retirement pension question

[Teleplucker]

Retirement is about a year away for me. I'm interested in seeing if any of you have been through this decision. Now relax, I am working with a CFP and a tax person and they will guide my decision more than a discussion on a guitar forum . Here's the scenario

My company converted our pension plan to a cash balance plan many years ago. When we retire we are given several options:

1.Lump sum that can be rolled over
2. Monthly payments to me
3. Monthly payments to me and to my beneficiary
4. Several combinations of partial lump sums and monthly payments.

The rules say you can only choose once. The seemingly logical choice would be a monthly payment for me and then for my beneficiary. The thing that I don't like is I am unable to pass the benefit to our heirs. If my wife and I meet an untimely demise then the money is gone.

My initial feeling is to take the money and do a rollover into some type of product that can generate a monthly income that can also pass to my heirs if there is anything left when we exit the planet.

Knowing how long we will live is the unknowable variable. At 62 I will have outlived my parents and one sibling, my wife is adopted so we dont know much about her medical history. We are both currently in reasonable health.

We have both saved as much as possible ( except for buying guitars and harps) we have very little debt. This pension is one component of our retirement plan. I welcome your thoughts.

[hubcapsc]

I welcome your thoughts.

Three.

A monthly income that will keep coming.

-Mike

[JonWint]

That's easy: 1. Lump sum that can be rolled over

You control it and invest it in your Rollover IRA. Withdraw now or any time until Required Minimum Distributions at age 72 force an annual distribution.

Vanguard is my choice for investing.

[chuckroast]

I had a similar offer from a former employer (several years after I had left). A lump sum or monthly payments for me only till I died or lesser payments for me and spouse if she survived me.

I had coworkers who were smart about NPV analysis and actuarial type stuff. They crunched the numbers and said take the lump sum. I took the lump sum, no regrets.

[buddyhu]

So much to consider.

I tend to aim for a middle ground when making financial decisions.

So I’d like to have a balance between sources of guaranteed lifetime income (pension/cash balance plan, and social security) and sources of income that are mine (to manage for myself, and to pass on to heirs if my money outlasts me). So it depends on how much you hold in retirement savings, and how much your pension is worth (comparing cash value of your pension if taken as a lump sum vs your balance in other savings).

Does your cash balance plan have a guaranteed yearly increase in benefits if you delay the start of your payouts? My pension increase 6% a year. Social Security increases 8% a year. 20 year average (non-guaranteed) return for S&P 500 is 5.9%, and I view the prospects in the coming years to lack visibility. So I’m waiting a while before I start drawing money from my pension...and I might wait until I am required to begin distributions; I re-evaluate each year.

I am only 1/4 vested in my pension...left that employer to start my own business. It is a smaller portion of my retirement finances.

My guess is that a “product” that you might purchase if you roll the money over (whether an annuity or a “lifetime” mutual fund) might carry more expenses and other limitations that would not compare well with what is available from your cash value plan ( except for the inheritability issue).

Is your wife near your age? That might shape your decision about whether to have her get benefits as your beneficiary. My wife is a bit older than I am, so I am uncertain whether it is wise to have her scheduled to receive benefits as my beneficiary if I ultimately decide to get a monthly check from my pension.

In the absence of more information, I’d recommend monthly payments to you and your beneficiary. I am assuming that your pension represents 1/2 or less of your total retirement savings.

I hope this is useful.

[godfreydaniel]

Originally Posted by JonWint

That's easy: 1. Lump sum that can be rolled over

You control it and invest it in your Rollover IRA. Withdraw now or any time until Required Minimum Distributions at age 72 force an annual distribution.

Vanguard is my choice for investing.

I second this.

You mention products with monthly payouts - that sounds like annuities. I’m not a fan. If your CFP or tax person is trying to sell you one, I’d find someone else for advice, especially if they suggest variable annuities.

https://www.investopedia.com/ask/ans...-recession.asp

Vanguard index funds have the lowest fees. Hopefully your CFP can advise you on what mix of stocks and bonds works best for how much risk you’re comfortable with. Ally Bank has better rates than most banks - consider a savings account and CDs to cover you for about three years - you never know where markets are headed in the short term.

[Kerbie]

Originally Posted by godfreydaniel

You mention products with monthly payouts - that sounds like annuities. I’m not a fan. If your CFP or tax person is trying to sell you one, I’d find someone else for advice, especially if they suggest variable annuities.

