Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Got ER pension offer
Old 05-30-2004, 07:10 PM   #1
 
Posts: n/a
Got ER pension offer

Hi,

I'm new to the discussion, and here's my story. I'm 53, single, debt free except for the mortgage. I currently make about $100K/yr.

I've just been offered an ER package due to downsizing at work. There's a pension component but only about $25K/yr, plus I have a 401K with about $400K in it. Health insurance is included in the ER package at the employee rate (currently $100/mo for a decent BCBS group plan).

I'm trying to decide if I can afford to take the ER.

I can buy a lifetime annuity with the 401K money, or just leave it to grow for later retirement needs and take it out later, or I can withdraw it in equal monthly payments. I'm not particularly good at managing investments, so the annuity is tempting, but interest rates are so low right now and I'm worried about inflation in my "real" retirement years--my gut tells me I should save the 401K money for later. (My parents/grandparents lived into their 80s, so I could be around for another 30-40 years.)

I don't think I can live on the pension alone, so I'll have to tap the 401K--or else work part time or in another job for a few more years.

I'm considering selling my place, paying off the mortgage, and buying a smaller place for all cash. The mortgage is really my biggest cashflow worry. Is this a good strategy?

Anyone have some advice for me? I really need it. Is this at all possible?

__________________
  Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Got ER pension offer
Old 05-30-2004, 07:47 PM   #2
Recycles dryer sheets
 
Join Date: Jan 2004
Posts: 159
Re: Got ER pension offer

Downsizing on the house, if you want to, can free up a big chunk of $$'s that you could invest and use for living expenses.

There's a rule of thumb thrown about here -- look at www.retireearlyhomepage.com and at the firecalc link (look at the banner ads here to get to it) for more info -- but it basically says that you can generally take 4% of your initial portfolio balance and adjust that initial amount for inflation and never run out of money.

Using that rule, your $400k in your 401k could support $16k. Add to that your $25k pension would give you $41k annually. How much do you spend annually? If it's $41k or less, you've got a decent chance, I'd say.

Two things to think about:

1. Is the $25k inflation adjusted? If not, it will get ravaged by inflation over the next 30-40 years, and so you'd have to account for that. I think the firecalc can help you with that calculation.

2. How long are you "guaranteed" the employee rate for health care, and how much do you believe the guarantee?

malakito
__________________

__________________
malakito is offline   Reply With Quote
Re: Got ER pension offer
Old 05-30-2004, 08:03 PM   #3
Thinks s/he gets paid by the post
charlie's Avatar
 
Join Date: Mar 2004
Location: Dallas
Posts: 1,211
Re: Got ER pension offer

Bill J.,

IMHO, you should not tap the 401k money until
you have to ....... age 70 if you can hold out.
I would sell the house to unload the mortgage
and rent until you get everything figured out.
I bet you could live off of the pension plus the
house equity until you can collect SS in 9 years.
In the meantime your 401k would double in 9
years at an 8% compound rate. Read Bernstein's
"4 Pillars of Investing" before you commit to an
investment adviser or broker. Take a hard look
at your expenses and make a realistic budget.

Have courage. You can do it if you want to.

Cheers,

Charlie
__________________
charlie is offline   Reply With Quote
Re: Got ER pension offer
Old 05-30-2004, 09:34 PM   #4
Thinks s/he gets paid by the post
 
Join Date: Feb 2003
Location: Mesa
Posts: 3,588
Re: Got ER pension offer

Hi Bill J.

I think malakito has provided a pretty good ballpark way to summarize your options. If your annual living expenses are somewhere around 41K or lower, then it's probably worthwhile to start running some FIRECALC simulations and taking a close look at your budget. If it's well above that, you have tougher decisions to make.

Good luck.
__________________
sgeeeee is offline   Reply With Quote
Re: Got ER pension offer
Old 05-31-2004, 02:10 AM   #5
Full time employment: Posting here.
 
Join Date: Mar 2004
Location: No Where for Very Long
Posts: 747
Re: Got ER pension offer

Hey Bill J,

I'm a newbie too, but I think Messrs. Chuck-Lyn, Salaryguru and Malakito gave you some timely advise.

