You really need to understand your pension's COLA provisions. People tend to vastly overestimate the benefit of pension COLAs. You didn't say which pension, sounds like it's NYSLRS, so the following applies:
The commonly-used measure for inflation is known as the Consumer Price Index for All Urban Consumers (CPI-U). A second measure known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is a variation of CPI-U that is weighted differently with more emphasis on food, transportation, and clothing. A third measure, called the Consumer Price Index for Americans 62 years of age and older (CPI-E) measures the spending patterns of the elderly (age 62+). Since 1983, the CPI-U has averaged 2.82%, the CPI-W has averaged 2.77%, and the CPI-E has averaged 2.98%.
Social Security COLAs will therefore tend to average a little bit lower than the actual inflation that you experience. Your pension basically won't keep up with inflation unless inflation is extremely low (looks like there is a 1% minimum).
Back of the envelope (ie, unreliably rough, DIY) calculations say you could reduce your taxable income by 2/3*22.5K = $15K which is taxable at 24% if you're single, yielding a savings of $15K*.24=$3.6K. Whether that is enough depends partly upon what your Social Security benefit will be. If instead you went entirely Roth, you would increase your taxable income by 1/3*22.5K=7.5K which would increase taxes by $1.8K. I have no idea what would happen with NY income taxes.
If you don't need the money, I would choose Roth entirely. That gives you much more flexibility in the future. If you don't currently have a Roth IRA, I would open one and fund it as much as possible also. Getting started on that timetable will pay dividends in the future -- especially since many public safety people retire well before the typical general population age.
Most recently, that meant:The law requires COLA payments to be calculated based on 50 percent of the annual rate of inflation, measured at the end of the State fiscal year (March 31). Once you are eligible, your annual COLA will be at least 1 percent, but no more than 3 percent, of your benefit. The percentage is applied to the first $18,000 of your annual pension benefit as if you had chosen the Single Life Allowance pension payment option, even if you selected a different option at retirement. Using the Single Life Allowance gives you the highest COLA amount possible, since this option pays the highest benefit. If your pension benefit under the Single Life Allowance option would be less than $18,000, your COLA payment will be calculated based on your actual pension benefit amount.
In your case, $50/$50K would have been about 1%. Effectively, you have the equivalent of a nominal annuity. If you want inflation protection, it will come from Social Security and your savings.The September 2023 COLA is 2.5 percent, for a maximum annual increase of $450.00, or $37.50 per month before taxes.
The commonly-used measure for inflation is known as the Consumer Price Index for All Urban Consumers (CPI-U). A second measure known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is a variation of CPI-U that is weighted differently with more emphasis on food, transportation, and clothing. A third measure, called the Consumer Price Index for Americans 62 years of age and older (CPI-E) measures the spending patterns of the elderly (age 62+). Since 1983, the CPI-U has averaged 2.82%, the CPI-W has averaged 2.77%, and the CPI-E has averaged 2.98%.
Social Security COLAs will therefore tend to average a little bit lower than the actual inflation that you experience. Your pension basically won't keep up with inflation unless inflation is extremely low (looks like there is a 1% minimum).
Back of the envelope (ie, unreliably rough, DIY) calculations say you could reduce your taxable income by 2/3*22.5K = $15K which is taxable at 24% if you're single, yielding a savings of $15K*.24=$3.6K. Whether that is enough depends partly upon what your Social Security benefit will be. If instead you went entirely Roth, you would increase your taxable income by 1/3*22.5K=7.5K which would increase taxes by $1.8K. I have no idea what would happen with NY income taxes.
If you don't need the money, I would choose Roth entirely. That gives you much more flexibility in the future. If you don't currently have a Roth IRA, I would open one and fund it as much as possible also. Getting started on that timetable will pay dividends in the future -- especially since many public safety people retire well before the typical general population age.
Statistics: Posted by GAAP — Thu Apr 11, 2024 5:12 pm — Replies 6 — Views 752