Looking For Pension Cash Out Investment Advice

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Topic Author
CJ_58
Posts: 5
Joined: Mon Oct 24, 2016 3:30 pm

Looking For Pension Cash Out Investment Advice

Post by CJ_58 »

Hi Everyone,

I’ve been lurking here for a while and have learned a lot but I am now in need of some advice.

My employer is offering a pension cash out option and I’m looking for advice as to how to handle the distribution.

The total pension buy out is $263,000.00
Non taxable = $6000.00
Taxable = $257,000.00

I have a current 401K with the company in the amount of $ 322,0000 which I can not move at this time since I am an active employee.

State Street Target Retirement 2025 > 33%
State Street Target Retirement 2030 > 33%
State Street Target Retirement 2035 > 34%

My current plan will accept the pension pay out but their funds are limited. They have life term funds managed by State Street but their other funds are non listed funds put together for their plan exclusively. My other concerns with my current 401K are that I will be 59 next month and they limit withdrawals for active employees after 59 1/2 to one time per year. I don't have plans for any withdrawal's but it is a concern to me.

I also have a 401K roll over account with a local LPL Financial advisor that has $82,000 in it. I have been very unhappy with his service so I am looking for a home for this too.

I think I would like to open either a Fidelity or Vanguard account but not sure what type or which funds to invest in. I was leaning towards a Fidelity account but I’m open to suggestions,

Do either of these companies offer any incentives in regards to the amounts I’m looking to move it them? Is the non taxable amount eligible for a Roth IRA or some other vehicle?

Any advice you could offer would be much appreciated !

Thanks in advance.
User avatar
Earl Lemongrab
Posts: 7270
Joined: Tue Jun 10, 2014 1:14 am

Re: Looking For Pension Cash Out Investment Advice

Post by Earl Lemongrab »

CJ_58 wrote:My current plan will accept the pension pay out but their funds are limited. They have life term funds managed by State Street but their other funds are non listed funds put together for their plan exclusively.
That doesn't make them bad. My company has those as well, and they provide some excellent index funds.
I also have a 401K roll over account with a local LPL Financial advisor that has $82,000 in it. I have been very unhappy with his service so I am looking for a home for this too.

I think I would like to open either a Fidelity or Vanguard account but not sure what type or which funds to invest in. I was leaning towards a Fidelity account but I’m open to suggestions
Vanguard does not, but Fidelity has a bonus program. They also allow you to sell most mutual funds without commission, in case your LPL account needs to be cleaned up.

You can find more information about brokerage bonuses here:

viewtopic.php?f=10&t=196884

Edit: If you aren't too hung up on simplicity, I might recommend sending the LPL account to Fidelity to get a $200 bonus and do the clean-up, and the rollover to TD Ameritrade. There you can get $1000, and buy Vanguard ETFs without commission.

Earl
Grt2bOutdoors
Posts: 25617
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Looking For Pension Cash Out Investment Advice

Post by Grt2bOutdoors »

Are you forced to take the buyout? What are your other options, if any? Usually, these buyouts are offered to reduce employer costs, not necessarily in your best interest.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Topic Author
CJ_58
Posts: 5
Joined: Mon Oct 24, 2016 3:30 pm

Re: Looking For Pension Cash Out Investment Advice

Post by CJ_58 »

Grt2bOutdoors wrote:Are you forced to take the buyout? What are your other options, if any? Usually, these buyouts are offered to reduce employer costs, not necessarily in your best interest.
Thanks Earl and Grt2bOutdoors for your responses.

To answer the question about other options, yes there are.

Option 1 > Roll the amounts above into another qualifying account.

Option 2 > Take all the funds and pay taxes and a penalty. (I’ve already decided I’m not doing this)

Option 3 > Life time annuity starting in December 2016 $1474. My concern with this option I am not married so if I were to pass away in a year or two most of my pension would be lost. I have older children that could benefit if it were to be rolled into another qualifying plan.

