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What to do with (small) pension benefit?

Posted by jench (My Page) on
Sun, Feb 8, 09 at 21:22

DH & I are relocating and just left our jobs at a health care company which still (at the time we were hired at least) has a pension/annuity benefit. So we had only been there 8 years & 6 years, and we are not anywhere near retirement age. Here is what our options are (this is for my DH, mine will be slightly less):

(1) take lump sum of ~ $21K (not including what will get taken out for taxes)
(2) receive $84/mo starting immediately
(3) receive $834/mo starting 2027

The $834 sounds nice, but there is no guarantee that the pension would be around by then, right? Should we take the $ now and invest it in our own way (most likely mutual funds & Roth IRAs)? What do you all think?

Thanks for your thoughts-
Jen


Follow-Up Postings:

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RE: What to do with (small) pension benefit?

The only option I might take out of the mix is #3 - in this particular scenario (not to mention the uncertainty of the times), 18 years is a long time to wait for $834 a month. And it may or may not be there when the time comes and you might lose at least what is currently available to you.

$84 a month (also subject to taxes) is something that could offset a bill or two; be banked to accummulate for bigger investment purchases.

My gut reaction would be to take the lump sum, bite the taxes and plow it into investments of your choosing and over which you have some control. Since you've left the company, do you want to stay tied to them for either $84 a month or for the possibility of $834 a month 18 years from now?


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RE: What to do with (small) pension benefit?

Hmm, let's just say that you lose about 27% total in state and fed taxes. THen round that down, just to make it easier to figure, to the $15K mark.

4% of that is $600/annually, or $50/mo. So that's what the lump sum is currently worth to you, on a rough basis. The question is, what do you think is the best way to compound that sum into something worth adding to your retirement?

In these times, before anything else, I'd make sure you had 7-12 months of expenses in savings. Do you?

The Roth contribution limit for 2009 is $5K plus the inflation limit. Don't overlook that little bonus, BTW. Every little bit helps.

Since you indicate there are many years of compounding ahead of you, putting the max in two Roth IRAs would probably use the vast majority of the lump sum and be a good investment over time. Do make sure you are investing in the lowest cost no-load funds possible.

Opting for #3 or #2 has its advantages, but you are indeed at the mercy of the employer and its insurance carrier to remain afloat, which is not at all a certain thing these days.

Good luck to you going forward.


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RE: What to do with (small) pension benefit?

Thanks for the responses. My gut is saying to "take the money and run" but I'm still thinking about it... It's nice to be able to get other opinions first from the wise people on this forum!
Jen


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RE: What to do with (small) pension benefit?

Could the whole $21K not be rolled over into an regular IRA?

Sue


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I'll investigate other options...

Sue - That would be the best scenario if we could take/roll-over a lump sum tax-free/deferred, but there was no mention of anything like that in the paperwork we received. (Just to clarify, this is separate from our 401Ks, which we are either leaving where they are or rolling over into the new employer's). I think I am going to call their help line, though, just to make sure I'm not missing something... Thanks!
Jen


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RE: What to do with (small) pension benefit?

Sue - That would be the best scenario if we could take/roll-over a lump sum tax-free/deferred, but there was no mention of anything like that in the paperwork we received.
Well that is something that they would not have to disclose to you, imho. If they hand the distribution to you, it is entirely up to you what you want to do with it.

The safest way would be to have an account set up (like a new IRA) and have the funds moved directly into the account, as opposed to you receiving the money and then you putting the $$ into the IRA. If they mail you the lump sum, they are required to withhold the tax on it. If it is rolled over into a qualified IRA account, then no taxes would be withheld at that time on the entire $21K, but would instead be taxed upon withdrawal, when you became 'withdrawal' age.

It sounds like you are all familiar with all the above though..sorry if I was preaching to the choir.

Good luck!

Keep us posted please.

Sue

Here is a link that might be useful: 401k and Pension Lump-Sum Rollover Assistance


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RE: What to do with (small) pension benefit?

Pension lump-sum distributions are often rollable into an IRA. If you have $21,000 in an IRA, and it earns 5%/year over the long run (which is actually quite conservative even with last year's horrendous market performance), that's $87.50/month -- and it doesn't include compounding or the value to your estate.

So before doing anything else, I would see if it is possible to roll the money into a traditional IRA.


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RE: What to do with (small) pension benefit?

The $834 sounds nice, but there is no guarantee that the pension would be around by then, right?
Yes, you are so right. There is more on that at the link below.

I feel sorry for those whose pensions have been cut and who may only be getting 40 to 50 cents on each dollar of expected retirement income.

traditional IRA That was what I was trying to think of and say instead of a 'regular' IRA.

Sue

Here is a link that might be useful: Unlike Death and Taxes, Pensions Are No Longer Guaranteed


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RE: What to do with (small) pension benefit?

In fact, vested benefits in a defined benefit pension plan (as distinguished from a defined contribution plan such as a 401k or profit-sharing plan) are still very much guaranteed under law in the United States. If the plan terminates, the vested benefits must still be paid -- there are strict rules about this. Even if the plan terminates involuntarily because of insolvency, the vested benefits are still guaranteed up to certain limits by the Pension Benefit Guarantee Corporation (PBGC). The biggest threat to the value of the annuity payment in the future is inflation not that the plan itself may not be around anymore.


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RE: What to do with (small) pension benefit?

I had a similar discussion with my broker a few months ago.
The point that he made, that stuck with me, is that relatively small amounts of money tend to get lost over time.

I opted to roll the small pension fund I had with a former employer into my tax deferred retirement fund.

As I live in Canada and am not familiar with your tax laws you will have to check into that part for yourself.


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RE: What to do with (small) pension benefit?

most private pensions are guaranteed by the PBGC a federal agency that provides backing if a company fails to meet their obligations. the maximum i think is around $45k a year. you are way under that.

i did the math because i left a job with a similar benefit of about $900 @ month at retirement. with the present value i dont believe i can beat the guaranteed benefit if i rolled over into an ira. i would have to earn around 12% or more per year for the next 25 years. it may be possible but that comes with a lot of volitality.


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RE: What to do with (small) pension benefit?

I think you have to determine whether this is actually a defined benefit pension, or merely an insurance annuity which the company purchases. The Pension Guaranty Trust covers DBPs, but not annuities.


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RE: What to do with (small) pension benefit?

I think I am going to call their help line, though, just to make sure I'm not missing something.
Hopefully the OP will check in here with us with some additional info.


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RE: What to do with (small) pension benefit?

just a quick check-in... like I said, I am relocating and to make a long story short - things happened really quickly, and it turned out to be this week!! So I will be offline for a week or so after today...

Wow, I really appreciate all of the additional discussion. You have given me plenty to mull over, I was originally thinking we would just take our "lumps" with the taxed lump sums. For some reason I didn't think we could roll-over tax-free to an IRA, I (mistakenly!?) assumed that was a special benefit for funds already in an IRA/401K type account. (Still need to investigate that option, though, to make sure I can do it.) So it's between that (#1 w/o tax) and letting it stew until retirement age (#3).

To those who asked, yes, it is a defined pension benefit. And mnk716 - my brother (who is into "doing the math") told me the same thing you determined, that #3 is by far the best $$$-wise.
Sue - thanks for the links, I have to wait til post-move to read them in any detail...

Thanks again!
Jen


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RE: What to do with (small) pension benefit?

I hope your relocation is swift and painless and you are soon back with us.

I'm curious. If you don't mind me asking, how old will you and your husband be in 2027? I'd think it would make a difference in your decision making if you were say 55, or 60, versus being 65 when benefits would start.

Sue...wishing you well


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