"Retirement" defined by my company

[Finance Dave]

I work at a Fortune200 company, and am considering leaving in 2012. I've been researching this for about a year now, and have found something unusual.

First let me say that we have a defined contribution pension plan, essentially a cash balance plan that we can get either in a lump sum or annuitized, but the point is that the value is already determined...there is no formula such as x years of service x $xxx/month.

In reading the plan rules for both my 401k and pension, I found that our company defines "retirement" as being either:

1) 55 years of age with 5 years of service or...

2) 30 years of service

Unfortunately, I'm 49 years old, with 23 years of service. I'd have to work 6 more years to meet qualification 1...which I don't want to do.

So then I started thinking...."ok, so I guess if I leave, I won't really be "retiring" by their standards, just "separating service"...which is a separate definition.

So then I started researching "ok, what benefits to I lose, or what are the implications of that", and I found some interesting things.

1) Our company pays variable compensation (essentially a bonus based on profitability) annually. The value is DETERMINED in about early March each year, for the prior year, and then PAID OUT in late March. Our company documents say that if you "separate service" prior to when the variable compensation is PAID OUT, you don't get it. WOW! My bonus target is 20% of pay, but can be as high as 40% (I'm anticipating for March 2012 a payment of around 30%). That means if I leave on March 15th, I get ZERO, but if I stay until March 30th, I get 30%!!!

2) You may leave your 401k money in the company, and if you "retire", the company pays your administration fees, plus the "guaranteed" fund pays prime + 2%, but if you "separate from service", you must pay $75/year in admin fees, and the "guaranteed" fund pays prime MINUS 1% to a minimum of zero. Obviously I'd want to either avoid that fund or roll my money out to an IRA.

3) Our company also makes contributions to an HSA early each year for us...I'd lose this if I "separate from service" too early in the year also.

I'm wondering if you folks have any experience with these "definitional" things. This is not a small company where I can go ask for an exception...we have 45,000 employees and they won't even entertain any exceptions for me I'm sure...so my goal is simply to plan around these events to my benefit...am I missing anything?

Oh, one other poing....even if I wait until April 1st to leave, I'd effectively still be giving up some of my bonus...the part that would be paid out the FOLLOWING year in 2013...but there's no way to avoid it completely obviously....other than leave in a year when we lose money and would not get a bonus anyway.

 

[REWahoo]

Bonus plan payout similar to what you describe are very common. I was ready to FIRE on January 1 but had to delay until May or I would have lost out on the prior year's bonus.

 

[utrecht]

Bonus? What the heck is that?

 

[REWahoo]

Bonus? What the heck is that?

It's the carrot dangled in front of you as a reward for making other people filthy rich.

 

[Leonidas]

"Legalistic" seems a better descriptor rather than "definitional". My former employer was such a beast - about 25,000 people. Some of the weirdness that happens in these systems is frustrating and comedic.

The last year of w*rk I was assigned to w*rk a night shift, but was temporarily promoted and working day shift. My day-time counterpart was temporarily assigned to work my night shift. He thought, as did I, that he deserved the pay differential for working a night shift - but HR said that was not the case. My favorite quote from that conversation: "We know it sounds silly, and seems unfair, but it's how the contract was written and we have to live with that."

The last year I was there I had a spreadsheet that tracked about ten different categories of pay and four or five different types of time off. When they accumulated, when they expired or were lost, their cash value (if any) and how they affected my retirement and pension. I spent ten-twenty minutes with that thing every day just to make sure I had a good idea of where I stood at that moment. My actual retirement process revealed that they had written the portion of the contract determining how leave was paid on retirement in such a way that it broke Federal law, but I was the only person affected out of thousands. It was all worked out to my satisfaction, but it was a major legalistic undertaking. http://www.early-retirement.org/forums/f28/flsa-rules-vs-contract-25031.html

 

[Finance Dave]

Leonidas, looks like you had a really messy one.

 

[rescueme]

I'm wondering if you folks have any experience with these "definitional" things. This is not a small company where I can go ask for an exception...we have 45,000 employees and they won't even entertain any exceptions for me I'm sure...so my goal is simply to plan around these events to my benefit...am I missing anything?

As a retiree of a multi-national that had close to 100k employees world wide and also had the cash balance plan in the U.S. (foreign locations had different plans, based upon local tradition - including government sponsored health plans) my simple advice to you is get (in writing), an "interpertation" of the rules, as they apply to your specific case, from your local HR manager.

