Pension (rollover IRA or stay put)?

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sonnylax
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Pension (rollover IRA or stay put)?

Post by sonnylax » Thu May 02, 2019 6:09 pm

I'm leaving my current job at big mega Telecom in a few weeks where I have a long time pension for a new smaller company without pension. And I need to decide to roll the big mega Telecom pension (lump sum) over to a Rollover IRA or leave it put.

Upon my separation from the company, the Immediate lump sum option is $175k that I could move to a Rollover IRA at Fidelity, Vanguard, etc.

Other options are to leave it alone until I'm 65 (year 2035) and then they are forecasting the following options available at age 65:
Lump Sum (at age 65) = $331k
Monthly Annuity (for Self at age 65): $2,089/month
Monthly Annuity for Self (at age 65) with 50% Survivor pop up for Spouse: $1,880 (Spouse would get half this amount after I passed until she died.)
Monthly Annuity for Self (at age 65) with 75% Survivor pop up for Spouse: $1,776 (Spouse would get 75% of this amount after I passed until she died.)

Some other financial details:
Me: 48 years old
Spouse: 41 years old
4 kids: All under the age of 8!
Me 401k: $540k
Spouse Rollover IRA: $30k

We are 80% stock (40% U.S. Large Cap Index, 20% U.S. Mid/Small Cap Index, 20% Intl Index) & 20 % fixed income (AGG, LQD, PFF, TIP). We feel like we are doing good with our retirement savings. But we don't have much at all for college savings for the 4 kiddos. My spouse is a public school teacher and she will get access to 2 other pensions (state & county). And those 2 penstions will only be more lucrative if she continues to work for another 20 (ish) years.

Would love your input on what I should do with the pension. I'm leaning toward rolling it over, so I can cut the (financial) cord with this employer and have the option to pass some of this to our kids. Also fearful of future pension benefits weighing down this Big Mega Telcom company, like Delta, GE, etc.

Also, if I move the pension to a rollover IRA - how should I invest these funds? Considering the finances (401k, etc.) above.

Thanks in advance! :D

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FiveK
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Re: Pension (rollover IRA or stay put)?

Post by FiveK » Thu May 02, 2019 9:21 pm

sonnylax wrote:
Thu May 02, 2019 6:09 pm
Upon my separation from the company, the Immediate lump sum option is $175k that I could move to a Rollover IRA at Fidelity, Vanguard, etc.

Other options are to leave it alone until I'm 65 (year 2035) and then they are forecasting the following options available at age 65:
Lump Sum (at age 65) = $331k
That's ~4% return, depending on exactly how many years between separation and age 65.
Monthly Annuity (for Self at age 65): $2,089/month
That may be even better than the lump sum at age 65, depending on what assumptions you make (plus assuming that you leave the money there at all).

You might look at rows 73-117 on the 'Misc. calcs' tab of the personal finance toolbox spreadsheet if you are interested in doing some "what if...?"s on your own.
We are 80% stock (40% U.S. Large Cap Index, 20% U.S. Mid/Small Cap Index, 20% Intl Index) & 20 % fixed income (AGG, LQD, PFF, TIP). We feel like we are doing good with our retirement savings. ...
Also, if I move the pension to a rollover IRA - how should I invest these funds? Considering the finances (401k, etc.) above.
If you leave the $175K lump sum to grow in your old company, that would be ~23.5% of your retirement assets and look very much like a bond.

If you want to stay ~80/20, that would imply moving all your current fixed income to stocks.

If you take the lump sum as a rollover IRA, see Three-fund portfolio and Tax-efficient fund placement for thoughts on how you might invest it. Good luck!

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Watty
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Re: Pension (rollover IRA or stay put)?

Post by Watty » Thu May 02, 2019 11:31 pm

Some sort of random thoughts;

One thing to watch out for is that they can take away the ability to take a lump sum later on. I have a small pension like that which had a lump sum option but they took that away for about five years because the pension was underfunded.

Read the details of the pension to find out how they calculate it. Mine was a cash balance plan and it would grow by 5% each year or the one year t-bill rate. The 5% was set years ago when they discontinued the pension and interest rates were much higher so back then it was pretty low, but now 5% is good. I decided to leave the money in the plan to get the 5%. Other people have posted that their plans got lower guaranteed rates.

Another thing to check on is to see what happens to the pension if both you and your wife die before you turn 65 and start the pension. Depending on the plan details your estate could get the lump sum amount or nothing. If it is designed so that your estate would get nothing there is nothing wrong with that since the mortality credits are part of how annuities can pay out more. You just need to understand that risk.

It is a good problem to have but if you take the pension then once that starts it will be harder to do Roth conversions in a low tax bracket because the taxable pension income will fill up the low tax brackets.

