Secure Your Future

Variable or fixed: That is the question

May 7, 2009 4:39 PM

VARIABLE ANNUITY
The unit value is computed during the latter part of each month. Recent values are:
	VARIABLE A	VARIABLE B
February	39.175	19.492
March	35.364	19.483
April	37.951	19.477

A Tier I and II member’s retirement allowance is made up of three parts. One part is called the pension, which is a percentage of the member’s final average salary based on years of service. It can be increased by longer years of service or a higher final average salary.

The second part of the retirement allowance is referred to as the annuity. The annuity is calculated based on the amount of dollars or variable units in the member’s account and a factor based on the age of the member at retirement. The amount of the annuity can be increased by greater contributions or by retiring at a later age.

The third part of the retirement allowance is the pension for Increased Take- Home Pay. The pension for ITHP is calculated based on the number of dollars or variable unit in the member’s ITHP account and the same age factor as in calculating the annuity.

The amount of the pension is fixed and it does not change during retirement. However, the annuity and the pension for ITHP can be either fixed, which means it is the same each month; or variable, which means the amount could change each month either up or down based on the investment returns of the variable choice(s) the member’s accounts are in.

In calculating the age factor used to determine the value of the annuity and pension for ITHP an interest rate is assumed. If no interest was built into the annuity factors, the amount of annuity the member receives would be much lower. The interest rate used in calculating the fixed retirement factor is not the 8¼ percent earned in an in-service member’s Fixed Annuity Savings Fund. If a member elects the fixed annuity and pension for ITHP, the amount of each monthly check will remain the same.

No one can predict whether the fixed or variable choice is better. We do know that the pension portion of the retirement allowance is always fixed and only the annuity and pension for ITHP portions may be variable. Generally, the pension amount is greater than the sum of the other two. When a member goes for a final pension consultation, the member gets an estimated comparison of both the fixed and the variable. Once in retirement, the variable portion can go up or down depending on the investment returns of the choices elected. An election made at retirement may be changed in the future. These changes can be made quarterly and can be completed in three-, six-, nine- or 12-month periods.

The UFT cannot predict which would be a better choice for you. Your decision must be based on what you believe is best for you. In the recent past, the years 2001-2002 were better for the fixed, 2003-2006 were better for the variable, and 2007 through the first quarter of 2009 have been better for the fixed. Past results may not predict the future.

Lump-sum withdrawals

While the retirement allowance is designed to pay a lifetime stream of payments to a member or a member and a beneficiary, there is a provision of law that permits a partial lump-sum withdrawal of funds from a Tier I/II member’s Annuity Savings Fund or a Tier III/IV member’s Member Contribution Accumulation Fund. A member must make this decision before retirement. Some of the considerations a member should have in mind are:

• Do I need the money at this time?
• Can I invest the money better than the professionals at TRS can?
• How much will my retirement allowance be reduced if I remove the funds?
• What are the tax consequences of removing the funds?
• Am I taking an option or am I going to take the maximum retirement allowance?

Health care costs

Fidelity Investments, the mutual fund company, has calculated a retiree health care cost estimate annually since 2002. The estimate is for post-Medicare lifetime medical expenses for a 65-year-old couple retiring this year without employer-provided retiree health care. This year’s estimate is a staggering $240,000, 6.7 percent greater than last year. Over-the-counter medication, long-term care and most dental expenses are not included in the estimate.

The UFT will continue its efforts to see that its retirees continue to get comprehensive health insurance and Welfare Fund benefits.

“Secure your future” is compiled and written by Mel Aaronson, Sandra March and Mona Romain, teacher-members of the NYC Teachers’ Retirement Board. For further information on items discussed, call your UFT borough office or the TRS. BRONX: 1-718-379-6200; BROOKLYN: 1-718-852-4900; MANHATTAN: 1-212-598-6800; QUEENS: 1-718-275-4400; STATEN ISLAND: 1-718-605-1400; Teachers’ Retirement System: 1-888-8NYC-TRS (692-877), www.trs.nyc.ny.us.