I think that's painting with a very broad brush. Annuities have taken a beating in public opinion because they are frequently misused by brokers and insurance salesmen. Their commissions are much better than simple mutual fund investments for the same amount of money.

Annuities work beautifully when they are used wisely. To condemn any use of annuities is no different from condemning any use of stocks or bonds. They all have situations where they fit perfectly and those where they fit poorly.

[source3]

Backdoor Roth?

[Kerbie]

Originally Posted by source3

Backdoor Roth?

In the right situation, that's a great idea, but its use is limited.

[Teleplucker]

Nice discussion so far, exactly what I wanted to see.

1. My wife is younger than me, she can retire with 20 years in the school system at about the same time I do. She took time away from work while our sons were young. Her health care is paid for as a retirement benefit. I can join her plan for about $450 per month.
2. My planner has not actually suggested anything yet. Since retirement is looking more like a reality than a concept I have been studying up more. I just discover the clause in the "pension" plan that it doesn't pass to heirs so I started thinking about what choices to make.
3. In one of the choices there is an option for a benefit with a 3.5% annual increase. You can't delay the start of benefits. You have to make your decision when you sign your retirement paperwork
4. The pension plan is about 35% of my retirement assets.
5. When things return to normal our wedding music business should pick back up again, that will also provide us with supplemental income as long as our fingers work.

[Mandobart]

A defined benefit pension is a unicorn today. I'm very lucky to count one as a large part of my retirement income (which I plan to start in two years or less). Would the monthly payment be like that? Most pensions don't extend to heirs.

Questions about the monthly payment:
1. Is it a fixed amount until death or until the money runs out?
2. Will there be any COLAs?
3. Is there a survivorship (spouse) benefit?

Questions about the lump sum:
1. Is it pre or post tax?
2. How much can be rolled over tax free?
3. What are the limits on rollover options?

Do you have any other source of retirement income?

Its pretty easy to make a few assumptions and determine the cash value of each option. I'm investigating multiple options using my state defined benefit pension, my 401k, 457 and social security, plus various savings and real estate holdings.

I favor spreading my options between a variety of risks, return rates and markets.

[Cypress Knee]

I personally would take the rollover and direct myself with a much higher percentage in equities than the average person. However, I use to be in the financial services business many years ago and have a much different outlook than most people.

If you are considering the fixed payment option, that is undoubtedly some sort of annuity contract from an insurance company. Thirty years ago you could have taken the lump sum amount and the life-long monthly payout and called me, and someone in my firm would have generated several annuity quotes from multiple insurance companies. You could then figure out if your pension's payout was in line with the overall market, better, or worse. Remember, these are contracts, so if you are investing a significant portion of your assets in a guaranteed payout program, you should read the contract through and through. Maybe today you can do it yourself online.

Best wishes going forward,

CK

[buddyhu]

Originally Posted by Teleplucker

Nice discussion so far, exactly what I wanted to see.

1. My wife is younger than me, she can retire with 20 years in the school system at about the same time I do. She took time away from work while our sons were young. Her health care is paid for as a retirement benefit. I can join her plan for about $450 per month.
2. My planner has not actually suggested anything yet. Since retirement is looking more like a reality than a concept I have been studying up more. I just discover the clause in the "pension" plan that it doesn't pass to heirs so I started thinking about what choices to make.
3. In one of the choices there is an option for a benefit with a 3.5% annual increase. You can't delay the start of benefits. You have to make your decision when you sign your retirement paperwork
4. The pension plan is about 35% of my retirement assets.
5. When things return to normal our wedding music business should pick back up again, that will also provide us with supplemental income as long as our fingers work.

Given this additional info, I’d be leaning towards option 3 and 4 in your first post. But there are still many important details that might argue for a different path.

I agree with those who advocate for Vanguard if you choose to do a rollover.

I understand why folks are advocating for a rollover that you would self-direct (and why some would put more in stock mutual funds), and i would have advocated for the same approach a dozen years ago. But the “Great Recession” exposed some assumptions i had been holding that were not necessarily accurate, and I have been a bit more humble and conservative since then.

[RP]

A question that comes to mind is whether there's any difference between the amount of the payments between #2 and #3...

[dhodgeh]

I went with a lump sum and have had no regrets. I have only tapped into it for special purchases and other expenses not related to our day to day living (covered by other means), and am still ahead of what I rolled over.


D