maifleur01January 9, 2010

Recently on one of my sites I came across a comment that the government was thinking of making a change in 401 rules were the person must purchase an annuity with part of the money to quarantee a life time income. So far I have not found anything on this other than that statement. Is it one of the fear government because they are going to do us all in or real suggestion. Can anyone point me to a site that is non-knee jerk for information.

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It's merely a proposal by some financial experts, not very likely to pass in Congress, and frankly isn't a bad idea for people who are without the traditional pension.

Very few people are saving sufficiently for retirement. My DH's traditional pension is worth well over $2M at a modest annual distribution rate - money we didn't have to save because his employer did it for him. In addition, it has an automatic COLA and comes with full retiree medical benefits for $80/mo for both of us.

Not a single one of our younger friends is working at a company that provides a similar defined benefit pension, so the onus of saving is completely on them. At least half of them are working as contractors, so they don't get any benefits whatsoever with their paycheck.

    Bookmark   January 9, 2010 at 6:37PM
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When I read your modest distribution rate I wonder where I went wrong. Partially I know why but I still wonder what I should have done. Am comfortable in retirement with my own savings and 401 but no where near some of the amounts that are mentioned by other retirees. If you know how much your husbands pension is, it is not a traditional retirement but probably some type of 401. Most traditional retirements are based on years of service times some percentage and would not give a set figure except for annual or monthly. I congratulate you and your DH on doing very good retirement planning.

Do you know the source, which financial experts?

    Bookmark   January 9, 2010 at 10:40PM
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It's simple to know what a defined benefit pension is worth, after the pension administrator gives you the official figure. Just reverse-math to figure out what principal amount it would take to generate such an amount at varying distribution rates - IOW, not everyone takes the same distribution percentage from their portfolios. Usually the distribution percentage varies from 2% to 8%.

As for the annuity proposal, I beleve I read something about it in AARP's most recent Bulletin mailer about it. I didn't pay much attention to it since I believe it's highly unlikely to fly politically.

    Bookmark   January 11, 2010 at 8:51PM
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There is a difference between traditional retirement benefits and what are now called defined benefit pensions. My comment was based on the traditional retirement where the retiree receives a pension based on salary and years of service.

    Bookmark   January 11, 2010 at 10:16PM
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You may need to be more careful of your definitions. I'm not sure what you are thinking of as a "traditional" pension. My DH's pension is a % x service yrs - in his case, 2% for every full year of service. It IS a Defined Benefit Pension, according to the pension administrator.

His 401k/457 accounts are separate from his pension; they are allowed because his employer doesn't participate in Social Security.

If you go the AARP.org website you will always find concise updates on the current political issues. AARP is always very clear (or at least so it seems to me) about what is proposed, what is real, and how they stand on an issue.

I prefer to get my daily news off the WSJournal and NYTimes websites, as our local papers are terrible and the national TV media is even worse.

This is a formal definition of a Defined Benefit Pension from the NY Life Insurance website. I hope it clarifies this confusing terminology for you:
"In a defined benefit pension plan, an employer commits to paying its employee a specific benefit for life beginning at his or her retirement. The amount of the benefit is known in advance and is usually based on factors such as age, earnings, and years of service. For 2009, the maximum retirement benefit permitted under a defined benefit plan is $195,000 (up from $185,000 in 2008). Defined benefit plans do not have contribution limits.

The employer is responsible for making the decisions about how much money to contribute and how to invest it. Employer contributions to the defined benefit plan are based on a benefit formula that calculates the investments needed to meet the defined benefit. These contributions are actuarially determined. Actuaries use statistical analysis to calculate the costs of future risks. The calculation takes into consideration the employee's life expectancy and normal retirement age, possible changes to interest rates, annual retirement benefit amount, and the potential for employee turnover.