Option 4 > 10 year certain life annuity $1415. I’m not married so I didn't think this would benefit me.

Option 5 > Level income annuity. From age 59 up to 62 $2870 and from 62 till death $1140. With my DOB being in 1957 SS doesn't kick in until I’m 66 1/2. I didn't think this was a good option since I’m still working. I thought it would drive me into a higher tax bracket.

Option 6 > They will keep it and manage it as they have done in the past. My concern here is how secure is it if the continue to manage it? I thought I would be better off moving it into an account controlled by me.
Grt2bOutdoors
Posts: 25617
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Looking For Pension Cash Out Investment Advice

Post by Grt2bOutdoors »

CJ_58 wrote:
Grt2bOutdoors wrote:Are you forced to take the buyout? What are your other options, if any? Usually, these buyouts are offered to reduce employer costs, not necessarily in your best interest.
Thanks Earl and Grt2bOutdoors for your responses.

To answer the question about other options, yes there are.

Option 1 > Roll the amounts above into another qualifying account.

Option 2 > Take all the funds and pay taxes and a penalty. (I’ve already decided I’m not doing this)

Option 3 > Life time annuity starting in December 2016 $1474. My concern with this option I am not married so if I were to pass away in a year or two most of my pension would be lost. I have older children that could benefit if it were to be rolled into another qualifying plan.

Option 4 > 10 year certain life annuity $1415. I’m not married so I didn't think this would benefit me.

Option 5 > Level income annuity. From age 59 up to 62 $2870 and from 62 till death $1140. With my DOB being in 1957 SS doesn't kick in until I’m 66 1/2. I didn't think this was a good option since I’m still working. I thought it would drive me into a higher tax bracket.

Option 6 > They will keep it and manage it as they have done in the past. My concern here is how secure is it if the continue to manage it? I thought I would be better off moving it into an account controlled by me.
How's your health? What is family longevity history? If relatively good, meaning living to at least age 74-75, I'd take the annuity, single life.
If you took $263K and purchased an SPIA starting in December, the annuity company would give you $1,201 per month. A 10 year term certain annuity would give you $1,182 per month. I would not take the 10 year certain annuity since you are single and even if you were married, taking a 10 year certain is only if both parties were in extremely poor health with a bad prognosis for longevity. You can now see why the company is chomping at the bit to get rid of your liability. The 66.5 is for traditional full retirement, the company is calculating the payout as if you take SS at age 62.5, the earliest you can take it - it's known as an equalization pension using your Social Security discounted monthly pension plus the reduced pension to equal what combined payouts would be from age 59 to 62, before stepping down when SS kicks in. But that would shortchange you 30% in what you could have expected at age 66.5.

I ask about your health, because you might be able to hedge the bet somewhat about your longevity or a shortened one at that....if you were in average health and applied for a $250K life insurance policy, it would run about $140 per month for 15 years, if above average health it would be $118 per month, could be even cheaper if you were in preferred status. You could take the annuity and take a policy with kids as beneficiary, if you lapse before 15 years is up, they benefit and you benefited. If you don't lapse, you had benefit of collecting the annuity over a period of time that exceeds the policy but will still beat what you could get in the marketplace. Might be a thought.

You could invest it, but if the insurance company can't beat the pension, how do you figure you'll beat or even match their performance?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Don Christy
Posts: 391
Joined: Sun Oct 11, 2009 10:33 pm

Re: Looking For Pension Cash Out Investment Advice

Post by Don Christy »

Will you have a lump sum option at commencement if you don't take this offer?

I'm not an actuary, but it's my understanding that plan sponsors will have to use new mortality tables reflecting longer lifespans and therefore higher lump sum values soon (1-2 years). Of course, if interest rates rise that would offset the LS value increase.

