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I can hear the streamliner coming down the track
Old 02-03-2014, 05:34 PM   #1
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I can hear the streamliner coming down the track

I just turned 60 recently, have been employed for 35.5 years with basically the same Megacorp. It has just been announced that the company is cutting 550 salaried positions to improve margins and cut costs. I will be surprised if my job is spared even though it is in a vital area. Nevertheless, I have been playing alot of "what if" to prepare just in case. Severance would be offered which for me would be about $110k taken as cash after all deductions or qualified to roll into an IRA. I'm assuming the entire $110k would be rolled into the IRA pre-tax. The other question on pension is this: Should I take $3950/mo Joint/Survivor for life, or take $525k plus $1340/mo J&S? We do have in the low 7 figures of 401k's, IRA's, cash and taxable. Under these circumstances when might you take SS. DW gets pension starting in 4 yrs of 1800/mo.
Your infinite imparted wisdom much appreciated......
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Old 02-03-2014, 06:09 PM   #2
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Sounds like you're ready for the RIF. And the severance sounds pretty decent.

As far as the pension - I would look at what it would take to purchase a similar annuity using a site like immediateannuities.com. Getting a decent pension AND half a million dollars is pretty sweet.

I'd also look at the health of whoever is paying the pension - if it's your company - what is their financial health? If it's run by an insurance company - is that insurance company healthy.
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Old 02-03-2014, 06:32 PM   #3
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I know anything can happen with a company and its pension plan, but this one was named one of the top 5 funded pension plans in the fortune 500, something like 135%, so I feel pretty good about the health. Worst case scenario, we would get decent payout if the plan was taken over. Has anyone gotten a severance who rolled it into an IRA? Hopefully no deductions were taken before the rollover. That is what I'm wondering. The HR people might help if it comes to that......
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Old 02-03-2014, 06:40 PM   #4
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Originally Posted by sheldon cornped View Post
.........Has anyone gotten a severance who rolled it into an IRA? Hopefully no deductions were taken before the rollover............

Hmmm...looks like it is undecided Can Severance Pay Be Taxed? - WSJ.com

Quote:
A year ago, we reported a disagreement between two federal appeals courts as to whether payroll taxes are due on severance payments made to laid-off workers. We predicted the issue could wind up before the U.S. Supreme Court. Now it has. In October, the court said it would hear one of the cases, U.S. v. Quality Stores, which the Sixth Circuit decided in favor of taxpayers. Oral arguments are scheduled to begin Jan. 14.
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Old 02-03-2014, 06:51 PM   #5
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Assume you take a 4% withdrawl of the $525K, which is still aggressive to some philosophies, that is $21K/year payout. The difference between $3950 - $1340 = $2610/mo = $31.32K/year. You would need to get approx 6% withdrawl to match the pension.

It seems that they are giving you a significant discount to take the lump sum. As long as you have confidence in the pension fund, it seems better to take the pension alone and let the company worry about keeping up the investments. If you think you can do bettter, or have doubts for the pension fund viability, it may be better to just take the lump sum and work to maximize the return you get.

One advantage of the lump sum is it can go on past yours and spouses death to your heirs, if that matters to you. Pension quits when you and your spouse do.

I would take the layoff severance as lump payout, then collect unemployment, then survive until 62. Take SS then, it will supplement your pension and you should have pretty decent monthly income. I think your severance is considered taxable income, at best you can only defer pre-tax up to the 401k limit of 23,000 (17,500 plus 5,500 including the over 50 catchup).

Since you already have the low 7-figure investment accounts, you really have nothing to worry about far as i can tell.

If you think you will live long, leaning to the pension is better. It takes the risk off you to worry about depleting that lump sum $525K. Just sit back and collect the monthly check from the pension.
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Old 02-03-2014, 07:10 PM   #6
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Originally Posted by 38Chevy454 View Post
Assume you take a 4% withdrawl of the $525K, which is still aggressive to some philosophies, that is $21K/year payout. The difference between $3950 - $1340 = $2610/mo = $31.32K/year. You would need to get approx 6% withdrawl to match the pension.
.
While I would likely take the pension, I think there is a flaw in your analysis. The pension is likely NOT indexed for inflation, but the 4% "safe" withdraw rate is.

Perhaps a better analysis is to see what the delta in the pensions would cost with an single premium immediate annuity (based on the OP's life expectancy).
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Old 02-03-2014, 07:34 PM   #7
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The pension is non-cola. Chevy, thanks beaucoup for your analysis. Your advice is exactly what I am leaning towards, so it helps to get that kind of consensus. Much appreciated....
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Old 02-04-2014, 12:13 AM   #8
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While I would likely take the pension, I think there is a flaw in your analysis. The pension is likely NOT indexed for inflation, but the 4% "safe" withdraw rate is.

Perhaps a better analysis is to see what the delta in the pensions would cost with an single premium immediate annuity (based on the OP's life expectancy).
There is no index for inflation on the 4% either. It is just a withdrawl of the base amount in the account. I realize annual return rates can be lower or higher based on risk tolerance and asset allocation. Please explain how a 4% withdrawl, or whatever rate you want to use, is indexed for inflation? If you are taking 4% after any inflation increase, then you need to maintain a 4% plus inflation rate as your rate of return. Assume 3% inflation and then you require a 7% total return rate. That requires a fairly high equities balance, and of course this is also net return after investment expenses.

My understanding is that a 4% withdrawl is used as that is expected to be able to take this amount on a yearly basis without having to worry about depletion of the principle (base amount starting with). In other words it is not indexed for inflation, but it maintains your principle balance.

I am not a financial expert, but am an engineer so I look at things logically. I also may not have stayed at Holiday Inn, but am on work travel and am staying at Residence Inn

Even without inflation index or not, the real question is that the company proposed lump sum is factoring about 6% rate of return; and whether Sheldon should take lump sum and small pension or take higher pension amount with no lump sum. Since the pension is not COLA'd, then the lump sum is not either in order to compare equal to equal.
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Old 02-04-2014, 01:39 AM   #9
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Chevy - the inflation rate is generally applied to the 4% withdrawal, not to your starting portfolio value. Assuming 2nd year inflation of 3%, 4% +(.04*.03) = .0412.
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