Employees are always entitled to the vested accrued benefit earned to date. If an employee leaves the company before retirement, the benefits earned so far are frozen and held in a trust for the employee until he or she reaches retirement age. "

    Bookmark   January 12, 2010 at 9:53PM
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Your post is fine but unless your husband is the only employee and has an individual plan set up only for him his company should not be able to give him a set amount that has been set aside for him. You can get a rough estimate of the amount set aside by figuring backward. Most of the plans I have seen give in the annual statement an amount that was contributed to the pension for all employees and not the amount an individual has in the pension. If they do give an exact figure they are not taking into account any reductions caused by market down turns or changes in the plan.

Any amount that they would give would only be an estimate and not a concrete figure unless it is invested in the company stocks and they have decided a preset amount for each share.

    Bookmark   January 13, 2010 at 12:20PM
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maifleur, I fear you are confusing yourself. Unfortunately you are not correct.

You would be wasting your time trying to Âfigure out backwards what part of the pension plan assets, as listed in the annual statement, are Âassigned to any individual retiree. It doesnÂt work that way, IÂm afraid.

My DH is ALREADY retired. He has received the official letter listing what his pension is. The retirement formula upon which his pension is based is quite clear, as I stated above. Any HR dept. can tell you your length of service, by which one can guesstimate a defined benefit pension fairly accurately before actual retirement.

Our own guesstimate, prior to his receiving the formal notification of pension amount, was within a $25 range of the final determination. % X yrs of service X highest salary in any 12 mo. period  itÂs a very basic calculation.

The annual statement is a legally required document which will give you a (convoluted) idea of the health of the pension plan as far as current funding. But it is not and was NEVER intended to give anyone an individual pension figure.

Future pension payments are funded on what is called the "Current Value of Future Profits"; e.g., a retiree may receive, say, $830,000 total pension over his remaining lifetime, but the employer does not actually fund the full $830K. Instead, investment earnings will make up a sizable percentage of the amount, which is why pension fund managers are restricted by law to certain types of investments deemed as less volatile by the IRS.

    Bookmark   January 13, 2010 at 10:53PM
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Have not been back but your statement "My DH's traditional pension is worth well over $2M at a modest annual distribution rate" lead me to believe that his employer had given him this figure as the amount in his individual pension account not the amount he could draw over time.

I was in at the start of the change over to the ERISA so am well aware of what the annual statement is. Worked for a company that it's pension plan was only in stock of that company and it's subsidiaries. Was very glad that I got out before it went under along with the Temsters pension fund.

    Bookmark   January 16, 2010 at 1:40AM
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Ah, I see what you meant! I apologize for confusing you. My example was merely to illustrate how one can properly value a pension in terms of one's overall financial picture. It's surprising how many of my friends don't know how to assign correct values to their assets when totalling net worth for estate planning purposes.

    Bookmark   January 16, 2010 at 5:04PM
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I am easily confused anymore. In looking at many of the posts in the gardening section I am so out of date of names etc.

    Bookmark   January 16, 2010 at 8:42PM
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And you hope that your employer doesn't go broke.

Some Chrysler/GM retirees and employees (along with retirees and employees of many smaller companies going broke while carrying defined benefit pension plans), are sweating blood, these days, concerned that their pension plans may turn out to be empty shells.

Seems to me that those long-term obligations of employers should rank high in the priority list of company obligations, in case of bankruptcy.

As for annuities ... as the payout rates offered usually relate to current interest rates at the time that they are set up (and are not amended later), one does not want to set up an annuity at a time when interest rates are low.

As the U.S. has military bases in over 100 countries, plus is pouring money down ratholes in Iraq (how long has it been since that war was "won"?) and Afghanistan, in addition to bailing out failing companies and inprovident bankers (who none the less feel qualified to claim magnificent year-end bonuses) at home, with the possibility of more such in future ...

... plus are printing money ...

... in addition to hearing uneasy messages from their banker (the government of China) ...

... there's a good possibility that, in order to entice lenders in other areas of the world to lend them more money, they'll be forced to offer substantially higher interest rates, and that rather soon ...

... I would be very averse to setting up an annuity any time soon, with the payout rate to be set in stone at the time of its initiation.

One prefers to set up an annuity at a time of high interest rates ... and I recall that in 1981, Canada Savings Bonds were offering (a temporary) 19% interest rate.

