Retirement payout

annie1956July 27, 2009

My current employer is changing it's retirement program to a strictly 401k match which made me go back and look at my previous company's benefits. This may be an early question - but from what I read from my termination papers when I left my previous employer after 13 years of service - when I turn 55 I will be able to start collecting 100% of my retirement monthly income. I will still be working at that time (I hope) & expect to probably work "forever" (we are not very well prepared for any sort of retirement i.e. have lots of debt & no savings).

So - I would think I want to start collecting this money since I will get it for the rest of my life - but then what would be the best thing to do with it? It will be taxable, so I will need to plan for taxes, right? Should I pay bills? Invest - in case I ever do "retire"?


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Pay your taxes and definately pay your bills and figure out a way not to run up any more. Do you know how much money is wasted in interest charges.

Sorry but paying interest is a big bugaboo with me. I hate giving away money because I couldn't wait, or spent too much. Since we paid our house off, I never pay interest. I keep track of what I have put on it, so I have no surprises and I pay my visa off every month. That and a Sears card are the only credit cards I have.

Getting your self out of debt should be your first priority. What would happen if you couldn't work?

    Bookmark   July 28, 2009 at 2:32AM
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Thank you for your response. You are very blessed to be in an ideal situation. Unfortunately, my DH became 100% disabled (workers comp) 7 yrs ago which put things on a back spin. Though he gets SSDI I am the only one employed and there have been times that the CC's were our only way to pay for something that was needed.
Our bills are current & I am attempting to pay things down - extra each month on everything (have managed to pay off 3 CC's) including the mortgage. But will we ever be in a position to be debt free? I don't possibly see how. That was my part of my original question - which I guess you answer would be - pay it towards the debt.

    Bookmark   July 28, 2009 at 4:24PM
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I would try to build up some savings and also pay some toward your debt. Maybe 50/50?

Pay off the debts with non-deductible interest (i.e., non-mortgage) first. Advice I've seen is to pay extra toward the debt with the smallest balance first while paying the minimum on the others. Then move on to the next largest balance -- and so on. The mortgage should be the last thing you pay off because (a) the interest is deductible and (b) your house is an appreciating (one hopes) asset whereas the other debts are not.

    Bookmark   July 28, 2009 at 5:06PM
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Sorry If I came on strong, and I certainly didn't nean to be judgmental. I had just had a converasation with a friend who's brother is knee deep in debt from careless spending. That is not your case and I will answer as I should have answered.

Pay the taxes, use some of the money to pay off your debt and some To put in The 401K.

This way you are covering all the bases. Pay off the ones you pay the highest interest on first. Search for alow fee, very low interest credit card--those perks will kill you in extra fees and most of them you will never use. My visa is a no fee card but the interest is high. This works for me because I don't pay interest but it wouldn't work for you, Search for one that does.

As for the 401K--if your employer contributes too then that's your pension and you are doubling the amount you can save because he is contributing too. That's a better return than investing it elsewhere.

What you have in there will come in handy if you ever have to quit work. You say you will probably work forever but who knows if you will be able to.

    Bookmark   July 28, 2009 at 5:23PM
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As for paying the lowest debt credit card first look at this equation
You have $1000--Would you pay off
a $1000 credit balance that has a 1% interest rate ----or
Put the $1000 on a card that had a $5000 balance with a 20% interest rate.

Pay $1000 on card with the the 20% interest rate and you owe $4000 @ 20% and $1000 @ 1%

Pay off the one with the $1000 balance and you still owe
$5000 at 20%

    Bookmark   July 28, 2009 at 6:40PM
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As long as you're working and able to keep up and also pay down your debts, leave your 401K alone. Unless your employer stops contributing. If that happens consult an investment advisor to see if there is a better place to put your money. You can always cash out and pay off debt in the future. Can you roll the oldest account into the new one? That one is no longer receiving contributions and there might be some benefit in combining the two. Or, you might close that one out and put a portion in a more liquid account for your emergency fund and the balance in your current 401K. Consensus seems to be a minimum of 6 months of expenses in your EF. You have several options so research them and go with what's best for you.

    Bookmark   July 28, 2009 at 7:07PM
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>>Or, you might close that one out and put a portion in a more liquid account for your emergency fund and the balance in your current 401K. >>

I'm not sure why pris says this. Perhaps s/he can explain further? If you have a previous 401k that you wish to rollover or convert (some employers will make you do this immediately upon termination of employment; others are open to holding accounts for non-employees), you will be paying a very heavy tax for any portion that you take in cash for personal use. You can certainly roll over the remainder, but IMHO it's better to roll over ALL of it and not touch 401k money at all until retirement.

I once surrendered a 401k upon termination for cash (trying to avoid bankruptcy, which didn't work) and it was possibly the stupidest thing I ever did. You lose 40% of the amount, due to penalties and taxes. Not to mention all the compounding it could have earned over the years! I learned my lesson and have since converted my old 401kÂs into a consolidated Regular IRA.

