Weighing mid-career break and pension decision

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AmericaninParis
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Weighing mid-career break and pension decision

Post by AmericaninParis » Tue Sep 18, 2018 9:34 am

After a decade of work with my current employer (an international organization) I am starting to feel ready for a new adventure. I'm thinking of taking a year-long career break to recharge my batteries - I would like to start this in the next year or so. Later, I would like to start my own business.

I'm 41 years old, so the question is how to make this transition financially. If I leave my job before the end of the year, I take a lump sum of about $260k (after tax). If I stay longer, then I keep earning a salary, but also vest in the pension scheme, which starts paying at age 63. As a US citizen living abroad the past decade my tax deferred options for retirement are limited and I don't expect much from social security. I plan to stay abroad for now.

The pension is inflation linked – with 2% assumption I would get about $40k/yr (nominal) starting at 63, rising with CPI over time. I have the option to take the pension in euros or dollars depending on where I settle. It’s guaranteed by multiple governments and tax deferred until payments start. I’ve run the numbers and if I live to 90, it's equivalent of about a 4.8-5.0% after tax IRR on the lump sum, not including additional salary savings from working.

I don’t need access to the money in the short term. One part of me says to take the lump sum and invest it (only option in taxable account), to keep control, maybe get a better return, and buy an annuity later. Or I could use it to invest in an apartment, but the rental yield would be a bit less than the pension.

Another part of me likes the pension as a diversification strategy and good longevity insurance (it's priced better than annuities) with a nice income floor...albeit only after 20 years. In that case, I would keep the equity portion of my portfolio higher for longer. The pension also has a survivor and orphan benefit, though at lower rates.

My current portfolio is $815k, allocated as follows –
• Between Equities and Fixed Income, I maintain a 70:30 AA. This is mostly in taxable, with $55k in IRAs.
- $400k in total market Equity ETFs (50:50 US: International)
- $170k in Fixed Income (mostly total bond fund and a HY savings account in France)
• $150k Cash
• $70k Annuity (this is a legacy investment I plan to cash out and reinvest according to my AA)
• $20k Private equity in a startup

Would appreciate any insights on my situation or the financial decision. Thank you!
Last edited by AmericaninParis on Sun Oct 21, 2018 9:28 am, edited 2 times in total.

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Meg77
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Re: Weighing mid-career break and pension decision

Post by Meg77 » Tue Sep 18, 2018 9:58 am

Hi there. I'm not sure why you are even analyzing the pension; you need and want to leave the job! Forget about the pension. Take the $260k distribution at the end of the year, and start the next chapter in your life. You'll be 40, single, healthy and a millionaire. Not a bad baseline from which to launch whatever you want to do next.

Besides, from a purely numbers point of view you're likely to be able to do better than 5.5% return on your own. This is true particularly if you invest in yourself and your own business, but even in your current AA 5.5% over the next 40 years shouldn't be hard to beat. But let's say you only earn 5% or 5.5% yourself. Cashing out still makes sense because you'd have control of the funds AND you could leave the money to someone when you die versus the principal vanishing if it stays in the form of a pension. Plus as rates rise even an annuity bought in the future should provide a higher payout than 5.5%.
"An investment in knowledge pays the best interest." - Benjamin Franklin

Valuethinker
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Re: Weighing mid-career break and pension decision

Post by Valuethinker » Tue Sep 18, 2018 10:14 am

AmericaninParis wrote:
Tue Sep 18, 2018 9:34 am


I don’t need the money in the short term. My gut says to take the lump sum and invest it, in order to keep control, and then maybe buy an annuity later. My head says take the pension as a fairly low risk diversification strategy, but it seems like a long time to keep that money tied up.

My current portfolio is $830k, allocated as follows –
• Between Equities and Fixed Income, I maintain a 70:30 AA. This is mostly in taxable, with $55k in IRAs.
- $400k in diversified Equity ETFs (50:50 US: International)
- $170k in Fixed Income (mostly total bond fund and a HY savings account in France)
• $165k Cash
• $70k Annuity (this is a legacy investment I plan to cash out and reinvest according to my AA)
• $20k Private equity in a startup
• I don’t expect much from SS as I have been working outside the US for a while now

Would appreciate any insights on my situation or the financial decision. Thank you!
Assuming you can square away the tax on a deferred pension then I would take the pension.