I doubt if anybody on this board can give you a "rule", for your situation ... Even if they gave their opinon, it would not be enforcable.

BTW, I received a profit sharing distribution (to my 401k) the year after I left, since I did wo*k there a partial year before retirement.

IMHO, retirement trumps any "bonus". I did not worry about that profit sharing payout (didn't really know about it till it happened). Retirement? Priceless!

 

[Telly]

Finance Dave, I haven't seen a retirement program at a big corporation that was so restrictive. Lucky you!

My experience was that retirement with full pension amount was @ 65, with the final average pay formula x years of service. With an early-out with no reduction in benefits if @ 55 or later one had some minimum y number of years of service. But y is always a large number!

Somewhere along the way, maybe federal-law inspired, it was found out that one could retire at about any age and get whatever according to a formula, always as a lump sum. But it would always pale compared to a 55 early out, or full age retirement. When I was LO <55, lump sum was computed with final average pay formula x years of service, but they added invisible years to get me to age 55 so there was no reduction. "Invisible years" meaning I didn't get any $ for those years, not service years.

 

[Andre1969]

I hadn't even thought about company bonuses. Now in my case, it's not much, usually $500-1000, and normally paid in August.

Right now, my (very flexible) retirement goal is April 1, 2016. So, if I went out on that date, I'd lose that bonus. Maybe it's not worth it to keep working another 4 months, just to get a $500-1000 bonus, but hey, I can be cheap like that sometimes!

I've been re-thinking that 4/1/16 date, anyway. It's coming up awfully fast. I probably won't retire cold-turkey, but will probably start taking a lot more time off, maybe see if I can cut back somewhat. I can cut back to as low as 30 hours per week and still be considered full-time, getting holidays, 401k, insurance, etc.

 

[Midpack]

See below...I don't think your experience is unusual for any reasonably sized Corp.

Not sure what your "pension" is worth, but I would have a tough time not gutting out those last 6 years. I did retire early (age 57) but only after my small pension (frozen in 1994) was fully vested.

1) Our company pays variable compensation (essentially a bonus based on profitability) annually. The value is DETERMINED in about early March each year, for the prior year, and then PAID OUT in late March. Our company documents say that if you "separate service" prior to when the variable compensation is PAID OUT, you don't get it. WOW! My bonus target is 20% of pay, but can be as high as 40% (I'm anticipating for March 2012 a payment of around 30%). That means if I leave on March 15th, I get ZERO, but if I stay until March 30th, I get 30%!!! Exact same at the medium size Corp I just retired from. Even if you worked the entire quarter, if you were not an employee on the payout date (mid month following each quarter), you forfeited your bonus.

2) You may leave your 401k money in the company, and if you "retire", the company pays your administration fees, plus the "guaranteed" fund pays prime + 2%, but if you "separate from service", you must pay $75/year in admin fees, and the "guaranteed" fund pays prime MINUS 1% to a minimum of zero. Obviously I'd want to either avoid that fund or roll my money out to an IRA. Not sure as I had no interest in leaving my money in, rolled to an IRA.

3) Our company also makes contributions to an HSA early each year for us...I'd lose this if I "separate from service" too early in the year also. My Corp offered two HSA payin/contribution options. Pay my portion on Jan 15 and company contribution made at the same time OR pay my portion pro-rated with each pay (1/24th per pay) and company contribution would also be pro-rated (1/24 per pay). If you chose the latter and retired during a year, you would forfeit the remaining pro-rated company contribution. I knew I was going to retire so I did the upfront plan this year and got the full company contribution. An option for you when you pull the plug?

Oh, one other poing....even if I wait until April 1st to leave, I'd effectively still be giving up some of my bonus...the part that would be paid out the FOLLOWING year in 2013...but there's no way to avoid it completely obviously....other than leave in a year when we lose money and would not get a bonus anyway. Similar for me. Without going into details, I took a $6K "haircut" on bonus this year for retiring during the year, for months that I was working.

 

[Leonidas]

Leonidas, looks like you had a really messy one.

More like complicated, with a legalistic aura surrounding it. But my career was completely out of the ordinary, and there was no reason to think its ending would be any different.

