Take Lump Sum or Monthly Pension Payments?

June 10th, 2009  |  Published in Pensions  |  1 Comment

This was the subject of a recent question to Money Magazine senior editor Walter Updegrave. The choice came down to whether you wanted the security of a monthly check for the rest of your life (monthly pension payments) or the freedom of investing the lump sum however you chose, with a few wrinkles. Updegrave says it’s more complicated than that but even after you look at the pros and cons of each, the crux of the decision has to do with just that… freedom or security.

The big con against monthly payment is that it’s rarely adjust for inflation, which is the enemy of fixed income, and the big con against the lump sum is that you won’t be able to manage it correctly. You might spend it all or make poor investment decisions.

Unfortunately, there is no universal right or wrong choice, but here is some advice in case you’re facing such a decision.

Being Fired Doesn’t Affect Retirement Vesting

March 12th, 2009  |  Published in 401K, Pensions  |  Comments Off on Being Fired Doesn’t Affect Retirement Vesting

If you are fired, it doesn’t affect the vesting status of your retirement assets. Any funds that hadn’t vested, will expire. Any funds that had vested, are yours to keep forever. Any contributions you made are always yours, regardless of how long you’ve been there or how the vesting schedule works. Your money is always yours.

Here’s a likely scenario – you contribute 6% of your salary to your defined contribution 401(k) plan and your company matches fifty cents on the dollar, kicking in 3%. The employer match doesn’t vest for a full year, meaning the 3% they put in doesn’t become yours until after a year. If you are fired in the next year, they will deduct the 3% from your account and leave you your 6%. The 6% you contributed is always yours, they can never take that away. The vesting schedule of 1 year simply means that the employer’s contribution isn’t yours until one year.

The same rule applies to defined benefit plans like pensions. Whatever you have vested is yours to take, role over into another account, whatever.

Being fired sucks, regardless of how much you get to keep, but at least you get to keep what’s rightfully yours.

Retirement Assets After A Layoff

January 17th, 2009  |  Published in 401K, Pensions  |  1 Comment

Being fired isn’t something you want to think about but with the economy in the sad state that it’s in, you should prepare for the worst and hope for the best. It’s important to find out what could happen to your retirement assets in the event you are laid off and fortunately, in most scenarios, your asset will be protected.

Your 401(k), or similar defined contribution retirement plan, will exist in a separate account outside the control of the company. Should they fire you, go out of business, or close for any reason, the funds should be in a separate account. Since it is in a separate account, in the custody of a financial firm, you can still access it, transfer it, and manage as you would if the company hadn’t fired you or closed up shop. What happens if you have company matching funds that haven’t vested when the plan ends? No problem, by law they vest immediately. There is a down side, if you borrowed money then you will be required to pay back the funds within 60 days of the plan terminating.

What about pensions or a defined benefit plan? If you are laid off, you should still be able to collect your benefits without a problem. If you company bankrupts, then you may have to turn to the Pension Benefit Guaranty Corp. to collect your benefits. They insure pensions and pay out a maximum of $54,000 a year in benefits based on what you had in your plan.

If you are fired, leave your job, or the company goes bankrupt, you will probably want to transfer your retirement assets into an IRA as soon as possible.

Vallejo, CA Declares Bankruptcy to Avoid Pensions

June 20th, 2008  |  Published in Pensions  |  1 Comment

Usually a debt obligation, such as a bond, by the federal government, state, or city is reliable and dependable. In fact, it’s so reliable that there’s a suit being raised against bond rating agencies over that very issue. Well, a pension is essentially a debt obligation and while we expect companies to potentially go bankrupt, thus effectively killing a pension (in reality the pension goes to the PBGC, Pension Benefit Guaranty Corporation, and pays pennies on the dollar), you don’t expect cities to.

Enter Vallejo, California.

You can partially blame the housing burst on sagging tax revenues but the real issue was the generous salaries and pensions offered by the city:

Thanks to retroactive benefit enhancements approved by the city council in 2000, police officers and firefighters can now retire at age 50 and receive an annual pension equal to 90% of their final pay (assuming 30 years on the job), an amount that gets increased every year to help keep pace with inflation. The old plan had given the workers a pension equal to 60% of their final pay at age 50.

So a Vallejo police sergeant making $150,000 a year can now retire at age 50 and receive an annual pension of $135,000, increased each year for inflation. To put that amount in context, you would need to amass a retirement nest egg equal to about $3.5 million to produce a similar retirement income on your own.

Police and firefighters were simply the example in the story but plenty of public employees have the same benefits and this same scenario is playing out in plenty of cities.

I don’t think any defined benefit plans are dependable, you need to supplement it with a solid retirement plan that doesn’t depend on someone else.

Defined Benefit vs Defined Contribution Plan

April 2nd, 2008  |  Published in 401K, Pensions  |  1 Comment

In all the discussion about retirement plans, pensions, 401(k)s, IRAs, you may have heard the term “defined-benefit” and “defined-contribution” plan thrown around and wondered what they meant. Both are employer-sponsored retirement plan types but have slight different characteristics.

Defined-Benefit Plan
A defined benefit plan, often called a “qualified benefit plan” or “non-qualified benefit plan,” is an employer sponsored retirement plan where an employee’s benefits are calculated based on an equation using employee factors, such as one’s salary history and length of employment. Under these plans, all the management functions of the plan are handled by the company and they alone bear the risk of their decisions; employees simply get paid out according to the schedule of the agreement.