I just try to remember that while my income may be fixed, I am totally in charge of my spending. Spending is the biggest lever that I, old Lance, can control. Finding cheaper shelter can make on HUGE diference to your budget. And living in a relatively low cost state or region helps too.

To me, I can have the "perfect" plan, but what is that worth, if I can never take the plunge?

Have a little faith Bill J.; sometimes just showing up means all the difference.

Lance
__________________

Lancelot is offline   Reply With Quote
Re: Got ER pension offer
Old 05-31-2004, 05:32 AM   #6
 
Posts: n/a
Re: Got ER pension offer

thanks for the comments, malakito.

"Using that rule, your $400k in your 401k could support $16k. Add to that your $25k pension would give you $41k annually. How much do you spend annually? If it's $41k or less, you've got a decent chance, I'd say."

The only problem with that scenario is that, because of my age I can't simply withdraw the amount that I want from the 401K. I have to get the "equal payments" thing, which they calculate for me, or else I can buy an annuity. If I use the 4% withdrawal technique and change it each year, I'll have to pay a penalty. This is all "as I understand it" of course...

"1. Is the $25k inflation adjusted? If not, it will get ravaged by inflation over the next 30-40 years, and so you'd have to account for that. I think the firecalc can help you with that calculation."

The 25K pension is frozen for 10 years; after that there's a modest inflation adjustment feature (up to 3%/yr, I think). So this is definitely an issue for me.

"2. How long are you "guaranteed" the employee rate for health care, and how much do you believe the guarantee?"

It's for the duration of retirement. And, if I ever drop it I can't get it back. I'd say I trust this as much as I trust the pension--pretty much 100%. But the cost of the BCBS plan could certainly go way up over the years.




__________________
  Reply With Quote
Re: Got ER pension offer
Old 05-31-2004, 05:43 AM   #7
 
Posts: n/a
Re: Got ER pension offer

"Downsizing on the house, if you want to, can free up a big chunk of $$'s that you could invest and use for living expenses."

Chuck-Lyn and malakito both mentioned this. Is it better to sell my current place, take the profit (about $150K), and invest it? Then I would have to rent. Or should I buy a smaller place for all-cash and not have a monthly housing payment at all?

I'm ready to downsize the house, but I live in an expensive city and would have to see what $150K would buy here. I've been spoiled by living in a low crime area, etc.
__________________
  Reply With Quote
Re: Got ER pension offer
Old 05-31-2004, 05:52 AM   #8
 
Posts: n/a
Re: Got ER pension offer

"IMHO, you should not tap the 401k money until
you have to ....... age 70 if you can hold out. "

This is what I had been thinking earlier. I had always assumed that the 401K was untouchable until I got older.

But my employer, when presenting the ER offer, assumed I would buy an immediate lifetime annuity with the 401K money. That got me thinking along those lines. Their calculations showed I could get about $25K/yr in the annuity, so I'm thinking 25K pension plus 25K annuity is $50K/yr and I can probably live on that.

__________________
  Reply With Quote
Re: Got ER pension offer
Old 05-31-2004, 06:10 AM   #9
 
Posts: n/a
Re: Got ER pension offer

There's one thing I forgot to mention. I have another small pension that will kick in when I turn 56 and run until Social Security starts at age 62.

Therefore, if I leave the 401K until later, the income picture looks like this:

age 53-56: 25K pension (plus income from house sale?)
age 56-62: 25K pension plus 9K smaller pension = $34K
age 62-70: 25K pension (inflation adj begins) plus Soc Security $17K = 42K
age 70- : 42K plus withdrawals from 401K and IRA

I've gotta tell you, these numbers look small to a guy who has been making $100K/yr. I really need to figure out my annual retirement expenses before I go any farther.

__________________
  Reply With Quote
Re: Got ER pension offer
Old 05-31-2004, 08:27 AM   #10
Thinks s/he gets paid by the post
charlie's Avatar
 
Join Date: Mar 2004
Location: Dallas
Posts: 1,211
Re: Got ER pension offer

Bill J.