First, I'd suggest you call your previous employer and make absolutely sure you can collect at 55. Usually non-union employees are subject to something called the Rule of 90. When I turned 55 I received letters from three previous employers with whom I was fully vested. When I turn 65 I will get modest monthly checks (1 real pension, 2 annuities) from each of them. Which is nice since I don't get full Social Security until age 66. But I can't claim the money early.

My DH, OTOH, is truly eligible to retire at age 55 with 2% for each year of service. So check to be absolutely sure you fully understand what is due you and when it will be coming!

Some employers give you the option of withholding taxes on pension checks at whatever percentage you select. You may find this helpful.

If you have lots of debt and no savings you need to put yourself on a budget ASAP. These days going without at least 3-6 months of emergency savings is really dangerous.

Best of luck to you going forward.

    Bookmark   July 28, 2009 at 11:05PM
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Thanks for all of the responses. My previous employer's plan was the old fashioned employer contribution only plan (i.e. not 401k). The paper says I am 100% vested and am able to collect 100% of my monthly payout beginning at age 55 with no penalty. To me that sounds like whether I am working or not somewhere else I can (and should) start getting what I worked for, right?
Where I work now - they have had a a employer contribution plan where I am vested which they are now ending as of 12/31 and making a strictly employee contribution (401k) retirement giving extra bonus percentages for the years of service. They always had the company match 6% 401k which I have always had. So I will add the extra percentage match for the 10 years I've been here to max it out. So I will then get my vested retirement when I retire here (whenever) and have the 401k. So I am trying to do something.....I've just never had enough to go to a financial planner (costs money) to "plan" - so I'm trying to think.

    Bookmark   July 29, 2009 at 11:53AM
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That does sound as if you can start collecting at age 55 - which is a good thing, indeed. You will have to pay taxes on it, so be sure to either have withholding started or you can adjust your withholding on your regular paycheck to make sure the new distribution's taxes don't catch you by surprise next April. If you're in debt there's nothing worse than having to come up several hundred (or thousands) dollars unexpectedly after doing your tax return.

It's not a bad idea to use the extra $$ to pay off your debt, assuming you make sure not to just run it all back up again. Interest rates on credit cards are fairly painful in most cases, so you will be ahead of the game by not having to pay interest any longer.

Once you are out of debt, put that money into building an emergency savings acct.

After that....then you'll have some options to consider.

Depending on how old you are, you may or may not find a Roth IRA helpful. It's generally held that unless you are willing to let it compound for at least 15 yrs before accessing it, it won't offset the tax disadvantage. But if you do have that timeline - remember, the important date is not the day you retire, but actually the day you die, so life expectancy/health plays in here - then you might also want to fund a Roth up to the max which is $5K/yr if you're under 50, or $6K/yr 50+. Amounts are adjusted for inflation each year, so they will gradually creep up unless Congress makes an adjustment to the law.

IOW, if a Roth is advantageous to you, don't increase your employer contributions. Keep your same paycheck contribution or even decrease it, fund the Roth to the annual limit, then put extra dollars pre-tax into the 401k.

If a Roth isn't worth it to you (it wasn't to us, as by the time we had sufficient extra money I was only a year away from retirement) then yes, fund your 401k to the max, which is $16,500 for under age 50 and $22K for over 50. Limits will be indexed for inflation starting in 2010 in $500 increments (but inflation is really low right now so I wouldn't expect it to go up for that year).

    Bookmark   July 29, 2009 at 8:34PM
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I am not familiar with the particular defined benefit plan you have, but most such plans give you the option of starting to collect your monthly benfit when you want. And the later you start to collect, the larger your monthly benefit. You should ask in detail about that option, because it might not necessarily be to your best advantage to start collecting when you're 55.

In any event, if you opt to start collecting at age 55, and you still have debts, you should set up a plan that will enable you to use the monthly pensiont to help you to pay off your debts as fast as possible, plus set aside some of the pension money to pay your taxes, because the pension will be taxed. Sometimes the pension program gives you the option to withhold taxes from you monthly pension. You might want to look into that option.

I agree with other posters to this thread that your first priority is to get debt-free. Things get a lot less complicated once you don't have those high interest monthly payments to worry about any more.

For your 401K that your present employer is offering as the ONLY retirement benefit, the most important decision is the asset allocation -- how much (what percentage) goes to stocks, to bonds, to money market (cash equivalent). The general rule of thumb is: the close you are to retirement, the more conservative your asset allocation should be. But you should always have SOME percentage in stocks, even when fully retired. Some say the percentage in bonds should roughly equal your age. So even when you're well into retirement, you still need some money in stocks because they help to fight inflation. If your 401K program offers index mutual funds, take them because they have a cheaper expense ratio and generally outperform the actively managed funds in the long term.

I hope these suggestions help.

    Bookmark   July 30, 2009 at 12:22PM
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