Author Topic: Pension ending - what should we do with the money?  (Read 4330 times)

justajane

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Pension ending - what should we do with the money?
« on: May 30, 2015, 07:09:20 PM »
When my husband started at his company, they had a pension plan. They stopped contributing a few years back and now the plan is ending. It's around 50K and they give us four options for the money.

1) annuity ($300/month for his life)
2) lump sum
3) 401k rollover
4) IRA rollover

I'm 99% percent sure 1 & 2 are not good ideas, but what are the pros and cons of either the 401k or the IRA? Because he doesn't yet have an IRA, would it make sense to put that money in a Vanguard account in order to better diversify our retirement accounts? Obviously the easiest thing to do would be roll it over in his 401k, but I just wanted to be sure that we weren't missing anything.

He is in his early forties and has 180K in the 401k, and I have 15K in a Roth IRA.

Any guidance would be much appreciated. If you suggest an IRA, I would appreciate suggestions for funds and allocation.

Another Reader

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Re: Pension ending - what should we do with the money?
« Reply #1 on: May 30, 2015, 07:23:29 PM »
I would look at the annuity.  The payments amount to 7.2 percent of the $50k.  Do you have information about what age the annuity starts (how many years in the future) and whether it is indexed in any way for inflation?

You do not want to withdraw the money.  You would owe income tax and possibly a penalty if he is under 59.5 years of age.

YoungInvestor

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Re: Pension ending - what should we do with the money?
« Reply #2 on: May 30, 2015, 07:28:13 PM »
The annuity seems interesting, regardless of whether it's indexed or not. Even if it's not indexed to inflation, assuming a 3% annual inflation rate, you're still at 4%, which is the "recommended" swr.

MikeBear

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Re: Pension ending - what should we do with the money?
« Reply #3 on: May 30, 2015, 07:50:11 PM »
I would look at the annuity.  The payments amount to 7.2 percent of the $50k.  Do you have information about what age the annuity starts (how many years in the future) and whether it is indexed in any way for inflation?

You do not want to withdraw the money.  You would owe income tax and possibly a penalty if he is under 59.5 years of age.

$300 a month for HIS life. That usually means there's no survivor benefits, in case he dies early. That's a major consideration in choosing this one...

Personally, I'd be inclined to take it as 401k or lump sum, and invest it myself.

justajane

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Re: Pension ending - what should we do with the money?
« Reply #4 on: May 30, 2015, 08:30:00 PM »
I would look at the annuity.  The payments amount to 7.2 percent of the $50k.  Do you have information about what age the annuity starts (how many years in the future) and whether it is indexed in any way for inflation?

You do not want to withdraw the money.  You would owe income tax and possibly a penalty if he is under 59.5 years of age.

$300 a month for HIS life. That usually means there's no survivor benefits, in case he dies early. That's a major consideration in choosing this one...

Personally, I'd be inclined to take it as 401k or lump sum, and invest it myself.

I was originally intrigued by the annuity, but then I read up on them and they seem to be roundly criticized. My original thought on it was that we would invest the amount monthly in a taxable account.

So, here's the deal:

$300 just for my husband, which means if he dies I get $0. or
$280 when he lives, ca.$140 if he dies. or
$240 when he lives, ca. $180 if he dies. or
$220 when he lives and $220 if he dies.

These are all approximate, but the annuity allows you to hedge your bets a bit. It would start immediately, and it is not tied to inflation. So that amount for the rest of either his or my life.

No votes for the IRA? I believe the lump sum would reduce it to about 25K




« Last Edit: May 30, 2015, 08:32:26 PM by justajane »

Another Reader

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Re: Pension ending - what should we do with the money?
« Reply #5 on: May 30, 2015, 09:47:39 PM »
It starts immediately?  It's not deferred to retirement age???  That's a good deal, if that is possible.  I assume it's a flat annuity with no COLA.  It would cost a lot more than $50k to buy such an annuity in the market today.  Looking at the Fidelity Guaranteed Income Estimator, it would cost $74,829 to purchase a similar annuity paying a flat $300 a month for life for a male turning 45 today that lives in California.

cshaw

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Re: Pension ending - what should we do with the money?
« Reply #6 on: May 30, 2015, 09:56:45 PM »
I like the 401K option provided you like the 401K plan you currently are in.  I just did a 401K rollover from a previous employer.  My current employer uses Vanguard which has lots of plan options and some very low expense ratios.  If you aren't thrilled with your current 401K plan then I'd consider the IRA rollover.

