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06-20-2017, 08:10 PM
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#1
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Moderator
Join Date: Nov 2014
Posts: 9,070
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Pension Question
I have a defined contribution pension plan. My thought was to take the lump sum when I retire, however, I've been educating myself on the plan as I get closer to pulling the trigger and I discovered I don't have to take the lump sum right away.
If I leave the money there, it grows by 4%. So in 5 years my balance goes from about $400k to $500K. Given that this is about 20% of my portfolio, seems like a worthy thing to consider.
I've also thought about turning that money into an annuity, but I know how the group feels about that. Thing is, the monthly annuity grows rather nicely too.
What would you consider in making the decision on whether or not to leave it with the company for awhile versus right at retirement?
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06-20-2017, 10:32 PM
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#2
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Thinks s/he gets paid by the post
Join Date: Mar 2017
Location: New York City
Posts: 2,838
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If you die before you draw the money , does it die ?
__________________
Withdrawal Rate currently zero, Pension 137 % of our spending, Wasted 5 years of my prime working extra for a safe withdrawal rate. I can live like a King for a year, or a Prince for the rest of my life. I will stay on topic, I will stay on topic, I will stay on topic
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06-20-2017, 10:58 PM
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#3
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Thinks s/he gets paid by the post
Join Date: Jun 2016
Posts: 4,655
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A few things:
- if you don't take the money now, presumably you'll need some cash to live on. If you'd be withdrawing from other investments, what are they earning? If better than 4%, maybe take the lump sum now and invest it.
- if you take the lump sum, is it taxable as ordinary income? If so, perhaps the annuitized payout is better.
- if you take it as a lump sum, what will you do with the proceeds?
- what other sources of cash do you have to live on throughout your retirement? In our case, we had a pretty substantial taxable portfolio plus a decent IRA, so having a monthly dependable pension check was appealing to me, even though my pension won't be enough to fully fund my living expenses. There is a benefit to having diversified cash flows so that might impact whether a lump sum or monthly payment is more attractive for you.
- is the monthly option COLA'd or fixed? Even if fixed, monthly payment could still be a good option but this is important to know.
I'm sure others will add more to think about but this is a start.
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06-21-2017, 04:58 AM
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#4
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Full time employment: Posting here.
Join Date: May 2007
Posts: 880
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If it grows 4% annually, guaranteed, then I'd let it grow for 5 years and then take the lump. I'd rather have the money than trust the health of the pension over the rest of my life.
__________________
"It is better to have a permanent income than to be fascinating". Oscar Wilde
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06-21-2017, 06:46 AM
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#5
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Thinks s/he gets paid by the post
Join Date: Nov 2006
Posts: 2,288
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If the consideration is take the lump sum now or take it in 5 years, why not take it now and invest it conservatively yourself? Id take my chances that I could put the whole thing in Vanguard Wellington and beat the 4% per year return. It may or may not beat the 4% in any 5 year period, but its averaged
10.64 over 5 years
7.04 over 10 years
8.19 over 20 years
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06-21-2017, 06:46 AM
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#6
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Thinks s/he gets paid by the post
Join Date: Oct 2006
Posts: 4,629
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Assuming I wanted at least 20% of my assets in a guaranteed interest investment, I'd probably say that 4% is pretty good in today's world.
Regarding taxes, I think the general rule is that you can roll a pension lump sum into an IRA when you leave your employer. I'd guess you can also do that later, but certainly taxes are a big enough deal to be sure before you decide.
I'd look at the annuity option today just to be sure the math works like you think. When I retired, before the "normal" retirement age in my plan, the lump sum calculation was very unfavorable compared to the annuity calculation. The numbers said take the annuity.
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06-21-2017, 07:44 AM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,201
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Quote:
Originally Posted by Jerry1
I have a defined contribution pension plan. My thought was to take the lump sum when I retire, however, I've been educating myself on the plan as I get closer to pulling the trigger and I discovered I don't have to take the lump sum right away.
If I leave the money there, it grows by 4%. So in 5 years my balance goes from about $400k to $500K. Given that this is about 20% of my portfolio, seems like a worthy thing to consider.
I've also thought about turning that money into an annuity, but I know how the group feels about that. Thing is, the monthly annuity grows rather nicely too.
What would you consider in making the decision on whether or not to leave it with the company for awhile versus right at retirement?
