Current Pension Topics

Time to Build Deferred Comp

By JOEL L. FRANK

Q.: I am 61 with 31 years of credited service with theNew York City Employees Retirement System (NYCERS). I earn $42,000 per year. If I retire at age 62, my annual retirement allowance will be about $27,000. This represents 64 percent of my salary. Social Security at 62 will be about $10,000 annually, which represents 24 percent of my salary. I will, therefore, replace 88 percent of my salary. I am afraid that within 3-5 years (due to inflation) I will not be able to live the way I would like to. I have no savings and I rent. What should I do?

P.H.

A.: Your retirement income stool should be supported by three legs: (1) City retirement allowance, (2) Social Security income and (3) your personal savings. If you do not want to continue to work for the city past age 62 in order to build up your third leg (personal savings), you have no other choice but to try to make it on 88 percent of your salary. When you see that inflation is eating up too much of your retirement income, you may very well be forced to seek employment or accept help from family and friends or move to an area of the country where the cost of living is less than in the city region. I would advise you to continue your city service until you attain, at a minimum, your full Social Security retirement age, which is 66. During these years, you must max out on your Deferred Compensation contributions. By staying on for another handful of years, you will be building larger lifetime incomes from NYCERS and Social Security, in addition to building that all-important third leg of your retirement income stool, your personal savings.

* * *

Q.: What is the advantage of taking out a "loan" prior to retirement? Shall I just leave my money in my pension account, or does one take out a loan after retirement? Thank you for your response.

D.C.

A.: The advantage of taking out a "loan" in conjunction with retirement is the receipt of a lump sum of cash. This sum may be used for any legitimate purpose: down-payment on a house, payoff of debts, opening a business, or investing in another pre-tax retirement account in a rollover transaction. The choice of what to do with the sum of money is strictly up to you. In return for the sum of money, you will be agreeing to accept a permanent reduction in your retirement allowance. The reduction is based on age and retirement system that you belong to. For example, if you are a 60-year-old member of NYCERS and take out a loan in conjunction with your retirement in the amount of $35,000, you will incur a permanent reduction in your retirement allowance of $3,421.25 (0.09775 x $35,000). If you choose to leave "my money there" ($35,000), you will receive a permanent increase in your retirement allowance of $3,421.25. The law does not allow for loans after retirement.

Of note: If you leave the $35,000 with NYCERS, you have voluntarily annuitized your $35,000. This legally means you have irrevocably transferred your title to your $35,000 to NYCERS. In return, NYCERS is legally required to pay you $3,421.25 annually for the rest of your life. All payments cease upon your death. There is no provision for a beneficiary. If, however, you desire to provide a benefit upon your death to another person, your annual payment will be reduced. For example, if you want your spouse, also age 60, to receive the same income as you, should you die first, then the $3,421.25 is reduced to $2,894.38 (0.846 X $3,421.25). The $2,894.38 is payable for as long as one of you is alive. All payments cease when the last of you dies.

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, by fax at (732) 536-7373, or via e-mail at rollover@optonline.net.