When I sold mutual funds a few years later, some investors, mainly seniors, chortled over those rates ...

... and I asked them how they liked earning a real rate of maybe $2,000. - 3,000. on a $100,000. investment.

When they figured that I was an idiot ... I suggested that, if they were in 25% tax bracket (and interest was and is taxed at one's top marginal rate), that reduced the 19% to about 14.25% ...

... and did they know what the rate of inflation was in 1981 - most did not know that it was about 12% ... which reduced their actual rate of return to between 2 and 3%.

Not too great a situation in which to be receiving a payout from an annuity, which was set in place at a time of low interest rates.

Good wishes for setting yourself a task of increasing your knowledge about how money ... and taxes ... work. It's an interesting hobby - **that - pays - well**!!

ole joyful

P.S. Do you know how to make 35% on your money ... guaranteed??

o j

    Bookmark   January 20, 2010 at 6:47AM
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Hi, ole joyful, nice to see you around again!

I agree with you that annuities are not a good idea in times of low interest. We shouldn't be surprised that people can't figure out their Real Rate of Return, since financial education has never been taught although we certainly need it these days. However, remember that not all annuities are lifetime contracts, there are shorter-term ones that are intended to allow for the interim between early retirement (many union members are allowed to retire at 50 or 55) and the full drawdown date for Social Security, which is at a variable age eligibility here in the US, anywhere from age 65 to 67, with benefits maxing out at age 70. Those type of short-term contracts usually offer a halfway-decent interest amount, as really it's more of a loan than an investment. Personally I'd rather use a good bond fund, especially right now when interest rates are indeed so low: easier to get your money out if necessary, higher ROI, lower management fees.

The US has the Pension Guaranty Trust which takes over pension obligations from failed corporations. It was begun when the asbestos manufacturers collapsed under the weight of multiple liability suits making them liable for thousands of people with mesothelioma (there's hundreds, if not thousands, of attorneys in the US who specialize in only these lawsuits).

The PGT is very far from perfect, but has guaranteed the pensions of many failed companies. Low-wage earners fare better than high-wage earners under PGT; there is a maximum payout cap. I vaguely recall a figure of $44K/yr but I may be wrong, I've never paid much attention to it.

And of course, just as pensions can go belly-up when a company files bankruptcy, an annuity can be almost worthless if the carrier is closed down by regulators. Many elderly people have multiple small annuities with the same company, not realizing that every state caps policy limit reimbursements, usually in the amount of $100K/per type of policy/per individual.

Debt as a percentage of GDP has been rising for all developed countries, not just the US. As of June 2009: Japan's debt is estimated at 212% of GDP, Italy 109%, Germany 76% and France 72%. Both the UK and US have the fastest growing debt, but there is no denying that growth prospects are quite different between the two countries. Younger demographics fed by growing minority numbers, along with a diverse economic base, give the US a plus here. We may not see the huge economic growth of previous years, but just as we were the first into recession, we are also the first out of it. The EU PIGS (Portugal, Italy, Greece and Spain) are faltering already, which is why the euro is falling with it vs the dollar.

(I discount China here. China's economy is driven by government policy and funding; it is an unwieldy hybrid beast that is always in danger of collapsing in on itself. The only thing you can count on is acting in their own self-interest.)

    Bookmark   January 21, 2010 at 8:03PM
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I dont want to look like an idiot, but i`am almost 55, would like to retire then. i`am vested for 950,000 in my 401k.plus a small pension of 600 a month. what am i looking at for a real yearly income at retirement? and what would the best thing to do? lump sum or annuity, or imediate annuity ?????? starting to get scary.

    Bookmark   March 21, 2011 at 10:51PM
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You will pay a tax penalty (10% in addition to the other taxes that will be owing) if you make withdrawals from your 401K before you turn 59 1/2. Obviously, it wouldn't make any kind of financial sense for you to count on 401K withdrawals were you to retire at 55 because the extra penalties for premature withdrawal would eat up a good portion of your principal.