TomTX

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Re: Pension ending - what should we do with the money?
« Reply #7 on: May 31, 2015, 05:52:01 AM »
When my husband started at his company, they had a pension plan. They stopped contributing a few years back and now the plan is ending. It's around 50K and they give us four options for the money.

1) annuity ($300/month for his life)
2) lump sum
3) 401k rollover
4) IRA rollover

I'm 99% percent sure 1 & 2 are not good ideas, but what are the pros and cons of either the 401k or the IRA? Because he doesn't yet have an IRA, would it make sense to put that money in a Vanguard account in order to better diversify our retirement accounts? Obviously the easiest thing to do would be roll it over in his 401k, but I just wanted to be sure that we weren't missing anything.

He is in his early forties and has 180K in the 401k, and I have 15K in a Roth IRA.

Any guidance would be much appreciated. If you suggest an IRA, I would appreciate suggestions for funds and allocation.

Unless he has an exceptionally good 401k it is a better option to open an IRA at Vanguard and roll over than to do the 401k. Typically, 401k plans have higher expenses than Vanguard. With $50k, he can put it in 1-2 funds and still have Admiral (lower cost) shares at Vanguard.

Capsu78

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Re: Pension ending - what should we do with the money?
« Reply #8 on: May 31, 2015, 02:21:42 PM »
It's common for an annuity to fund a frozen pension, so think of the annuity as equivalent to a pension.  While buying an one off annuity usually has perceived high commission fees, that might not be the case with a group trying to just get out from under administering a pension for the next 45 years.  I actually think $220 a month for every month until the second one of you dies is not such a bad thing, particularly if you are younger.  You probably won't see another pension in your husbands working career while you most likely will see multiple $50,000 bumps, via matches or bonuses etc.

The money in an annuity, even non cola, is off of the "risk table"   so factor that into your decision.  We kept our frozen pensions because they were not big enough in lump sum to really move the needle in our investments, but allow us to play a little more aggressively with what we do have.  I would request a "Summary of Retirement Benefits Statement" for cashing in the annuity as we were presented with 6 different options for claiming our benefits, several of which we didn't even know about until we asked.

KC1983

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Re: Pension ending - what should we do with the money?
« Reply #9 on: May 31, 2015, 02:31:40 PM »
I suspect the 401k rollover only applies if he has a 401k to roll it over into. If he's not invested in a 401k now, I'm not sure how that would be an option. And it would have to be a very good 401k to be better than a rollover Vanguard IRA. I also suspect the lump sum would be a taxable event, correct? If so, it seems it's really a choice of annuity vs. rollover IRA.

I think Capsu78 has good advice on assessing the annuity.

justajane

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Re: Pension ending - what should we do with the money?
« Reply #10 on: May 31, 2015, 03:59:46 PM »
Thanks for the replies, everyone! Unfortunately, my husband was spouting those numbers off the top of his head from memory, and they are actually slightly lower. I believe the highest annuity rate is $250 and the lowest around $200. I'm still warming to the idea, however. I like it as a hedge against job loss. $225 a month won't solve all of our problems, but it will literally keep the lights on among other things in the event of a financial crisis. In the mean time, we'd just up our automatic monthly contribution to Vanguard by that amount.

For the IRA, is a three fund portfolio (total stock, international and bond) the most prudent choice? We would likely split it even or put slightly more in bonds.

Capsu78

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Re: Pension ending - what should we do with the money?
« Reply #11 on: May 31, 2015, 07:39:42 PM »
Jane.
Also I am getting the feeling that any number presented to me by annuity is just a WAG anyway that needs to be flushed out anyway- YMMV on any given day.  That is why I would ask for a flushed out precise number because you would still have time to say no- we are going in another direction.

KC1983

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Re: Pension ending - what should we do with the money?
« Reply #12 on: May 31, 2015, 08:19:49 PM »
Thanks for the replies, everyone! Unfortunately, my husband was spouting those numbers off the top of his head from memory, and they are actually slightly lower. I believe the highest annuity rate is $250 and the lowest around $200. I'm still warming to the idea, however. I like it as a hedge against job loss. $225 a month won't solve all of our problems, but it will literally keep the lights on among other things in the event of a financial crisis. In the mean time, we'd just up our automatic monthly contribution to Vanguard by that amount.

For the IRA, is a three fund portfolio (total stock, international and bond) the most prudent choice? We would likely split it even or put slightly more in bonds.

That sounds fine for the IRA, though some may call it a touch aggressive and recommend a slightly higher percentage of bonds. You might also consider a target date fund that will take care of a progressively more conservative AA as time goes by.