How long until you want to leave and when would you be able to commence.?
“Speak only if it improves upon the silence." Mahatma Gandhi
Topic Author
CJ_58
Posts: 5
Joined: Mon Oct 24, 2016 3:30 pm

Re: Looking For Pension Cash Out Investment Advice

Post by CJ_58 »

Grt2bOutdoors wrote:I ask about your health, because you might be able to hedge the bet somewhat about your longevity or a shortened one at that....if you were in average health and applied for a $250K life insurance policy, it would run about $140 per month for 15 years, if above average health it would be $118 per month, could be even cheaper if you were in preferred status. You could take the annuity and take a policy with kids as beneficiary, if you lapse before 15 years is up, they benefit and you benefited. If you don't lapse, you had benefit of collecting the annuity over a period of time that exceeds the policy but will still beat what you could get in the marketplace. Might be a thought.

You could invest it, but if the insurance company can't beat the pension, how do you figure you'll beat or even match their performance?
Health wise I could stand to loose some weight but otherwise in good health. I'm not taking and blood pressure or cholesterol medication.

Your suggestion about the life insurance policy strategy is very intriguing. I think you are correct in that I don't think I could invest the rollover and beat the insurance company return.
Topic Author
CJ_58
Posts: 5
Joined: Mon Oct 24, 2016 3:30 pm

Re: Looking For Pension Cash Out Investment Advice

Post by CJ_58 »

Don Christy wrote:Will you have a lump sum option at commencement if you don't take this offer?

I'm not an actuary, but it's my understanding that plan sponsors will have to use new mortality tables reflecting longer lifespans and therefore higher lump sum values soon (1-2 years). Of course, if interest rates rise that would offset the LS value increase.

How long until you want to leave and when would you be able to commence.?
According to the documents I've received the lump sum offer is not offered when I reach normal retirement age which is 65, only the annuity options.

I get the impression they are structuring this offer in such a way as to "encourage" the lump sum offer to get as many folks to take it and get us off the books.

I realize they are maybe low balling this offer in some respects but I also realize I'm blessed to at least have a pension to cash out. So many companies today don't offer anything but a 401K which is how my company handles it today.
Topic Author
CJ_58
Posts: 5
Joined: Mon Oct 24, 2016 3:30 pm

Re: Looking For Pension Cash Out Investment Advice

Post by CJ_58 »

Earl Lemongrab wrote:
CJ_58 wrote:My current plan will accept the pension pay out but their funds are limited. They have life term funds managed by State Street but their other funds are non listed funds put together for their plan exclusively.
That doesn't make them bad. My company has those as well, and they provide some excellent index funds.
Hi Earl,

Suppose I do roll over the $257,000 taxable portion into my company's 401K, what do I do with the $6,000 of the non taxable? Is it possible to open a ROTH IRA to handle this? I don't know a thing about ROTH IRA's. I was thinking of taking the $6,000 and putting it towards my rainy day fund which isn't the robust at the moment. As a side note, I was surprised to see a non taxable amount being offered since this pension plan was non contributory on my part. It was totally company sponsored.
User avatar
Earl Lemongrab
Posts: 7270
Joined: Tue Jun 10, 2014 1:14 am

Re: Looking For Pension Cash Out Investment Advice

Post by Earl Lemongrab »

CJ_58 wrote:Suppose I do roll over the $257,000 taxable portion into my company's 401K, what do I do with the $6,000 of the non taxable? Is it possible to open a ROTH IRA to handle this? I don't know a thing about ROTH IRA's. I was thinking of taking the $6,000 and putting it towards my rainy day fund which isn't the robust at the moment. As a side note, I was surprised to see a non taxable amount being offered since this pension plan was non contributory on my part. It was totally company sponsored.
I would put it in a Roth IRA. That's the basic idea behind the Mega Backdoor Roth (search the forum). However, if you haven't contributed then I would double-check that there is an after-tax amount and ask how they came up with that and how it would be recorded. I assume these pension value distributions get a 1099 in similar fashion to 401(k) plans, but I'm not an expert there. Alan S. probably knows.

Earl
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