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What to do with Cash Balance Pension
Old 08-13-2023, 05:21 PM   #1
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What to do with Cash Balance Pension

My wife recently changed jobs and has a cash balance pension plan with her former employer and I am trying to determine what to do with it.

I am 41, she is 40. In total, we have about 700k in retirement assets. I'm trying to maintain an 80/20 portfolio with intentions to move slowly towards 60/40 as we age over the next 15 years or so.

The employer calculator projects that her cash balance pension plan will be worth a lump sum of around 90k at age 53 and 52 (earliest commencement date according to the plan). It also projects annuity payments of around ~$450 per month at this time. If we wait until age 65, the lump sum grows to 141k. It projects annuity payments of around ~$950 at age 65.

I need to look at the assumptions in the plan more to understand them, but I believe they are using a benchmark interest rate +1-2% to apply interest each year. I assume, however, whatever assumptions used by the plan, are overly optimistic. I also assume that there is a real possibility that at some point the plan could have interest rates reduced or frozen altogether.

We are trying to figure out what to do with this plan. Based on the risks of changes at the employer and overly optimistic assumptions I am not sure leaving it there is the best option. Since it has served as a "bond" in our portfolio allocation, I am inclined to roll it into an IRA and treat it as fixed income and purchase BND or VBTLX and be done with it.

Has anyone experienced anything similar and what are some considerations that I should be making here when assessing what to do with the cash balance pension?
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Old 08-13-2023, 08:01 PM   #2
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I have one that the rate is 5 year treasury +1% IIRC with a floor of 4%...

Not sure but I think it reprices annually so have to live with that rate for awhile..

I just view it as a CD... there is no interest rate risk, just default risk, but it is one of the strongest companies out there so not worried...

Thought about moving it but am having trouble finding income securities that I like... so it sits...
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Old 08-13-2023, 08:53 PM   #3
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Originally Posted by Klubbie View Post
Has anyone experienced anything similar and what are some considerations that I should be making here when assessing what to do with the cash balance pension?
I'm retired now and older (64). I have a cash balance plan still in deferral that I monitor Some of the considerations I consider important:

1. What is the interest rate calculation ? Typically it is calculated based on some long term published rate, with a guaranteed floor.

2. What is the health of the plan ? This isn't necessarily based on the corporation's business health. The important metric is plan funding status, which has to published annually. Check with the custodian for current funding status.

3. What are the rules that govern the availability of lump sums ? Generally this is based on the funding status and lump sums will be disallowed when/if the funding status falls below a threshold, usually 80%.

4.How does the annuity payment option compare with what you could buy on the individual SPIA market ? Usually cash balance plans pay a better annuity than you could buy yourself with the cash balance. Do you think that an annuity option is a consideration for your future ?

5.Is there an "uplift" or "whipsaw" calculation that inflates the value of a lump sum taken well before annuity age ?

6. Who is the custodian ?

In my case, I choose to keep my cash balance plan because it has a good guaranteed interest rate floor of 5% (5.8% currently) and will pay a better annuity than I could buy with the lump sum. I intend to take the annuity option at age 70, subject to change. My plan's current funding status is 138% and is managed by Fidelity. If my plan's funding status started falling I would consider withdrawing the lump sum before the door closed, but that isn't a concern for now.
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Old 08-13-2023, 09:06 PM   #4
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Thank you both. Some great considerations that I will need to look into.
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Old 08-14-2023, 07:31 PM   #5
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Assuming she can rollover the cash balance today, what is the current lump sum today? If she can't access the money today, I'm not sure what your current concern is today - 12 years before a decision can be made.
If you are trying to estimate the future, then use the numbers for 12 years out and call it close enough for the next 11 years.
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