Even when you withdraw after 59 1/2, your withdrawals will be taxed as ordinary income. If you were to take out a large lump sum to buy, for instance, an immediate anuuity, you would be taxed at a much higher rate becase the lump sum withdrawal would put you into a high income tax bracket. However, your 401K plan may allow you to set up an annuity within your plan so you don't have to make a single, large withdrawal. Also, many annuity providers will set you up an IRA into which you roll the money to fund the annuity (which is not considered a withdrawal for tax purposes.

Since you have a sizable amount in your 401K and don't appear to feel comfortable with doing the necessary planning yourself, it might be wise for you to consult with a financial planner (you may be able to do this through your plan) to find the best way for you to provide yourself with an income stream after you retire.

You can get a lot of info about annuities and post-retirement planning in general from the retirement sections of the websites of big financial companies like Fidelity, Vanguard and T Rowe Price. You will find that all of them provide free retirement planning calculators which allow you to input data about your individual financial stiuation, your projected retirement date, your desired monthly income and so on, and then calculate for you whether you're on track to meet your financial goals for retirement and if not, what to do about it.

    Bookmark   March 22, 2011 at 5:59PM
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i was told there is something called a t-72 ??? for early retirement to avoid the huge amount of taxes. besides hating the job, my position will also be done away with. so 55 is it.

    Bookmark   March 22, 2011 at 7:33PM
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Having worked the last 15+ years before I retired being told there would be mass shutdowns at least every year and being handed pre-layoff forms at least 4 times my advice is to hold on to your job for the time being. Unless the choice is strickly retire now or lose pension benefits it would be to your advantage to work until 62. Right now the return on annuities is not good. Your $950K would be gone in a few years if you started removing more than what it earns for the year.

One additional piece of advice is to start putting money into a Roth IRA. One thing I am finding is that for many that have a decent amount in a 401K is that the taxes when withdrawn are generally more than if you had just taken the money and invested it at the time earned. Most of mine was earned at 15% tax level but because we saved at least 20% of our salaries the withdrawals are taxed at 25% possibly more when hubby and I turn 70 1/2 and must take out the manditory amount. Nice to know the money is there but also sad.

    Bookmark   March 23, 2011 at 2:15AM
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Another consideration about early retirement. Don't forget the cost of health insurance before you turn 65 and can qualify for Medicare. A cousin retired at 62, able to pay COBRA, but the premiums skyrocketed on her share. She's paying a fortune for COBRA coverage.

    Bookmark   March 23, 2011 at 10:06AM
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In order to take advantge of IRS Rule 72(t), which does permit early, penalty-free withdrawals, you will be required to take regularly scheduled distributions from the 401K for at least 5 years. If you retire at 55, that would mean until you are 60. There are three permitted ways of determining how large each distribution must be, the specifics of which are too complicated to go into here. However, Bankrate.com does have a calculator which you can use to figure out how much you would receive annually using each of the three methods.

Plugging in your numbers as best I could, I calculated that your minimum annual distribution would be about $32,000 and your maximum about $44,500. That corresponds to a minimum monthly income of about $2670 and a max of about $3790. Note that you need to input the "applicable Federal midterm rate," which is 2.44% for March, 2011. Obviously, it will probably be different during the month your plan is implemented, should you go that route. So any results you get using the calculator will be somewhat rough, but at least will get you in the ballpark.

The biggest red flag that hovers over 72Ts is that these early distributions, especially if you take the maximums, may result in you depleting your account during your lifetime. If I were doing this, I'd stick with the minimums.

If you have any intention of doing this, you MUST find a professional tax advisor who is very experienced in setting up these plans. It's very easy to screw things up and leave you stuck with paying big tax penalties.

Here is a link that might be useful: 72(t) distribution rates

    Bookmark   March 23, 2011 at 2:41PM
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I assume you mean that you have conventional IRAs? What you say is true, but don't forget that you were able to invest the 15% that you didn't pay in taxes back then for all these years, thus taking advantage of compound earnings for many years, which are very likely greater than the additional taxes you will have to pay when you take distributions. After all, it's these same earnings that will put you into a higher tax bracket.

