Author Topic: Roll Money Out of Pension or Leave it in  (Read 2233 times)

apricity22

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Roll Money Out of Pension or Leave it in
« on: May 02, 2017, 06:02:25 PM »
Here is my situation:

I have a pension with a former employer that currently has an account balance of $220,000 that I am eligible to roll over to another retirement account such as an IRA if I desire. If I leave it in I will accrue a guaranteed rate of return of 3% per year on the balance.

If I formerly retire in this system at age 50 I will be entitled to an annual benefit of $11,500. This benefit increases each year I forgo collecting benefits up to $26,000 if I wait until age 62. I am currently 39.

A separate balance number is kept in the event that I die before I formerly retire in the system. Currently this balance is $280,000 and accrues a guaranteed rate of return of 8%. If I die, my wife would receive the lump sum and be ineligible for any defined benefit.

The pension system is healthy so the likelihood of reduced benefits or elimination is low.

As long as I leave my money in the pension system, I am grandfathered in to older more generous rules. The likelihood of me returning to the system are low but not impossible especially since the system covers a wide range of government agencies in my state.

So to recap the pros and cons that I am thinking of now consist of:

Pros of staying in: Guaranteed Rate of Return of 3%, Grandfathered in to more generous rules if I were to return to pensioned employer, Generous Guaranteed Rate of Return of 8% and higher existing balance for my wife if I were to pass away early, access to a benefit prior to 59.5

Cons of staying in: Potential Higher Rate of Return outside of the system. Control of investments,  Loss of principal to my heirs if I were to die shortly after beginning the defined benefits.

I would be interested to hear what others think. Thank you.

Babybalrog

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Re: Roll Money Out of Pension or Leave it in
« Reply #1 on: May 05, 2017, 01:42:38 PM »
I'm intrigued as to what state structures their payouts that way.

Others will give you Math answers, but I'll give you my gut reactions.

By forgoing the pension until 50 or 62, you are in affect giving up the option to retire early. Now maybe you have significant savings on the side. But most people would consider 220k a large portion of their Stash.  I certainty don't include my pension in my FIRE numbers because it won't kick in until well after I'm retired. A 220k lump sum now could make a significant step towards retiring in the next decade.

The 3% return they are offering you is ok, but only what a 30 year bond pays. If you just took the lump sum and bought the bond you'd get the same result, have control, and leave it to your heirs. RMDs could be a problem, but you'll roll that to a Roth soon enough.

The annual benefit of 11.5k is worth an equivalent of 287,500 assuming a 4% withdraw rate. You can't claim that for 11 years. You can privately invest 220k and turn it into 287k in 10 years, that's a 2.7% return per year. Heck dividends alone may get you there. Likewise the rate of return for claiming the pension at 62 is 4.8%.

So net-net it sounds like all their numbers are very conservative, and by taking the lump sum and buying a bond, much less stocks you can get equal treatment. Most pensions are back loaded, so if you return, your benefits may rise much quicker. Other things to consider are how much you are saving on the side, your risk profile (but like i said 30 year bonds), and your ability to make a investing statement and stick to it.

apricity22

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Re: Roll Money Out of Pension or Leave it in
« Reply #2 on: May 07, 2017, 12:20:08 PM »
Babybalrog, Thank you for the reply.

This pension is not the only part of my stash. I also have about $260k in a 457, a couple of IRAs and a taxable brokerage account. These investments are about 90% stocks and 10% bonds. I am willing to take a pretty aggressive stance when it comes to investing. If the market does not cooperate and I have to work a few more years so be it, this would be easier for me to psychologically handle than working longer because I wasn't aggressive enough. I actually am feeling anxiety about having that money sitting there potentially missing out on higher returns over the long run. I am currently able to save $48k annually towards my stash. I haven't saved nearly this aggressively in the past but I'm more naturally a saver than a spender and believe I can stick to the plan.

Babybalrog

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Re: Roll Money Out of Pension or Leave it in
« Reply #3 on: May 08, 2017, 02:05:29 PM »
Glad I could give a perspective. If you're comfortable investing, then take the payout. See if you can roll it into your 457. They have much better withdraw rules. Then you won't be waiting around until 59.5

KungfuRabbit

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Re: Roll Money Out of Pension or Leave it in
« Reply #4 on: May 10, 2017, 08:31:29 AM »
I'll keep it simple.

-take the payout if you aren't going back.
-leave it there if you are going back.

 

Wow, a phone plan for fifteen bucks!