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If you can earn 4% guaranteed with no interest rate risk that is almost too good to be true.... I would keep it as part of my fixed income allocation.
On taking lifetime payments vs a lump sum....if you could use more guaranteed income and/or they pay an attractive payout compared to commerically available immediate annuities then it may be worth considering. Is there a COLA on the payouts?
One of my DC plans had an attractive annuity payout so I decided to keep it and let it grow... they later changed the annuity payout and it was less favorable so I rolled it over into my IRA for simpicity.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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06-21-2017, 07:45 AM
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#8
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Full time employment: Posting here.
Join Date: Apr 2014
Location: Houston
Posts: 957
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Another factor to consider is the impact of changing interest rates on your lump sum payout. Check the rules for your pension lump sum payout. Specifically check to see if it fluctuates based on some federally set interest rate.
For my pension, a rise of 0.25 in interest rates that the lump sum was based on would cause a decrease of ~2.5% in my lump sum payout. So waiting to take the lump sum during a dropping interest rate period was good.....waiting to take it during a rising interest rate period was not. The current feds target is 1 more interest rate increase this year and 3 in next yr (probably 0.25% each). If your pension is similar to mine, that would cause a decrease of 2.5% x 4 rate hikes of 0.25 each = 10%. So check your rules as it could have a significant impact on your decision.
Kiplinger article on interest rate increase forcast:
Interest Rate Forecast
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06-21-2017, 08:14 AM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2013
Location: Les Bois
Posts: 5,761
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Quote:
Originally Posted by pb4uski
If you can earn 4% guaranteed with no interest rate risk that is almost too good to be true.... I would keep it as part of my fixed income allocation.
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this has to be a cash balance (defined benefit pension) plan (CBP)
4% is probably the current interest crediting rate
it is almost unheard of for CBPs to guarantee a rate of 4% per annum, almost always they are designed to credit some index usually plus basis points (i.e. 10 year Treas plus 100 bips) that changes at least annually - the reason being is that the interest crediting rate is part of the participant's "accrued benefit" and 4% is one heck of a guarantee
OP: what does the SPD or plan document say?
__________________
You can't be a retirement plan actuary without a retirement plan, otherwise you lose all credibility...
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06-21-2017, 08:15 AM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2013
Location: Les Bois
Posts: 5,761
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Quote:
Originally Posted by Whisper66
Another factor to consider is the impact of changing interest rates on your lump sum payout. Check the rules for your pension lump sum payout. Specifically check to see if it fluctuates based on some federally set interest rate.
For my pension, a rise of 0.25 in interest rates that the lump sum was based on would cause a decrease of ~2.5% in my lump sum payout. So waiting to take the lump sum during a dropping interest rate period was good.....waiting to take it during a rising interest rate period was not. The current feds target is 1 more interest rate increase this year and 3 in next yr (probably 0.25% each). If your pension is similar to mine, that would cause a decrease of 2.5% x 4 rate hikes of 0.25 each = 10%. So check your rules as it could have a significant impact on your decision.
Kiplinger article on interest rate increase forcast:
Interest Rate Forecast
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Cash balance pension plans aren't normally interest rate sensitive (i.e. a sudden spike in prevailing interest rates wouldn't impact the hypothetical balance) - actually increasing interest rates would generally increase the interest crediting rate thus increasing the hypothetical balance going forward
hey man just saw ur in H-town - take care in that tropical storm! I moved away 6 years ago and DO NOT miss prepping for tropical cyclones!
__________________
You can't be a retirement plan actuary without a retirement plan, otherwise you lose all credibility...
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06-21-2017, 08:38 AM
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#11
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Recycles dryer sheets
Join Date: Jun 2005
Posts: 152
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My DW has a supplemental "discretionary contribution" benefit plan from her international employer that guarantees 8% a year on the balance until she turns 60 and 3% thereafter, with her retaining full rights. That seemed a very good deal, so when she retired early and took her base pension a few years ago, she left her supplemental contribution collecting interest. At 60 (coming soon) she will likely take the supplemental as an annuity (with generous terms and a 10 year guarantee ), rather than leave the balance at 3%. But if the annuity calculation weren't so generous, she might well have kept the funds invested. Even 3%, with no interest rate risk, is pretty good, particularly if you can postpone taxes and withdraw the funds at any time.