 

[Alan]

F. Dave,

I don't think your company's rules for separation versus retirement are unusual, which is why I hung on for an extra 3 years until I was 55, even though I was than more than ready to leave at 52.

 

[Finance Dave]

Finance Dave, I haven't seen a retirement program at a big corporation that was so restrictive. Lucky you!

Many large companies have done away with "defined benefit" (DB) plans and moved to "defined contribution" (DC) . There are pros and cons to each. IMO the biggest pro of the new way is that the plans are "portable"...meaning your pension has an actual lump sum balance, that you can see on a website, and that is in a trust, protected from creditors in case of bankruptcy, must be fully funded, and you are guaranteed to get it.

The downside is that the amount is less generous. In other words, if two people worked, at the same wage, for the same number of years, and one had the DC and annuitized it upon retirement at 65, and the other had a DB, the DB person would get more per month, and you are guaranteed to keep getting it no matter how long you live. With the DC, you can get this guaranteed payment forever only through annuitizing.

So in today's job market, where people leave companies after 5-10 years and go somewhere else, they can take their balance with them...not easy to do with a DB plan.

I hadn't even thought about company bonuses. Now in my case, it's not much, usually $500-1000, and normally paid in August.

My bonus will likely be $35k-$45k in March of next year. It's not always that high, but we're having a great year. A typical year would be more like $22k. I'm at a relatively senior management level...my title is Finance Director.

See below...I don't think your experience is unusual for any reasonably sized Corp.

Not sure what your "pension" is worth, but I would have a tough time not gutting out those last 6 years. I did retire early (age 57) but only after my small pension (frozen in 1994) was fully vested.

My DC pension has a current lump sum value of about $145k. If I leave today (or next year), I'd have a few choices.
1) Take lump sum of $145k. Not smart for tax reasons.
2) Annuitize immediately (given my young age of 49, annuity would likely be quite small)
3) Leave in plan earning interest at a slightly lower rate, and then annuitize or take lump sum later. If you're employed, the rate of interest is 30-year T-bond rate +1%, but if you leave, you get 30-year T-bond rate MINUS .5% (minimum zero).

Not sure whether I'd do 2 or 3...but I'd initially do 3 until I had a month or two to research options, then decide. Not sure if I could take a PORTION of it in lump sum...but if so, I may take some up to a tax bracket breakpoint, then leave the rest.

My pension is already fully vested. As far as gutting out the last 6 years, there is really little to no benefit to doing so...there is no magical thing that happens at "retirement". Yes, my account would continue to grow in lump sum (the company adds 6% of my pay each year and of course there is a small amount of interest...but no "trigger event" that occurs at retirement).

By the way, I feel like I'm already "gutting out" this last 12 months.

I'll start a different thread about my plans in "rehirement".

 

[Finance Dave]

More like complicated, with a legalistic aura surrounding it. But my career was completely out of the ordinary, and there was no reason to think its ending would be any different.

You have a good sense of humor too.

Is there a thread on here where everyone tells their profession? If not, do you mind sharing what you did in your wo*king life?

 

[Finance Dave]

F. Dave,

I don't think your company's rules for separation versus retirement are unusual, which is why I hung on for an extra 3 years until I was 55, even though I was than more than ready to leave at 52.

What did you gain by staying those three years? Obviously more contributions...but other than that?

 

[ziggy29]

Bonus? What the heck is that?

It's what we've received in the last few years instead of raises, so when the company's profits don't grow by as much as what Wall Street wants, we can lose 10% of our annual compensation.

 

[Finance Dave]

My DC pension has a current lump sum value of about $145k. If I leave today (or next year), I'd have a few choices.

Update....the $145k was a number from recent memory. Due to recent company contributions and interest, my DC plan now has a lump sum value of $162k.

 

[Midpack]

Again below.

I'm at a relatively senior management level...my title is Finance Director. I was too, reporting to VP Operations.