Others are more current on this, but if you go the
"equal payments route" for withdrawals from your
IRA/401k there are a number of things to keep
in mind. First, you are committed to continue for
5 years or age 59, whichever comes last. I did
the same thing when I retired at 55 in '89. As it
turned out, the withdrawal rate was over 6% which,
as you know, exceeds the 4% most consider safe.
I think you can split your IRA and make the equal
payments on only part of the total. You could also
convert only part of your IRA to an immediate annuity.

I still think it is not wise to tap your IRA/401k prematurely. Many on this forum can and have
retired with less income than you project. It is
a matter of will. If you have the desire, you can
do it.

Cheers,

Charlie
__________________
charlie is offline   Reply With Quote
Re:  If you're not already confused enough...
Old 05-31-2004, 10:22 AM   #11
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,563
Re:  If you're not already confused enough...

If you take the ER offer, do you have to quit working? Is your job environment so good that you can afford to pass up the ER offer, or will the next ugly department meeting have you kicking yourself for passing up the ER offer? A couple of the incumbent ERs achieved their status by taking their ER offers with the thought that "What the heck, I can always go back to work." If you think you'll miss your boss & co-workers, then you can always take them to lunch. Unless you're working for one of the S&P500's top ten employers, I'd take the money and run.

Are you emotionally/psychologically ready to ER and be responsible for your own upkeep & entertainment? This isn't just a financial decision. Take a couple days to look through the "Lifestyles in Retirement" thread and see what hits your brain cells. But what the heck, you can always go back to work.

With insufficient data and time pressure, there's a huge temptation to throw a wad of money at a "financial advisor" and ask "Tell me if I can afford to do this?!?". Unless your workplace will pay for the experience, I wouldn't pay for "advice". Read Bernstein's "Four Pillars" book, learn how to throttle your investment expenses, and make your own ER decision.

Conventional wisdom appears to agree that, with limited resources, it's better to ER without a mortgage. But many of us ERs still have our mortgages and we're handling them within our budgets. If you're not interested in relocating to a lower-cost area (and, with all the other incipient lifestyle turbulence, I wouldn't recommend it) then you could easily end up being a long-term renter while you wait for the real estate market to cool off. I'd be reluctant to buy anything at today's prices, although in ER you could tackle the sweat-equity fixer-upper from hell if that interests you.

I'm with Lance-- I wouldn't be in ER without keeping a tight watch on the expenses. You're right, you DO need to get a handle on what you're spending so that you can attempt to quantify your ER decision. (But the decision still has a big emotional component!) This board's "Costs of Retirement" section has three exceptionally good threads on "Spending in ER", "80% Rule", and "33%-- That's My Story". (TH, this would also be a great time to point us toward your list of retirement expenses for new roofs & appliances, replacement cars, fantasy vacations, etc.) But what the heck, Bill, you could always go back to work.

My point (and I do have one) is that the ER decision is nearly impossible to make from within the ivory tower of your workplace. You're close enough to give it a try, even with your current house/mortgage and inflation-ravaged pension. You can always keep working-- but you can't get a refund for your missing free time if you don't ER! And if, after a few months of experiential learning, you conclude that ER can't be done in your current situation, then you could always go back to... but you get the idea.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: Got ER pension offer
Old 05-31-2004, 11:42 AM   #12
 
Posts: n/a
Re: Got ER pension offer

Hi Nords! Good post. In my case, I can't go back to work, at least not full time and certainly not at what
I did for most of my career. So for me, I don't have
the option.
As the condemned prisoner said, "It focuses your attention wonderfully".

John Galt
__________________
  Reply With Quote
Re:  I hear Wal-Mart needs more greeters... (ntip)
Old 05-31-2004, 11:44 AM   #13
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,563
Re:  I hear Wal-Mart needs more greeters... (ntip)

__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: Got ER pension offer
Old 05-31-2004, 11:55 AM   #14
 
Posts: n/a
Re: Got ER pension offer

Hey Nords, that's the sort of post many folks wish I sent in more often

John Galt
__________________
  Reply With Quote
Re: Got ER pension offer
Old 05-31-2004, 12:12 PM   #15
Recycles dryer sheets
 
Join Date: Jan 2004
Posts: 159
Re: Got ER pension offer

Bill,

Good afternoon.

