Bonnie
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| CalPERS 5 year buyback |
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Hi: I would appreciate an opinion on buying 5 years of retirment for 63,000 and it would give me an additional 650 per month. I am 63 .5. I plan to retire within a year. If this is not a good purchase what should I purchase that will be a better investment.
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Wed Mar 02, 2005 5:02 am |
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David Briggs
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| The $63,000 will be gone, right? |
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If I understand the CalPERS buyback program correctly, you would turn over $63,000 to them and enjoy an increase in your monthly cash retirement benefit. When you die, the benefit stops and there are no more monthly checks. So, how good an investment this is depends on how long you live. It is life expectancy annuity calculation like an insurance company would do.
If you live to age 80, my math shows that you will have earned an average 6.1% annual yield. Past age 80, your yield will prove to have been even better.
Are you in relatively good health? If the answer is yes, then that is a vote for the buyback. Is it important to you to leave maximum money to your heirs? If the answer is no, then that too is a vote for the buyback.
The best alternative investment I can think of which would be suitable for you would only generate $315 per month, but would allow you to leave the $63,000 to your heirs.
~~David
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Wed Mar 02, 2005 2:09 pm |
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BlankenshipFP
Money Talk Advisor
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Location: Illinois
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Bonnie, you said that the increase was $650 per month. Is that indexed for inflation?
David, I'm not sure (I could just be really slow) where your 6.1% figure comes from. Could you elaborate?
Thanks.
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Wed Mar 02, 2005 2:43 pm |
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David Briggs
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Cash: $ 57.86
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| Fuzzy math |
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It was a fast and dirty computation, Jim (so I probably should have left off the decimal place!) Did not have the benefit of a financial calculator which could back out an interest rate from a flow of payments where the monthly $, principal $, and # months are known, and where the principal gets used up in the process. I did factor-in pro rata return of principal into my best guess, though, since nothing at all needs to be earned to on it to give it back to her at $300+/mo. The rest of the monthly payment consists of investment income.
How close did I come?
~~David
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Wed Mar 02, 2005 10:07 pm |
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BlankenshipFP
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Okay - I'm following you.
I think that makes sense. I took a different angle on it before and I came up with a little more (around 9%). I don't mean to belabor the math - I was just curious because at first glance I thought it should be near a 10% return. My method was to treat this like a mortgage, paid off in 192 installments (16 years), at a payment of $650 with a principal of $63,000. Adjusting the number of years upward increases the rate, and downwards decreases it. Perhaps I've oversimplified...
Either way it seems to make sense to go with the buyback if Bonnie is in reasonably good health, and even moreso if she's married and there is a survivorship clause.
Hope this helps -
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Wed Mar 02, 2005 10:43 pm |
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David Briggs
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Yes, I see what you mean! Plugging in those given values into the online mortgage calculators crunches out to 9.77 percent! That is a pretty great return. Wonder how they do it??
~~David
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Wed Mar 02, 2005 11:40 pm |
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BlankenshipFP
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Cash: $ 79.56
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Location: Illinois
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I'm sure it works to their advantage in some cases, and not in others. If someone takes this plunge and gets hit by a bus in two months, they (the pension system) come out smelling like a rose.
Actuaries work all of this out, and they're a pretty careful lot, in general.
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Thu Mar 03, 2005 12:03 am |
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David Briggs
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Of course! That's how they do it! Most people don't live to age 80! Thanks Jim, the fog has lifted.
~~David
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Thu Mar 03, 2005 12:52 am |
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super dude
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Keep in mind the fastest growing age group is 85+ year old! Keep yourself in good shape, and with modern medicine you should be around for a long time. I hope you find many years of good health. 
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Thu Mar 03, 2005 7:54 am |
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BlankenshipFP
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David, Do I detect sarcasm? 
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Thu Mar 03, 2005 4:56 pm |
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David Briggs
Senior Member
Cash: $ 57.86
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No, I was sincerely mystified how they could be managing a portfolio which guaranteed a 9.77 percent return. But you helped switch the light bulb on for me. The answer is actuarial!
~~David
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Thu Mar 03, 2005 8:00 pm |
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BlankenshipFP
Money Talk Advisor
Cash: $ 79.56
Posts: 390
Joined: 05 Oct 2004
Location: Illinois
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Groovy - I thought you might have been pulling my leg. Sometimes I'm a little slow on the uptake! 
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Thu Mar 03, 2005 8:30 pm |
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