Taking the lump sum would give you more flexibility later and you can buy an annuity then if you want to. If interest rates are higher then you might get a much higher annuity payout with one that you could buy then.

I like to turn this question around to get a different perspective, In this you could ask, "I have $175K in an IRA. Should I buy a deferred annuity that starts in 17 years?" They actually sell deferred annuities like that but people rarely buy them.
sonnylax wrote:
Thu May 02, 2019 6:09 pm
the Immediate lump sum option is $175k......

Me 401k: $540k
Spouse Rollover IRA: $30k
I you took the lump sum then you would have $745K in retirement account that should grow until you retire and you will be making contributions to them too. You can crunch the numbers several ways but by the time you are 65 you could have $2 million or more in retirement accounts. Once you start Social Security and are taking RMD's you may have no need of the pension income.

I don't see a lot of need for the pension income and you would have lot of inflation risk if you leave the money in the pension plan. I would probably take the lump sum.

panine
Posts: 71
Joined: Wed Jul 29, 2015 2:32 pm

Re: Pension (rollover IRA or stay put)?

Post by panine » Thu May 02, 2019 11:44 pm

FiveK wrote:
Thu May 02, 2019 9:21 pm
sonnylax wrote:
Thu May 02, 2019 6:09 pm
Upon my separation from the company, the Immediate lump sum option is $175k that I could move to a Rollover IRA at Fidelity, Vanguard, etc.

Other options are to leave it alone until I'm 65 (year 2035) and then they are forecasting the following options available at age 65:
Lump Sum (at age 65) = $331k
That's ~4% return, depending on exactly how many years between separation and age 65.
Monthly Annuity (for Self at age 65): $2,089/month
That may be even better than the lump sum at age 65, depending on what assumptions you make (plus assuming that you leave the money there at all).

You might look at rows 73-117 on the 'Misc. calcs' tab of the personal finance toolbox spreadsheet if you are interested in doing some "what if...?"s on your own.
We are 80% stock (40% U.S. Large Cap Index, 20% U.S. Mid/Small Cap Index, 20% Intl Index) & 20 % fixed income (AGG, LQD, PFF, TIP). We feel like we are doing good with our retirement savings. ...
Also, if I move the pension to a rollover IRA - how should I invest these funds? Considering the finances (401k, etc.) above.
If you leave the $175K lump sum to grow in your old company, that would be ~23.5% of your retirement assets and look very much like a bond.

If you want to stay ~80/20, that would imply moving all your current fixed income to stocks.

If you take the lump sum as a rollover IRA, see Three-fund portfolio and Tax-efficient fund placement for thoughts on how you might invest it. Good luck!
:confused negative 4% return?... negative 23.5% of assets? what am i missing here?

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FiveK
Posts: 7239
Joined: Sun Mar 16, 2014 2:43 pm

Re: Pension (rollover IRA or stay put)?

Post by FiveK » Thu May 02, 2019 11:47 pm

panine wrote:
Thu May 02, 2019 11:44 pm
:confused negative 4% return?... negative 23.5% of assets? what am i missing here?
The difference between a tilde (i.e., "approximately") and a minus sign (i.e., "negative")? ;)

infotrader
Posts: 256
Joined: Tue Feb 28, 2017 2:39 pm

Re: Pension (rollover IRA or stay put)?

Post by infotrader » Thu May 02, 2019 11:59 pm

Take the 175k lump sum and roll it over to fidelity. It is a no brainer to me. There is little chance that the lump sum option will be available at 65. When there is a change of the pension plan, the lump sum option will be the first to go.

panine
Posts: 71
Joined: Wed Jul 29, 2015 2:32 pm

Re: Pension (rollover IRA or stay put)?

Post by panine » Fri May 03, 2019 9:39 am

FiveK wrote:
Thu May 02, 2019 11:47 pm
panine wrote:
Thu May 02, 2019 11:44 pm
:confused negative 4% return?... negative 23.5% of assets? what am i missing here?
The difference between a tilde (i.e., "approximately") and a minus sign (i.e., "negative")? ;)
ah. yeah, definitely negative signs on my computer at least. :happy

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sonnylax
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Joined: Fri Jun 01, 2012 4:30 am

Re: Pension (rollover IRA or stay put)?

Post by sonnylax » Fri May 24, 2019 3:31 pm

Thanks for the feedback!

I agree with the earlier analysis.... It's around 4% mark I'd have to beat, managing this myself.

Anything 4.5% or above for that next 17 years beats the current forecast model. so I'm going to move it to a Rollover IRA at Fidelity.

lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Pension (rollover IRA or stay put)?