Guaranteed and CPI indexed. Is there a spousal benefit? You and your (future) spouse between you could collect that pension for 40 years. That's a phenomenal amount of money.

I have not run the numbers on this but that is more than post people retire on and you have earned that by the time you are 40!

Your "gut" is steering you wrong. Would you have felt this way at the end of 2008? Equity markets have done phenomenally well in the last 10 years, and bonds are paying almost the lowest yields in history - there are plenty of storms ahead.

Your business venture could go wrong. Lots of other bad things could happen - you could die prematurely, however your spouse (assuming spousal benefit) would then have a survivor pension.

On your asset allocation the private equity you have to value at zero. Really, it's a lottery ticket. Don't expect anything and be pleasantly surprised if you do get anything - bunce as they say in Yorkshire.

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Watty
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Re: Weighing mid-career break and pension decision

Post by Watty » Tue Sep 18, 2018 10:39 am

AmericaninParis wrote:
Tue Sep 18, 2018 9:34 am
The pension is inflation linked – with a 2% assumption I would get about $35k/yr starting at 63, rising with CPI over time.
This is confusing. If this in 2018 dollars?

If not and it is in inflated dollars then it might be worth something less than half that with 23 years of 2% inflation.

AmericaninParis wrote:
Tue Sep 18, 2018 9:34 am
If I leave my job by the end of the year, I can take a lump sum payment of about $260k (after tax). If I stay longer, then I vest in the pension scheme, which starts paying at age 63.
Reading in between the lines I would suspect that you will not last in your current job for many years even if you don't leave by the end of the year. If that is correct then leaving before the end of the year might make sense.
AmericaninParis wrote:
Tue Sep 18, 2018 9:34 am
I’m worried about leaving loose ends with projects I manage, but I’ve reached a limit where I just can’t power through at work anymore.
People often think they are more indispensable than they really are. If they would have a dire problem without your then they might be able to work out some sort of contract for a while to help the transition.
AmericaninParis wrote:
Tue Sep 18, 2018 9:34 am
I can’t resolve this with a vacation, during which I end up working anyways. I need a sabbatical to recharge, meditate, and explore where my real passions are in life.


You have a lot going on and you might consider getting some professional counseling. One thing I would be concerned about is what you will do if you just quit that job. Sitting in a room and doing nothing would not be good.
AmericaninParis wrote:
Tue Sep 18, 2018 9:34 am
I don’t expect much from SS as I have been working outside the US for a while now
I assume that you are a US citizen. Two things to consider;

1) Is your visa work related and will you have to leave the country you are in if you leave that job?

2) It is a long way off but to qualify for Medicare for when you retire normally takes about 10 years of working under Medicare. There are lots of details but even some work you did while in high school can help you qualify for it. If you don't have that then there are at best additional fees. You may not be planning on returning to the US but plans can change or you might have to return to the US some day. If you don't have the 10 years of working under Medicare you might want to keep that in the back our mind and get any additional needed work years before you turn 65.

AmericaninParis
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Re: Weighing mid-career break and pension decision

Post by AmericaninParis » Wed Sep 19, 2018 12:22 pm

Thanks to all for the replies.

The $35k/yr starting at 63 would be in nominal dollars (so about $23k/yr in 2018 dollars assuming 2% annual inflation).

I understand the visa issues, but I have a way to manage those so I would not have to move. And I certainly have plans of things I would like to do once I leave the job.

So it really just comes down to the pension vs lump sum decision, which is still not an easy one...

gluskap
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Re: Weighing mid-career break and pension decision

Post by gluskap » Wed Sep 19, 2018 2:20 pm

Personally I would take the lump sum as I like more control of my money and I think you could get more than 5.5% return over a long time period. Plus you have more opportunities to decide how much you want to take out each year to better manage your taxes. If you later change your mind and want a payment that is more predictable as a baseline you can always buy an annuity later.

AmericaninParis
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Re: Weighing mid-career break and pension decision

Post by AmericaninParis » Sun Oct 21, 2018 9:36 am

Thanks, very helpful...I have not yet made a decision, but I think they are both good options and at least I'm now more comfortable with the trade offs!

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