of the latter at normal retirement age, do a second computation where the solution becomes the future value, N becomes number of years from today to normal retirement, and return is your assumed inflation rate. Solve for present value. That answer becomes the one you compare to the present value of taking the annuity starting today.

Those gyrations are pretty much the easy part. The hard part is deciding on how long you will live, what assumed COLA you should use for inflation, and what you will do with the annuity if you receive it now. If it gets saved instead of spent, then the calculation has to take that into account as well by seeing how much those savings will increase any payment you would get starting at normal retirement age. Or do you intend to retire early anyway? :-) The list goes on and on.


Regards..Pixy
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Hello Pixy,

My sincere thanks for your response. I think I sort of understand the path you perscribed. Although somewhat fuzy, I'll start the process, take good notes and holler when I get stuck.

Do you know if the present value calculators in Excel would be a good tool to use?
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