You wrote:

The only problem with that scenario is that, because of my age I can't simply withdraw the amount that I want from the 401K. I have to get the "equal payments" thing, which they calculate for me, or else I can buy an annuity. If I use the 4% withdrawal technique and change it each year, I'll have to pay a penalty. This is all "as I understand it" of course...

More or less right, but there's quite a bit more to it. An alternative to an annuity is to roll your 401k into a traditional IRA and then take SEPP payments from it. Although there are rules, there are techniques you can use to still get what you want. For example, you can split your IRA into as many IRAs as you want and you can do an SEPP from any or all of them. You can hold IRAs "in reserve" and not include them in your SEPP "universe" (to quote TheBadger). If flexibility is your concern, I suggest you head on over to www.retireearlyhomepage.com and look around for TheBadger's report on SEPP payments. It's like $10 for a 136-page PDF which will tell you more than you ever wanted to know on the subject. Highly recommended reading.

There's another flavor of the same thing which is that you can leave your 401k with your employer, and if you separate in the year you turn 55 you can get set up to just take regular withdrawals from the 401k. No penalties, no annuity. But you'd have to check with your company on what their options are in this regard. This probably won't work for you, though, since you said you're 53, but I mention it in case you had a superflexible employer and were going to turn 54 tomorrow; maybe they'd keep you around for another six months doing special projects so you could use this option and retire on January 1, 2005.

You later wrote:

Is it better to sell my current place, take the profit (about $150K), and invest it? Then I would have to rent. Or should I buy a smaller place for all-cash and not have a monthly housing payment at all?

This is two separate questions:

1. Do you want to downsize to a cheaper place to live in order to free up money to invest/live on?
2. Do you want to own or rent?

Both are really up to you. The first one is a good technique if your home equity is a large portion of your net worth and you're looking around for capital. The second question has been debated nearly endlessly and the conclusion I've come to is "It depends on your circumstances and what you want to do."

Oh, you also mentioned low crime. Personally I would caution against believing that cheaper houses means higher crime rates. There are inexpensive places to live and the people are decent there too.

Charlie wrote:

Others are more current on this, but if you go the
"equal payments route" for withdrawals from your
IRA/401k there are a number of things to keep
in mind. First, you are committed to continue for
5 years or age 59, whichever comes last.


True for SEPP payments, which can't be done from a 401(k) (but can be done from a traditional IRA, which you can roll your 401(k) into).

I'm not sure if this is true if you follow the "separate from employer in the year you turn 55 route".

I did the same thing when I retired at 55 in '89. As it
turned out, the withdrawal rate was over 6% which,
as you know, exceeds the 4% most consider safe.
I think you can split your IRA and make the equal
payments on only part of the total. You could also
convert only part of your IRA to an immediate annuity.


Both true.

Regards,

malakito.
__________________
malakito is offline   Reply With Quote
Re: Got ER pension offer
Old 05-31-2004, 12:42 PM   #16
 
Posts: n/a
Re: Got ER pension offer

Hey Malakito.......excellent post. Starting in 1993
I expected to be forced into an early (equal payments/annuitized etc) draw on my IRA beginning
almost at once. However, I had some luck and have
not begun to draw yet (I'll be 60 in Sept. if I make it).
Anyway, now it is kind of a challenge to see how long I can hold off.

John Galt
__________________
  Reply With Quote
Re: Got ER pension offer
Old 05-31-2004, 07:18 PM   #17
 
Posts: n/a
Re: Got ER pension offer

Thanks to all, once again, for the great comments and advice!

Nords, I'm not sure I can go back to work in the same job. After all they're eliminating my job! But I still could work elsewhere if I needed to, or perhaps even do some contract work for my old employer. But your main point is well taken--I can always go back to work if the ER doesn't work out. I would probably make less $$, but I would still have the pension as a salary supplement.

