Pension compounded interest vs AAI (accelerated annual increase)
Hi and thank you in advance. I’m agonizing over a choice I have to make about my pension. The decision is whether or not to accept my monthly pension as is, which includes a 3% compounded interest cost of living raise every year for life OR receive my m I nthly pension without the compounded interest and take an AAI, which equals about $170,000. No taxes if moved into a 403B equivalent. The former is very safe and steady the latter gives me control, but I’ll have to invest it which has its risk. AND, do I take the money and run so to speak in the event the state has money problems. This is a TRS teacher pension. I just retired and am 60 years young.
I sure hope you can shed some light. Thank you!!
Terry Says
I don’t have a crystal ball to answer this one! Let’s start with the math. A 3% compounded inflation rate is pretty generous — and no risk, unless inflation is much greater over a long period.
If you invested in the S%) 500 stock index over a 10 year period, you could expect maybe 8% average annual return– but no guarantees. And if you don’t just stick with an index, you could either make more, or lose a lot more!!
As to the guarantees behind your pension, that will become an issue in the future. I don’t know how it will be resolved, since the state can’t “print” money– unlike the Federal government.
PLUS, this has to be considered in context of your plans to keep working, your other assets, your desired retirement lifestyle — and more. I suggest you click on this link to find a fee-only FIDUCIARY financial planner who is trained to evaluate these decisions in context of your entire financial future.
