Question about how to enter California teachers' pension

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Teacher in CA
Posts: 4
Joined: Wed Aug 11, 2010 7:08 pm

Question about how to enter California teachers' pension

Post by Teacher in CA » Wed Aug 11, 2010 7:12 pm

Hello,

I have been trying to figure out how to enter my future pension in the Additions section. It is a California State Teachers pension, and it doesn’t have a standard COLA, but a 2% simple (non-compounded) incremental raise every year, based on the initial benefit amount. 2% of the first year amount is added every year. So I averaged the raises for 10-year segments, and input those amounts as no-cola pensions in 3 or 4 batches. The outcome was not good.

Adding to the complexity is that legislation requires CalStrs to send supplemental payments to bring the benefit up to 85% of the purchasing power of the initial benefit. So there is a built-in floor that won’t allow the benefit to get way out of line with regard to inflation, but it doesn’t really keep up.

So in effect, I SORT OF have a cola pension, and sort of not. Is there a way I can figure it out for a realistic outcome?

jimr
Posts: 514
Joined: Thu Feb 28, 2008 6:48 pm

Re: Question about how to enter California teachers' pension

Post by jimr » Wed Aug 11, 2010 7:18 pm

Hello,

I think you're on the right track in trying to break your pension into multiple parts. I made this spreadsheet to help me visualize the payout terms and it seems like that 85% minimum purchasing power guarantee really dominates in the later years.

With some help from the spreadsheet, you should be able to enter the pension in 2 just parts. First, enter a COLA'd pension using 85% of its starting payout value (continuing until the end of the plan). Then create an additional no-cola pension to make up the difference between the actual payout and the guaranteed payout that occurs during the first few years before the guarantee really kicks in.

With a 3% inflation rate (if I did the spreadsheet right), it looks like it takes about 15 years before the guarantee kicks in. If your starting benefit was $10,000 annually, to cover the difference, you'd enter an additional 14-year no-cola pension payout of $1006 a year. (Edit the starting payout and inflation rate in the spreadsheet to compute the actual amount to use for the second pension.)

Good Luck,

Jim

Teacher in CA
Posts: 4
Joined: Wed Aug 11, 2010 7:08 pm

Re: Question about how to enter California teachers' pension

Post by Teacher in CA » Wed Aug 11, 2010 7:27 pm

Jim,

I entered my pension with the changes you suggested, and the outcome is VERY favorable...100% with green light. Of course, there is no guarantee the legislature won’t yank the 85% floor for current and future retirees, especially with the current anti-pension climate.

I always figured if that happened, I could rely on a modest inheritance to boost my portfolio. But when I enter, say, $100,000 as a one-time savings at age 63, the whole plan is less successful, and the ending portfolio value is less. Why is this? And is this the best way to enter a one-time windfall I intend to invest?

Thanks again!

jimr
Posts: 514
Joined: Thu Feb 28, 2008 6:48 pm

Re: Question about how to enter California teachers' pension

Post by jimr » Wed Aug 11, 2010 7:36 pm

Hello,

I moved this new question to a new topic about lump sum investing so people can find the topic more easily. Otherwise the lump-sum question would get buried inside this pension topic and people might not find it.

Jim

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