Post by lakpr » Fri May 24, 2019 5:29 pm

Possible to roll over the pension amount into the 401k itself? Not a big fan of Rollover IRAs since they have the drawback of interfering with backdoor Roth

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sonnylax
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Re: Pension (rollover IRA or stay put)?

Post by sonnylax » Tue Jul 02, 2019 9:49 am

lakpr wrote:
Fri May 24, 2019 5:29 pm
Possible to roll over the pension amount into the 401k itself? Not a big fan of Rollover IRAs since they have the drawback of interfering with backdoor Roth
How so?

Couldn't you pay the applicable taxes and convert Rollover IRA dollars to Roth IRA dollars down the road?

SovereignInvestor
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Re: Pension (rollover IRA or stay put)?

Post by SovereignInvestor » Tue Jul 02, 2019 10:02 am

The pension is like fixed income.

But those who say it is 4% implied return overstate it.


If God forbid you were to die before you take it, does wife get any of it?


If not then the pension is returning less than 4%, the 4% would include provision for chance you don't live to.65 to collect it. So the actual return may be actuarially in the 3% range which isn't that good for fixed income since it isn't risk free..it's probably more like a high grade corporate bond.

I would personally take the lump sum now and if you wanted to wait then just invest it in high grade fixed income and get the same return and if you don't live to 65 the wife gets the sum instead of losing it.

This would add to.your fixed income allocation.

If it has a joint and survivor feature until 65 then it becomes more attractive to leave since 4% fixed income return is decent.

SovereignInvestor
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Re: Pension (rollover IRA or stay put)?

Post by SovereignInvestor » Tue Jul 02, 2019 10:06 am

In extreme example, if I promise you $1 now or 1 million if you live to 120 years old...72 years later but only if you're alive and the heirs get nothing if you pass... That is implied 21% return. But statistically the chance of living to 120 is zero so the actual mortality adjusted return is 0. Better off taking $1 now.

lakpr
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Re: Pension (rollover IRA or stay put)?

Post by lakpr » Tue Jul 02, 2019 10:16 am

sonnylax wrote:
Tue Jul 02, 2019 9:49 am
How so?

Couldn't you pay the applicable taxes and convert Rollover IRA dollars to Roth IRA dollars down the road?
If your annual combined income exceeds $203k for 2019, you are not allowed to make a Roth contribution for either spouse. The way to get around it is dubbed the “Backdoor Roth” (search for this term in the wiki), and is usually a two step process.

1. Make a non-deductible contribution to a traditional IRA. There are no income limits to do so, you only need earned income
2. Convert that non-deductible contribution to a Roth IRA.

In step 2, though, if you have any Rollover IRA, the conversion of that amount you do in step 2 above is deemed to be a proportional conversion across all your IRAs. So in your case, you already have $175k in a Fidelity Rollover IRA. You are converting $6k to Roth. The way IRS sees it, you have converted $6k out of $181k (out of which $6k is a “basis” that is not taxable) into Roth.

So IRS sees this conversion as 6k * 6k/181k = $199 as non-taxable basis, the remaining $5801 as additional taxable income.

What just happened here is that — if you take only the year 2019 view — you paid taxes on the $6k you contributed in step 1, and you are paying additional taxes on $5801 of the same $6000 again.

What happens if there were no Rollover IRA? Then $6000 is the entire basis, $6000 is what you converted, the taxable income is zero, the end effect is you shielded $6k into Roth account and all future growth is tax free.

Lastly, this may or may not be a concern to you personally if your combined family income is quite far off from the $193k to $203k Roth phaseout threshold.

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tfb
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Re: Pension (rollover IRA or stay put)?

Post by tfb » Tue Jul 02, 2019 11:18 am

sonnylax wrote:
Thu May 02, 2019 6:09 pm
Upon my separation from the company, the Immediate lump sum option is $175k that I could move to a Rollover IRA at Fidelity, Vanguard, etc.

Other options are to leave it alone until I'm 65 (year 2035) and then they are forecasting the following options available at age 65:
Lump Sum (at age 65) = $331k
Monthly Annuity (for Self at age 65): $2,089/month
Monthly Annuity for Self (at age 65) with 50% Survivor pop up for Spouse: $1,880 (Spouse would get half this amount after I passed until she died.)
Monthly Annuity for Self (at age 65) with 75% Survivor pop up for Spouse: $1,776 (Spouse would get 75% of this amount after I passed until she died.)
You can work out the math with the two calculators here:

https://thefinancebuff.com/pension-lump ... vivor.html

The annuity options can be worth a lot more than the $175k lump sum now or the $331k lump sum at age 65.
Harry Sit, taking a break from the forums.

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