Author Topic: Using a Pension to Bridge the Gap?  (Read 1998 times)

SouthernTransplant

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Using a Pension to Bridge the Gap?
« on: October 08, 2014, 12:26:52 PM »
Hi everyone,

I am one of the lucky few who still has a defined pension plan through their employer, and I have been playing around with the "payout calculator" that is provided with the plan.

My tentative plan has been to retire at age 45, which would give me 15 more years of potential service for the company.  According to the calculator, in 15 years my pension would be worth approximately $162,000 as a lump sum that I could either leave in the plan until 67, take as an annuity immediately, or roll over into an IRA.

My question is this - would it make sense to use this money to help cover my expenses between early retirement and the time when I would be able to access my IRA's/401k at age 59?  The annuity would only pay out approximately $730 a month during this time, but this would put a nice dent in my expenses short term.  I know I could likely do better rolling this over to an IRA and investing it myself, but this seems to be an interesting option.

I basically look at this as a way of diversifying my retirement assets.  I'm a little uncomfortable having all of my money in deferred accounts, even with the possibility of using Roth pipelines to access it - there is no guarantee that this method will be possible in 15+ years.

Are there any obvious downsides to this plan that I am missing?


Cheddar Stacker

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Re: Using a Pension to Bridge the Gap?
« Reply #1 on: October 08, 2014, 12:39:09 PM »
I find it ironic that you trust in the continuity of your pension more than the continuity of tax law. Neither should be considered safe.

If you take a lump sum you will have control, but you will pay the tax man. I'd hate to pay that much tax all at once, but what guarantees do you have that your pension will continue to be fully funded throughout your lifetime?

I like self-reliance. I would never turn down a pension, but I would never rely on one either until the money was under my control. Save as much as you can outside of the pension. If you don't trust the tax man, save it post tax, although that is likely not your best option either.

In your position, I would take it as an annuity as soon as you retire, but I would supplement it in every way possible.

Weedy Acres

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Re: Using a Pension to Bridge the Gap?
« Reply #2 on: October 08, 2014, 12:53:23 PM »
Typically you only get to make the decision once.  So if you pick the annuity, you're stuck with the interest rate it provides.

I'd do the math on your expected return on $162,000 and see if the "bridge" annuity is worth giving up a higher return for 40 years.  There would be less expensive ways of doing this, like saving some of your FIRE money in after-tax vehicles.

No Name Guy

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Re: Using a Pension to Bridge the Gap?
« Reply #3 on: October 08, 2014, 01:05:46 PM »

My question is this - would it make sense to use this money to help cover my expenses between early retirement and the time when I would be able to access my IRA's/401k at age 59? 

You can access your IRA's / 401k at any time by using the provisions of 72(t) / SEPP.

Cassie

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Re: Using a Pension to Bridge the Gap?
« Reply #4 on: October 08, 2014, 03:03:45 PM »
annuity

Hotstreak

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Re: Using a Pension to Bridge the Gap?
« Reply #5 on: October 08, 2014, 03:15:05 PM »

Are there any obvious downsides to this plan that I am missing?

With a non-COL adjusted annuity, the biggest downside is that your $730 payout will be worth less and less as time goes on, due to inflation.  If you're relying on it to pay bills, you'll have to increase your distribution % from IRA's over time.  For instance, you might start at a 3.5% withdrawal rate, but as your annuity looses purchasing power you may increase to 3.6%, to 4%, or higher.