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06-21-2017, 11:08 AM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 17,715
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I would agree with others. Nail down if the 4% is guaranteed to stay 4%. If so, that might make up part of your "bonds" equivalent. That should allow the equity portion of AA to be a bit higher - assuming the underlying financial asset is solid. Only you can determine that without more info. So, YMMV. Best of luck!
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Ko'olau's Law -
Anything which can be used can be misused. Anything which can be misused will be.
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06-21-2017, 11:31 AM
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#13
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gone traveling
Join Date: Mar 2015
Location: Greenville
Posts: 653
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I also had a couple of defined contribution pension with a company that I left in 2000 that has earned over 4% every year since I left (they tell me the annual percentage rater for the upcoming year at the end of each year). As BCG suggested, just understand what happens to the pension IF the owner passes BEFORE starting payouts. In my case, one plan has beneficiary whether I have started the payouts or not, the other did not (you die, you lose it). When I was offered lump sum rollover of the one that did not have beneficiary (until AFTER payouts started), I jumped on it and rolled to 401k. The other plan I hold as part of my cash AA.
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06-21-2017, 01:39 PM
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#14
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Moderator
Join Date: Nov 2014
Posts: 9,070
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Thanks. I never thought about the death/beneficiary question. Taxes will be the same no matter when I take the lump sum. The amount is rolled into and IRA so that transaction is tax free. Annuity does not have a COLA. I will also check to see if the 4% is guaranteed. It's been 4% since they converted from a defined benefit plan but I'm not sure if that's guaranteed.
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06-22-2017, 07:06 PM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2004
Location: Laurel, MD
Posts: 8,304
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Can you take a partial distribution lump sum and leave the equivalent of your fixed asset allocation in the plan?
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...with no reasonable expectation for ER, I'm just here auditing the AP class.Retired 8/1/15.
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06-22-2017, 07:25 PM
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#16
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Moderator
Join Date: Nov 2014
Posts: 9,070
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Quote:
Originally Posted by jazz4cash
Can you take a partial distribution lump sum and leave the equivalent of your fixed asset allocation in the plan?
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No. Whenever you take it or agree to an annuity, that's it. Nothing partial about it.
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06-23-2017, 07:26 AM
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#17
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Recycles dryer sheets
Join Date: Aug 2016
Location: Cottage Grove
Posts: 212
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I'm in a similar boat with a MUCH smaller lump sum amount but mine pays an extra 5% for every I wait to draw it as an annuity or lump sum. Mine is also complicated by the fact that I can take the first 9 or so years under the original DBP. The only benefit I see to the latter is that if I retire at 56 and don't draw until 58, it has an option that will pay me about $1200/month until 62, and then it only pays about $40 for life. This also drops the CBP from about $1150/month for life to $890/month for life if taken at the same ages.
So, if I take the complicated route, I would start drawing $2090/month until I turned 62 and then $930/month for life after. If I take everything as an annuity under the CBP, I get $1150/month for life. I had planned on taking the lump sum at some point and rolling it but now I'm thinking I should take it monthly in case I want to spend a few years out of the country on a pensioner visa where the country requires a lifetime guaranteed income of at least $1000/month.
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06-23-2017, 07:47 AM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2013
Location: Les Bois
Posts: 5,761
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Quote:
Originally Posted by Johanson
The only benefit I see to the latter is that if I retire at 56 and don't draw until 58, it has an option that will pay me about $1200/month until 62, and then it only pays about $40 for life.
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that's called a Social Security Leveling option
__________________
You can't be a retirement plan actuary without a retirement plan, otherwise you lose all credibility...
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06-23-2017, 07:58 AM
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#19
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Confused about dryer sheets
Join Date: Apr 2017
Posts: 8
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As with a previous post here regarding a vanguard fund, I prefer the approach of Managing this lump sum in a tax deferred account myself as opposed to having the corporation do this for me.
This pension account grows every month- it's one of the reasons I still enjoy going into the office....
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06-23-2017, 08:42 AM
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#20
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Recycles dryer sheets
Join Date: Nov 2014
Posts: 269
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DW will have a small pension and I am glad it will only be a small part of our retirement funds. I agree with some others as I would take it and invest it myself. I believe there's going to be a precedent set in the near future regarding pensions unless the US really booms to right the mess of some of the insolvent pensions! Regardless of how healthy, if they could get out of paying full pensions, I believe they would do it ??
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