(In the case of qualified benefit plans, the qualified refer to tax-qualified and the difference is that those plans have added tax incentives. Non-qualified benefit plans do not get these tax incentives)

Pensions are a common form of defined-benefit plan. Many pension equations include a growth rate tied to the results of the investments decisions made by the plan, but if the decisions result in negative results you will often see companies dip into earnings to fund pension shortfalls.

Defined-Contribution Plan
Whereas a defined benefit plan defines the benefit an employee receives, through a calculated equation, a defined-contribution plan only defines the front side of that equation. It’s an employer sponsored plan in which a specified amount or percentage is set aside for an employee. In these plans, the investment decisions may or may not rest in the hands of employees.

401(k) and 403(b) plans are common forms of defined-contribution plan. With a 401(k), your employer agrees to match your contributions up to a certain amount or simply contribute a percentage of your salary each year. In the case of many 401(k)s and 403(b)s, investment decisions and risks are for the employee to make and bear.

Pensions: Take Lump Sum or Annuity?

September 6th, 2007  |  Published in Pensions  |  1 Comment

When you retire and are eligible to withdraw from your company’s pension, you’re often two options. The first is keep the pension as an annuity and receive payments each month that you and, if you have a spouse, your spouse will receive for as long as you both are alive, it’s called a joint-and-survivor annuity. The other option is to take the amount out as a lump sum and move it to an IRA. There are benefits and drawbacks to both options.

The main benefit is that you cannot outlive the annuity, it’s guaranteed payments for as long as you live and something you can depend on. The drawback is that if you reach an early end, any value still left in the annuity cannot be passed onto your heirs.

Lump Sum
Here, the benefit is that if you do reach an early end, you can pass on the value of the IRA to your heirs but the risk is that you outlive the funds inside the IRA.

So, that’s the tradeoff… and there’s a good chance you’ll live a very long time. 🙂

Freezing Pensions, Moving to 401K

March 5th, 2007  |  Published in 401K, Pensions  |  Comments Off on Freezing Pensions, Moving to 401K

More and more companies are doing what Goodyear recently announced that they would do, freeze pensions and move towards 401k’s as the standard retirement vehicle for most workers. Pensions, in general, are very expensive, as you may have surmised by the numbers Goodyear has put out for how much they would save, and employers are moving away from them in droves lately. How much is Goodyear going to save?

The changes will be phased in over a two-year period, and Goodyear indicated that it expects to reap savings of $80 million to $90 million in 2007; $100 million to $110 million in 2008; and $80 million to $90 million in 2009 and beyond.

Honestly, I think this is better for most workers because pensions depend on the solvency of the company that offers them. Sure, the company is supposed to fund the pension so that even if they go bankrupt, the pensions would survive – but as recent airline bankruptcies have shown us, this isn’t a certainty. The Pension Benefit Guaranty Corporation (PBGC) paid out pennies on the dollar when some airlines went under! So by moving away from pensions, employees are better off from a responsibility perspective because they don’t believe that the freebie will be there in the future. Obviously, by removing pensions all together, it’s a losing proposition for employees but at least there’s a philosophical silver lining.

Ultimately, it’s is better to not be reliant on something like a pension because it can certainly vanish into thin air (or be converted into pennies) even though employees are losing in the long run.

Reasons To Take The Lump Sum

November 19th, 2006  |  Published in 401K, Disbursements, Pensions  |  Comments Off on Reasons To Take The Lump Sum

When it comes time to cash out your retirement, it usually comes down to a decision of whether you want to take a lump sum or income for life (or a mix of both). Here are some reasons why you should consider a lump sum.

1. You can control your investments

If you take the lump sum, you can turn around and invest that money on your own. You get to make the decisions and you’re in the driver’s seat, this of course could be a good or a bad thing!

2. You aren’t afraid of inflation

When you take a lump sum and are able to invest that money, you can protect yourself from inflation. When you take income for life, the income may not be adjusted for inflation (in fact, very few are) so your check loses buying power year after year.

3. Bird in the hand…
When all those airlines went bankrupt, the first to go was the pension… income for life may mean income for the rest of your life or income for the rest of your company’s life, whichever is shorter. If you company goes under, the Pension Benefit Guaranty Corporation, which insures pension plans, only pays out pennies on the dollar.

Finding Lost Pension Benefits

September 16th, 2006  |  Published in Pensions  |  1 Comment

Just like finding lost money owed to you (say, from a security deposit on an apartment), lots of folks have pension benefits that they don’t know about or have lost track of! Personally, I know I don’t have pension benefits because I wasn’t at my first job long enough and my current one doesn’t offer a pension but it’s easy to lose track when you move around often, forget to leave forwarding addresses, and, surprisingly, get married and change your name. In a article, Pension Benefit Guaranty Corp. (PBGC, the same one that bails out bankrupt pension plans for pennies on the dollar) reported that the average lost account was worth over $5000 with the highest lost pension over $255k!

If you want to find out if you may have pension benefits floating out there somewhere, the PBGC has a free tool which lets you search “missing pension funds by last name, the name of the company for which the participant worked or by state.” If you can’t find the company, another tool “allows [you] to search by pension plan name, PBGC case number or the company’s name.”