Author Topic: Negatives of lump sum pension rollover to IRA?  (Read 5009 times)

eyePod

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Negatives of lump sum pension rollover to IRA?
« on: December 16, 2014, 11:41:00 AM »
I left my previous company and found out that I can roll over my pension since it's less than 50k.
I'm going to lump sum it over to an IRA with Vanguard.

I can't really see any negative. Am I missing something? The pension really obfuscates how it invests the money too. Basically, I'm able to now throw this into a rollover IRA and invest it how I want.

I guess I'm just hoping for a pat on the head and a "good choice." I really like having everything under my control instead of having it as an unknown in the future.

GGNoob

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Re: Negatives of lump sum pension rollover to IRA?
« Reply #1 on: December 16, 2014, 01:21:15 PM »
If you never plan on going back to that company or being eligible for that pension again, then you may as well take it out and roll it over to Vanguard.

ubermom4

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Re: Negatives of lump sum pension rollover to IRA?
« Reply #2 on: December 16, 2014, 02:43:25 PM »
Good plan. If you take the pension and put it in your rollover you can control it and remove the risk that the company mismanages it or goes belly up entirely. My DH has a small pension from a previous employer and they have never offered us this option -- I wish they did. Enjoy!

skyrefuge

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Re: Negatives of lump sum pension rollover to IRA?
« Reply #3 on: December 16, 2014, 02:51:45 PM »
I started the same discussion for myself here: http://forum.mrmoneymustache.com/ask-a-mustachian/should-i-take-a-lump-sum-pension-distribution/

Initially, I was leaning towards taking the lump sum, but posts from Reepekg and On_a_slow_boat (and maybe a slight bit of inertia/laziness) made me change my mind, and I ended up keeping the money in the pension fund.

Essentially I liked the idea of "diversification" in income sources. I don't see myself actively converting my investments into an annuity, so keeping a pension is a way to back into some annuitized income (beyond Social Security). A small hedge against the chance that I live to 150, so to speak. Since the amount was relatively small (the $29k lump sum would have increased my investment portfolio only 3.9%) I see it as essentially an experiment to expose myself to different financial instruments (just like how I have a similar amount in one individual stock holding).

From Reepekg's post: "why would you allow the transfer of risk from the company to you without being compensated for assuming that risk? There is a reason companies want to offload their defined benefit pension liabilities. They're stuck paying you even if the market doesn't return x%"

eyePod

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Re: Negatives of lump sum pension rollover to IRA?
« Reply #4 on: December 18, 2014, 06:22:42 AM »
I started the same discussion for myself here: http://forum.mrmoneymustache.com/ask-a-mustachian/should-i-take-a-lump-sum-pension-distribution/

Initially, I was leaning towards taking the lump sum, but posts from Reepekg and On_a_slow_boat (and maybe a slight bit of inertia/laziness) made me change my mind, and I ended up keeping the money in the pension fund.

Essentially I liked the idea of "diversification" in income sources. I don't see myself actively converting my investments into an annuity, so keeping a pension is a way to back into some annuitized income (beyond Social Security). A small hedge against the chance that I live to 150, so to speak. Since the amount was relatively small (the $29k lump sum would have increased my investment portfolio only 3.9%) I see it as essentially an experiment to expose myself to different financial instruments (just like how I have a similar amount in one individual stock holding).

From Reepekg's post: "why would you allow the transfer of risk from the company to you without being compensated for assuming that risk? There is a reason companies want to offload their defined benefit pension liabilities. They're stuck paying you even if the market doesn't return x%"

That's very interesting. I hadn't thought of that. Mine's 38k, but that's a much larger % of my portfolio than yours. I feel like either decision isn't a bad one, but I also like being able to diversify using my own plan instead of being forced to stick along with the pension's. If I were closer to retirement (I'm only 29), I'd probably make a different decision.

Thanks everyone for the insight. I've chosen to get the lump sum.

El Marinero

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Re: Negatives of lump sum pension rollover to IRA?
« Reply #5 on: December 18, 2014, 01:50:50 PM »
I ended up keeping the money in the pension fund.

Annuities such as Social Security or a pension can be a good way of insuring against the 'risk' that you will have a longer than expected lifespan (not that living long is a bad thing!).  The long-lived get the benefit of more payments, at the expense of the unlucky or unhealthy part of the population who die early. 

The question is how much to pay for that sort of insurance and diversification in your income stream. 

In my mind there is no question that a monthly pension benefit is quite valuable if you are close to the plan'sretirement age.  If you need to wait 30 years to get the benefit, that's a different story. 

randommadness

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Re: Negatives of lump sum pension rollover to IRA?
« Reply #6 on: December 18, 2014, 01:59:58 PM »
Been wondering how this plays out with a Federal pension. If I left at 40 I'd have 20 years in.

Think I could collect a 20 year pension at 62, or at 57 if willing to take a 5% per year deduction. (so -25%? for those 5 years)

I feel like the difference between the pension and the lump sum would be a huge difference in that case, as I believe Fed's will only get their contributions if they cash out, not the Government's.

eyePod

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Re: Negatives of lump sum pension rollover to IRA?
« Reply #7 on: December 19, 2014, 08:34:08 AM »
Yeah, mine's private sector. I think I made the right decision as I have a TON more flexibility with drawing out the money and even if I die early, it is all in my house now and goes to my wife instead of having to set it all up in the pension. Or if I had died at some point during pension payout, there would be all these hoops to jump through.

On a side note, holy crap, their customer service was unbelievably helpful. Knew all the forms I would receive, which ones I had to fill out, and what I needed to send. Such a breath of fresh air compared to every other CS rep I've talked to about anything.

On_a_slow_boat

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Re: Negatives of lump sum pension rollover to IRA?
« Reply #8 on: December 21, 2014, 08:03:45 PM »
skyrefuge - thanks for the shout out.

forgot i wrote that