Author Topic: Wife's Pension - Rollover to IRA or leave alone?  (Read 1762 times)

Tyson

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Wife's Pension - Rollover to IRA or leave alone?
« on: November 19, 2016, 01:02:09 PM »
My wife worked for a non profit company for many years before leaving it about 5 years ago.  They just sent her a letter saying that she has a one time option to take a payout for it and roll it into an IRA (or other suitable account), or she can leave it in place and take the benefit of it starting at 65.  My wife is 47. 

Here's the numbers:

Option 1 - Payout/rollover of $72,000

Option 2 - Leave the money in the Pension plan.  At age 65 (18 years from now), wife gets a monthly payout of $982.

Help, I have no idea how to weigh/decide which is the better option.

cincystache

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Re: Wife's Pension - Rollover to IRA or leave alone?
« Reply #1 on: November 19, 2016, 03:36:19 PM »
A few things to consider...

1. How safe is the pension? This is impossible to predict for certain, but I would be concerned about a non-profit being able to pay their full pension benefits 18 years from now and then for however long your wife lives. What happens if the company goes out of business? 

2. Is there a survivor benefit or does the pension payment stop upon death of the beneficiary (your wife)?

3. The 72,000, invested decently (6% return) will end up as 211,000 at age 65. At a 4% withdrawal rate, you could take about $700 dollars per month AND you'd still have the principle to pass on to your heirs/surviving spouse or charity etc. when you die.

4. What other retirement assets do you have? Is this a majority of your retirement assets or just a small %?

5.  What is the tax treatment of the pension payment? You might be able to better control your taxes owed if you have it in an IRA and can convert to a Roth in years where your taxable income is minimal.

6. Does the pension have a cost of living adjustment or is it a flat $982 for life? If it's flat, I would strongly lean towards taking the payout since inflation will erode that spending power pretty fast whereas if you have the ability to invest it yourself, you at least have a chance of outpacing (or at least matching) inflation.

I hope that helps, there are a lot of things to consider. If it were me, I'd probably take the rollover and invest it myself but that is dependent upon many factors including how comfortable you are with managing your own investments and  the answers to the points above.

Good luck, keep us posted on the outcome.

MDM

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Re: Wife's Pension - Rollover to IRA or leave alone?
« Reply #2 on: November 20, 2016, 12:26:07 AM »
Help, I have no idea how to weigh/decide which is the better option.
All you need to know is the investment return you will get and how long you will live. ;)

See the 'Misc. calcs' tab in the case study spreadsheet to enter your own numbers in the table below.

One way to evaluate "lump sum now"  vs. "pension later"
Compare pension payment promised at the later time to either
  - the "Interest generated by the Future Value (FV) of the lump sum" (FV principal is not touched), or
  - the "Constant withdrawal of FV over time L" (principal goes to zero), or
  - "Trinity-style withdrawal of FV over time L" (annually inflated spending; principal -> zero)
Lump sum nowPV$72000
Interest ratei5.547%/yr
number of yearsn18yr
number of payments/yearfreq12/yr
When payments are made for each ntype00 = at end, 1 = at start
Future ValueFV$194968
Interest generated by Future ValueFV(i,n,P) * i901$/payment
Longevity of future pensionL25yr
Constant withdrawal of FV over time LPmt_future1203$/payment
Spending growth rate (e.g., CPI)g2.0%/yr
First year Trinity-style withdrawalW(FV,L,i,g)11784$/yr
. . 982$/payment

Tyson

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Re: Wife's Pension - Rollover to IRA or leave alone?
« Reply #3 on: January 17, 2017, 05:00:24 PM »
Hello everyone, just wanted to update you all (and say thanks! again).  We did take the option to roll her 403b over to a Traditional IRA at Vanguard.  It's kind of nice, now in our net worth on Personal Capital it shows our liquid net worth as $281,000!!!!!  And to think, before I found MMM, the best I'd been able to do from age 20 to age 42 was get to $130,000.  In 2 years we are now at $281k.  Holy crap that feels so awesome.  Thank you all!

Tyson

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Re: Wife's Pension - Rollover to IRA or leave alone?
« Reply #4 on: January 30, 2017, 04:34:14 PM »
And to really, really finish this out, I switched it all over to 80% VTSAX and 20% VBTLX today. 

Thanks again!

MDM

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Re: Wife's Pension - Rollover to IRA or leave alone?
« Reply #5 on: January 30, 2017, 05:34:31 PM »
Well done!

Keep up the good work!

And don't panic if a market dip causes that net worth to go backward for a while.... ;)

Tyson

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Re: Wife's Pension - Rollover to IRA or leave alone?
« Reply #6 on: January 30, 2017, 06:39:45 PM »
Already weathered the 2008 crash/panic with money in the market, so I know my resilience to downturns is not too bad :)