Author Topic: Pension Plan  (Read 3976 times)

bap2185

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Pension Plan
« on: May 10, 2014, 08:52:00 PM »
I would like some advice regarding a pension plan I have access to. I recently left a job and I have the three options for handling the money in the account.

A: Start receiving a monthly check of $55
B: Deffer until age 65, and receive a monthly check for $225
C: Withdraw the total sum of $13000

I am currently 28 and I am leaning toward option C. I can invest the money and even in something conservative will outperform the other two options.

What do you think?

MarciaB

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Re: Pension Plan
« Reply #1 on: May 10, 2014, 09:22:22 PM »
Here's what I'm thinking about option B.

To generate $225 per month (or $2700 per year) at the safe withdrawal rate of 4% you would need a lump sum of $67,500. So, if you've got a balance of $13,000 today and 37 years to grow it to $67,500, what rate of return (compounded annually) would get you there?

I went to Bankrate.com (simple savings calculator) and put in $13,000 as a starting balance and 37 years as the time horizon. Then I played with the interest rate until I got $67,500 as a final balance. You would need just a smidge more that 4.55% to go from $13,000 to $67,500 in 37 years.

So the question is - can you do better than 4.55% over 37 years? If you can, then don't choose option B. If you can't, then you're better off going with option B.

deborah

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Re: Pension Plan
« Reply #2 on: May 10, 2014, 09:31:34 PM »
Interesting conundrum.

If you take option A - and you spend it, you get the smallest amount. If you invest it as you get it, you get the largest amount. Or didn't I do the maths right?

horsepoor

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Re: Pension Plan
« Reply #3 on: May 10, 2014, 09:33:43 PM »
I was thinking along the same lines.  Is that $225 inflation adjusted though, or is it really $225, 37 years from now?

Do you need to pay taxes if you withdraw?  If not, then $13K invested at an average of 7% return gives you over $150K at age 65, which translates into about $500/month at a 4% withdrawal rate.

Another Reader

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Re: Pension Plan
« Reply #4 on: May 10, 2014, 09:34:24 PM »
What is the "crediting rate" for your pension?  For example, IIRC, the CalPERS crediting rate is 7 percent.  If yours is similar, the guaranteed rate is a good deal.  Often, you have the choice to simply leave it in and withdraw the compounded amount as a lump sum or take it as the annuity when you "retire" from the pension system. 

Before deciding, do some more research.  Don't forget, if you withdraw the pension money, you will have to pay taxes on it.

ender

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Re: Pension Plan
« Reply #5 on: May 10, 2014, 09:35:28 PM »
Do you not have the option to convert it to an IRA and not pay taxes on it?

hobbes1

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Re: Pension Plan
« Reply #6 on: May 12, 2014, 07:51:03 AM »
The pension plan from my company works along the same lines. I have spent some time putting in various stop-work dates and retirement withdrawal dates. I have noticed that if i stop working on a given date but leave the pension alone, it generally is predicted to continue growing. When I get to the FIRE stage of life, I plan to have enough funds to live on excluding this pension and plan to leave it alone for a few more years, let it grow, and then roll it over to a Traditional IRA.

At your young age, if you feel the company that provided the pension is sound and likely to be around for many years, I'd recommend you leave it alone and let it grow. Talk to Human Resources at the company about just leaving it and see if they can tell you the previous years growth rate. Good luck!

MDM

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Re: Pension Plan
« Reply #7 on: May 12, 2014, 11:22:58 AM »
Company notices about your pension often say something similar to "If there are discrepancies between (a) information in this communication and (b) the Summary Plan Description (SPD) of the plan, the SPD will govern."

At first glance that doesn't appear helpful, because who has their SPD pension handy?  Well...you do, or can if you choose.  E.g. see this summary: "ERISA requires virtually every employee benefit plan to have a summary plan description (SPD) and to furnish copies to each individual entitled to receive the SPD."

It can take some careful reading of the SPD, and then a little spreadsheet work, but one should be able to reproduce pension calculations more or less exactly.  You still have to decide when and how to take it, but at least you'll have as much information as possible.

aclarridge

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Re: Pension Plan
« Reply #8 on: May 12, 2014, 11:44:29 AM »
My take: a bird in hand...I'd say go for C.

There is a risk that the company won't be around anymore when you're 65, or at some point after that when they still owe you money. You don't want to maintain a relationship with them for that long either, making sure they always know your information or whatever.

Davids

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Re: Pension Plan
« Reply #9 on: May 12, 2014, 11:48:03 AM »
I would choose Option C, no guarantee that pension will be available 40 years from now.

electriceagle

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Re: Pension Plan
« Reply #10 on: May 12, 2014, 12:58:06 PM »
I would choose Option C, no guarantee that pension will be available 40 years from now.

If this is a private pension, it should be covered by the PGBC. The poster is nowhere near the couple of thousand per month limit on pension guarantees, so his money should be safe even if the company goes tits up.


mbl

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Re: Pension Plan
« Reply #11 on: May 12, 2014, 01:06:30 PM »
Absolutely Option C.
Not only will you have seen capital appreciation where the amount would generate the $225/month....unlike a pension....you'd also have the principal amount, not just the monthly interest.