I read the Four Pillars book a while back and have allocated my portfolio following its principles. Great book!

Charlie, I agree about trying not to tap the 401K prematurely. However, maybe I could take a portion of it to supplement my pension, leaving most of the 401K to draw earnings until later. I guess the bottom line, again, is getting a handle on my estimated expenses in ER.

Malakito, it's clear from what you've said that I need to meet with H.R. to see exactly what I can do with the 401K. If I could transfer part of my 401K balance to an IRA and then take SEPP withdrawals from the IRA, that would be a possible solution to my problem.

I know what you mean about how inexpensive places don't necessarily have crime, but when I searched online for places around here in my cash-only budget range, I got marginal locations. I need to do some more work on this. I've just about decided, however, to stay put for a year if I do the ER; the ER itself will cause enough turmoil in my life at the beginning. The mortgage runs about $13K/yr. Maybe I can pull that out of my cash reserves for the first year of ER with the goal of eliminating it somehow by the second year.

On the other hand, if a good opportunity to downsize presents itself this year, I might jump on it.

My next steps are (1) meet with H.R. to get firm pension figures and more details on the 401K, and (2) work out a more detailed ER budget. Thanks to you all!













__________________
  Reply With Quote
Re: Got ER pension offer
Old 05-31-2004, 07:41 PM   #18
Recycles dryer sheets
 
Join Date: Jan 2004
Posts: 159
Re: Got ER pension offer

John Galt wrote:

Hey Malakito.......excellent post.

Thanks, John!

Bill J. wrote:
Malakito, it's clear from what you've said that I need to meet with H.R. to see exactly what I can do with the 401K. If I could transfer part of my 401K balance to an IRA and then take SEPP withdrawals from the IRA, that would be a possible solution to my problem.

I don't know if you can do what you describe; it probably depends on your particular employer's plan. Something else which accomplishes nearly the same thing is to transfer all of your 401k to an IRA; split the IRA into two parts, initiate SEPP withdrawals on IRA #1, and maintain IRA #2 in reserve.

malakito
__________________
malakito is offline   Reply With Quote
Re: Got ER pension offer
Old 05-31-2004, 08:36 PM   #19
 
Posts: n/a
Re: Got ER pension offer

Hi malakito,

I just checked my 401K withdrawal rules, and I think I understand them:

1. I can take a one-time partial withdrawal from the 401K; this can be rolled over to a traditional IRA and the IRA withdrawal rules apply from there, including SEPP, etc. If I do this, the balance of the 401K stays in the account where it continues to generate earnings until I withdraw the entire balance later.

2. I can roll over the entire balance of the 401K to one or more traditional IRAs and take it from there (as you have mentioned).

3. I can get monthly payments directly from the 401K based on the IRS life expectancy table--this is recalculated automatically each January. I would have no control over the amount I receive.

4. If I do anything else (getting payments based on my own 4% withdrawal calculations, getting a big lump sum out, etc.), I have to pay a 10% penalty because of my age.
__________________
  Reply With Quote
Re: Got ER pension offer
Old 07-24-2004, 08:52 PM   #20
 
Posts: n/a
Re: Got ER pension offer

Malakito wrote...

"I'm not sure if this is true if you follow the "separate from employer in the year you turn 55 route".

There is a slight loop hole in the "withdrawal from retirement accounts" law.

If you have a 401K at work and you retire from your company at 55 years of age or older you can take all or part of your 401K stash without any penality.

You do have to pay the tax, but no 10% penalty and that might work out nicely if timed properly.

boont
__________________
  Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Military pension and pay - how much is it past 20 Average Joe FIRE and Money 13 03-18-2007 10:22 AM
Traditional Pension being frozen by megacorp murg FIRE and Money 16 03-15-2007 10:41 AM
Pension Time Bomb Article Mountain_Mike FIRE and Money 11 01-17-2006 06:49 AM
The Fat Pension newellcr Young Dreamers 34 07-26-2005 08:23 AM

 

 
All times are GMT -6. The time now is 02:20 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2016, vBulletin Solutions, Inc.