That being said, Roth IRAs are particularly good for young savers who are likely to move up in tax brackets as their earnings increase.

    Bookmark   March 23, 2011 at 2:58PM
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No I was talking about 401K. Having been lower income until the last 8 years of working I was in the lowest tax bracket. When hubby and I both are taking the minimum distribution when we turn 70 1/2 unless the tax level changes most of our amount will go for taxes. I can not believe that we are the only ones that this will happen.

    Bookmark   March 24, 2011 at 9:45PM
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It doesn't matter if it's a non-Roth IRA or a non-Roth 401K, the principle is still the same -- the amount of taxes that you didn't have to pay when made your contributions grew at a compounded rate over the years you've held these investments. These additional earnings that you gained by making pre-tax rather than post-tax investments are very likely greater than the additional taxes you'll have to pay when you take withdrawals. You would need to have jumped tax brackets by more than 10% not to come out ahead, or had a very low return on your investments.

For example, if your investments earned an average 6.5% a year, you made an initial tax-free investment in year one and a similar investment each year for 20 years, the additional amount you will have made on your investments will be about 50% more than the added taxes you'll have to pay because your tax bracket is 10% higher. If you don't believe me, try running the numbers yourself.

BTW, the lowest tax bracket is 10%, not 15%.

I also don't understand your statement "most of our amount [I guess you mean the amount of a MRD] will go for taxes." How can that be when you say you'll be paying at a 25% rate?

    Bookmark   March 25, 2011 at 4:28PM
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Not real figures but if I take out 10% min of $25,000 & hubby takes out $45,000 his minimum for a total of $70,000 from our 401's added to the regular income this will put us in a much higher tax bracket when we must take withdrawal. If we had been able to put in a Roth, only the growth would be taxable. It was late in our careers that Roth's became available for non-self employeed.

I do not think that having to pay a higher rate with withdrawals putting people in a higher tax bracket will be that unusual as more reach their 70's. Lots of ways to shelter the after tax amounts but the bite is still there.

    Bookmark   March 25, 2011 at 8:55PM
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Oops, I meant to type RMD (Required Minimum Distribtuion) instead of MRD. Sorry.

I don't understand, Maifleur, where the 10% in your last post comes from. The RMD for most 401K account holders who turns 70.5 during the tax year is the total dollar amount of the 401K account divided by 27.4 (the life expectancy at that age) -- in other words, about 3.65% of however much the account holds. For your combined RMDs to be $70,000, the combined value of your 401Ks would have to be $3,525,000. That would make most retirees very happy, not sad.

I don't know whether any or all of your employers made matching contribution to your 401Ks, If so, that has to be figured in as well. Roth IRAS are funded entirely by the owners' after-tax dollars. I actually don't think they are particularly useful for people approaching retirement because most retirees will be in a lower, not higher, bracket after they retire. Of course there are exceptions, but they're just that -- exceptions. And the power of the Roth's tax-free compounded earnings increases as the years go by. That's why they work so much better for younger workers, not older onres.

    Bookmark   March 27, 2011 at 12:29AM
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thanks for the info, the t72 info was interesting. talked to my broker today, he came up with about the same figures. thankfully we have full medical from my wifes retirement. she was forced out at 52. she has her pension of 700.00 a month and we rolled her 401k over also decided to jack up my contribution to my 401 from 32% to 40% if i get 3 more yrs that should make a big diff. wish i had started at 32% 27 yrs ago! glad we dont carry any debt.

    Bookmark   March 27, 2011 at 4:17PM
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Sounds like you'll have a pretty solid nest egg, Bill. That plus the medical and the combined pensions (and lack of debt) puts you in much better shape for early retirement than most people.

Don't we all wish we'd saved more back when? But at least we saved something.

    Bookmark   March 29, 2011 at 6:12PM
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You can rollover 401k to SAFETY plan with NO loss on account with Guaranteed growth and possibility full/partial withdraw, systematic withdraw or lifetime income - all by your choice. Also includes terminal illness and nursing home benefits

    Bookmark   January 22, 2014 at 10:10AM
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