My DC pension has a current lump sum value of about $145k. If I leave today (or next year), I'd have a few choices. Mine was $206K, *** would have been about 35% of that had I retired before early retirement eligibility.
1) Take lump sum of $145k. Not smart for tax reasons. I woudn't dream of taking a lump sum as taxable income. I rolled the entire amount into my existing rollover IRA tax and penalty free because...
2) Annuitize immediately (given my young age of 49, annuity would likely be quite small) ...this is about the worst time to annuitize that I can think of IF you can avoid it (I'll get flamed for this). Annuity rates are at historic highs due to historically low interest rates, and conversely lump sum payouts (if calculated based on equiv annuity as mine was, I thought most were) are at an all time high. I rolled mine over, and can buy an annuity anytime I want with that money - a year from now, 10 years, whatever. If there's a downside to lump sum over annuity today, I don't see it.
3) Leave in plan earning interest at a slightly lower rate, and then annuitize or take lump sum later. If you're employed, the rate of interest is 30-year T-bond rate +1%, but if you leave, you get 30-year T-bond rate MINUS .5% (minimum zero). I still like option 1. I have no restrictions on what I can invest in within my rollover IRA. No matter how good your 401k is/was, most have a (very) limited set of investment choices.

Not sure whether I'd do 2 or 3...but I'd initially do 3 until I had a month or two to research options, then decide. Not sure if I could take a PORTION of it in lump sum...but if so, I may take some up to a tax bracket breakpoint, then leave the rest.

My pension is already fully vested. As far as gutting out the last 6 years, there is really little to no benefit to doing so there was for me ***...there is no magical thing that happens at "retirement". Yes, my account would continue to grow in lump sum (the company adds 6% of my pay each year and of course there is a small amount of interest...but no "trigger event" that occurs at retirement).

By the way, I feel like I'm already "gutting out" this last 12 months.

I'll start a different thread about my plans in "rehirement".

 

[bbbamI]

You have a good sense of humor too.

Is there a thread on here where everyone tells their profession? If not, do you mind sharing what you did in your wo*king life?

Here ya go....


http://www.early-retirement.org/forums/f27/what-was-is-your-occupation-25537.html

 

[Alan]

What did you gain by staying those three years? Obviously more contributions...but other than that?

It had a DB pension which I could start drawing at 55, otherwise it would have been deferred until 'full' retirement age at 62.

However, the big carrot was retiree health insurance which I could sign onto at 55 at the same rates as employees, otherwise Cobra at full group rates for 18 months.

 

[Finance Dave]

It had a DB pension which I could start drawing at 55, otherwise it would have been deferred until 'full' retirement age at 62.

However, the big carrot was retiree health insurance which I could sign onto at 55 at the same rates as employees, otherwise Cobra at full group rates for 18 months.

Those are excellent reasons to stay.

We basically get no health insurance when we leave...even if we do retire. Why do I say "basically"? Because policy says that if you retire, you can purchase a policy through the same company that our corporation does, but you must pay for the entire premium yourself. I looked at this, and the benefit is actually not that great...I can do just as well on the open insurance market...and we don't have an health issues which will preclude us from doing that.

 

[Finance Dave]

Here ya go....


http://www.early-retirement.org/forums/f27/what-was-is-your-occupation-25537.html

Thanks! Just posted there

 

[ziggy29]

It had a DB pension which I could start drawing at 55, otherwise it would have been deferred until 'full' retirement age at 62.

However, the big carrot was retiree health insurance which I could sign onto at 55 at the same rates as employees, otherwise Cobra at full group rates for 18 months.

Want. Want badly.

 

[Finance Dave]

Again below.

I'll have to see if I can roll my DC plan balance into an IRA...if so I'd definitely do that.

My DC plan is completely separate from my 401k. I already have plans to roll the 401k into my IRA...but wasn't sure if I could do this with the DC balance. As I said, I'll wait until I'm closer to research this.

 

[W2R]

F. Dave,

I don't think your company's rules for separation versus retirement are unusual, which is why I hung on for an extra 3 years until I was 55, even though I was than more than ready to leave at 52.

+1

Think of it this way, Finance Dave - - - from the point of view of your company, you would not be retiring, you would be quitting. There's a huge difference.

Like Alan, I did not quit as soon as I was FI. I worked an extra 2 years in order to qualify for genuine retirement. In my case, among other advantages my formal retirement from federal employment included lifetime membership in group medical, for a monthly fee, as well as an immediate (tiny but nice-to-have) pension.

Seems like a lot of people are started on blood pressure medications and cholesterol medications in their mid 50's. I guess that could present some insurance problems (such as pre-existing conditions if you need to get a new policy). If so, it may be nice to be able to keep your health insurance, even though you have to pay both ends of it.