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My former employer just sent me my pension plan termination package. Kind of a double whammy reminder of old office life as I’m also doing my taxes, which are half a year as a fulltime employee and half as self-employed.
They offer 2 options – 1 is a monthly benefit to be paid when I turn 62, and the 2nd is a lump sum available now. My inclination is to take the lump sum and put it into an IRA to increase in value over time. The only benefit I see with a monthly payment is if I outlive the lump sump projection (my one remaining grandmother is 102!). However, since my old employer was a very small company with 1 owner, I don’t know about the future of the company and its pension plan payouts so far in the future.
Just curious to hear what other scavengers would choose and why. (And I know I have been bad about updating my numbers, but I’m plugging along around $1500/wk after my long trip to the Philippines. After taxes are done, arghhh, I’ll try to chime in again!)
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In the past, I rolled over my retirement funds into an IRA. I also had concerns about my previous employer being able to fulfill a pension so many decades out, (single owner veterinary practice). I also wanted to be in control of the money. To me, a pension still has the implication of dependence on the employer.
You’ll need to look at the tax rules for taking the lump sum now. I *think*, (and do not quote me on this, please do consult with people in the know!), that if you take the payment now, you have so many days to put it into another retirement vehicle, otherwise you have to pay taxes and an early distribution penalty.
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There’s no simple answer to this question.
You need to know, the lump sum you will be paid now, versus what you would be receiving monthly at age 62. There are plenty of future value calculators online you can use to see which option pays the most.
Your concern regarding the stability of the pension is valid as well. Based on this, I would strongly consider rolling over the pension into a qualified retirement plane, such as an IRA.
Once in the IRA, or similar plan, your options are endless. The simplest solution may be, to invest in an index fund, such as the total stock market index. You could do this with a very low expense investment company such as Vanguard. This is one of the simplest buy it and forget it methods. Your investment will increase or decrease with the general market.
Beyond this, your options are many. Without knowing any of the specifics, I think rolling the money out of the pension would be my recommendation.
Good luck.
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Dave Ramsey swears by the lump sum method. Here’s some bedtime reading for you.
In terms of running out of money if you take the lump sum, the 4% rule appears to be quite popular. The rule states that your total withdrawal from the fund cannot exceed 4% per year, so $100,000 will give you $4,000 per year spending money. If you do not take more than 4% out of the account, there is enough left to ensure that you never run out of income. This is also why income planners reckon you need a minimum of a million in retirement funds! LOL.
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Me personally, I would take the lump sum. The biggest reason is, I can pass it on when I pass on. a Pension dies with you. There are a lot of other factors that could change the equation. One being are you good with money, if you can invest it wisely and not blow it, then I would say lump it.
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