By: Bill O'Connell

Yes, I think this anomaly is in the actual calculation rules for retirement, and that the "handy calculator program" has a true reflection of this rule.

First, a "backgrounder" on annuity factors: The monthly retirement amount, if you take that option, is an amount based on three factors and then modified by a fourth factor. The three factors are:

1. How many years of service paying into the retirement fund
2. Your average monthly pay averaged over the highest three-year continuous period
3. An annuity factor, which is related to how many years and months someone in your age class is expected to live after starting to collect the retirement benefit.
4. There is then an adjustment for a fourth factor, the selected spouse continuation payment. This adjustment is also based on the annuity principle, i.e., the adjusted monthly amount is based on both your and your spouse's ages at retirement time.

The annuity factors used above are calculated for the ages at retirement, to the year and month. (There is also a built-in bonus for retiring at age 60. This is a side point, but I will note it anyway. The annuity factor is ramped up over a 24-month period from age 58 to 60, so that at age 60 you get the annuity factor appropriate for a person aged 65 years 0 months. Then the annuity-factor curve is flat, so the bonus is gradually disappearing, and at age-65 retirement you get the age-65 annuity factor, which by that time is actuarially right. After age 65 the annuity-factor curve still stays flat, so you would have a loss rather than a bonus if you wait until substantially beyond 65 before retiring.)

The lump-sum is a reverse calculation of an annuity, i.e., what is the lump sum you would have to pay to buy an annuity which gives you the defined monthly payment benefit for the remining duration of your life. [The way the UC_Bencom describes it is: The lump sum cashout is a present value projection of the member's lifetime retirement income. In other words, it is the amount of retirement income (in today's dollars) that the member could be expected to receive over his or her lifetime.] For this calculation, the annuity factor is just evaluated to the nearest year (no finer gradations for months of age). It is this once-a-year adjustment of the factor which gives you an anomaly once a year.

Some other "gotchas" I have heard about:

If you take the lump sum, the university gives you the payment 30 days AFTER your retirement date. So you have lost one month of interest (or stock gains) on your investible lump sum, and the University has had the benefit of the interest for one more month.

If you take the monthly payment, there is an annual increase in your monthly payment, to compensate for the cost of living. The increase percentage is some fraction of the increase percentage in the Consumer Price Index. The first annual increase is on the SECOND JULY 1 you are in retirement. Thus if you retire on a June 1, you wait 13 months for your first annual cost-of-living adjustment. If you retire on an August 1, you wait 23 months for your first annual cost-of-living adjustment.

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Back to SPSE Newsletter #3, September 1999