Dad asked for my help on pension decision that I do not understand

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AirTimeMD
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Dad asked for my help on pension decision that I do not understand

Post by AirTimeMD » Tue Jul 10, 2018 2:19 pm

Good afternoon,

Dad is 68 years old, earns approximately $70,000 and looks to me for most money management advice. Little does he know that I look to BH for my money management education and while I'm savvy with how to create a 3 fund portfolio and look for low expense ratio market index funds, I'm really out of my element with regards to evaluating annuities and retirement options (I'm under 40).

Here is the current situation I need BH help with:

Dad received a letter from a company stating that-
"The XXXX Pension Plan was terminated on December 31, 2017." He is provided with several options and must select one before August 15, 2018.

Options:
Lump Sum Payment-
-Elect to receive a single lump sum payment of $63,021.57 paid in September 2018
-The lump sum payment may be taken as a taxable cash payment, or rolled over tax free to an IRA or another employer's retirement plan.

Immediate Annuity Payment-
-Elect to start monthly benefit payments effective September 2018
--Single Life Annuity - $331.32 month
--50% Joint and Survivor Annuity - $296.93 month + $148.47 month to your survivor after death for rest of their life
--75% Joint and Survivor Annuity - $282.27 month + $211.70 month provided after death for rest of survivor life

Defer Payment Until Later-
-Elect to defer your payment until later (payments can only be requested after you reach your early or normal retirement date under the plan)

**Note: If you elect an annuity option or elect to defer your payment to a later date, you will receive more information 2019, after COMPANYXXX receives regulatory approval and selects an insurance company to administer future benefits. Yo will be provided information on how to contact the insurance company selected.


Dad feels that he will work for 5 more years. He earns approximately $70,000 a year and lives in FL. He additionally collects a spousal survivorship benefit after my mothers death of $29,472/year.

What should he consider when evaluating the options above?

Thank you always,

ATD

delamer
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Re: Dad asked for my help on pension decision that I do not understand

Post by delamer » Tue Jul 10, 2018 2:40 pm

There are lots of issues that he should take into consideration.

One thing to consider is how much in savings your father has. If he has very little in liquid assets, then he might want to take the lump sum. If he has other assets then the lump sum is relatively less attractive.

Another consideration is his other income when he retires. For example, if the survivor benefit is from Social Security, how will it change when he retires? If it is from a pension, will it be affected by the Windfall Elimination Provision? Otherwise, how much Social Secuiry will he receive on his own record?

I assume the survivor annuity for his pension is irrelevant since your mother is no longer living? And I assume it would make sense for him to defer (if he decides on the annuity) while he is still working in order to increase the payout?

Finally, how do the above sources of income compare to his expected expenses in retirement?

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gunn_show
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Re: Dad asked for my help on pension decision that I do not understand

Post by gunn_show » Tue Jul 10, 2018 2:48 pm

delamer wrote:
Tue Jul 10, 2018 2:40 pm
There are lots of issues that he should take into consideration.

One thing to consider is how much in savings your father has.

Another consideration is his other income when he retires.

Finally, how do the above sources of income compare to his expected expenses in retirement?
+1 lot of great questions and topics posted by delamer

I would add we need to understand his health at 68 and how that relates to life expectancy

There are still a half dozen questions we would need details on to really answer this one. I am no expert in retirement and annuity stuff, but understanding dad's health (ie do you both expect him to live another 5, 10, 20, 30 years?), current savings, retirement income and sources, and current and retired expenses (does he still have a mortgage or is he debt free?)

Lump sum makes sense if he may not live more than 10-20 years. Annuity could make sense if he will live into his 80s and 90s. Also what is dad's risk flavor? Annuity has little to no risk, lump sum and investing in XYZ adds risk.
"The best life hack of all is to just put the work in and never give up." Bas Rutten

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Artful Dodger
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Re: Dad asked for my help on pension decision that I do not understand

Post by Artful Dodger » Tue Jul 10, 2018 2:56 pm

AirTimeMD wrote:
Tue Jul 10, 2018 2:19 pm
Good afternoon,

Dad is 68 years old, earns approximately $70,000 and looks to me for most money management advice. Little does he know that I look to BH for my money management education and while I'm savvy with how to create a 3 fund portfolio and look for low expense ratio market index funds, I'm really out of my element with regards to evaluating annuities and retirement options (I'm under 40).

Here is the current situation I need BH help with:

Dad received a letter from a company stating that-
"The XXXX Pension Plan was terminated on December 31, 2017." He is provided with several options and must select one before August 15, 2018.

Options:
Lump Sum Payment-
-Elect to receive a single lump sum payment of $63,021.57 paid in September 2018
-The lump sum payment may be taken as a taxable cash payment, or rolled over tax free to an IRA or another employer's retirement plan.

Immediate Annuity Payment-
-Elect to start monthly benefit payments effective September 2018
--Single Life Annuity - $331.32 month
--50% Joint and Survivor Annuity - $296.93 month + $148.47 month to your survivor after death for rest of their life
--75% Joint and Survivor Annuity - $282.27 month + $211.70 month provided after death for rest of survivor life

Defer Payment Until Later-
-Elect to defer your payment until later (payments can only be requested after you reach your early or normal retirement date under the plan)

**Note: If you elect an annuity option or elect to defer your payment to a later date, you will receive more information 2019, after COMPANYXXX receives regulatory approval and selects an insurance company to administer future benefits. Yo will be provided information on how to contact the insurance company selected.

...
He really has three options.

1) Take the $63,021.57 lump sum, either as at taxable payment, or roll it over to an IRA.
2) Take an immediate annuity of $331.22 a month. Dad is widowed so no need to consider a joint life payment reduction.
3) Defer until a later date.

Number 1 is probably the best choice, and probably to roll over to an IRA, so he's not taxed at the maximum amount while he's still working. I checked a quick immediate annuity calculator, and he could do a lot better than the quoted payout, so I wouldn't do that. The one unknown is if there is any benefit to deferring the payment. He, or you, may be able to find something out from his HR area. I would ask before making a final decision.

soccerrules
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Re: Dad asked for my help on pension decision that I do not understand

Post by soccerrules » Tue Jul 10, 2018 3:02 pm

Without knowing his other assets, expenses, SS, retirement plan-- I'd go for the Lump sum rollover to IRA.
Don't let your outflow exceed your income or your upkeep will be your downfall.

Dottie57
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Re: Dad asked for my help on pension decision that I do not understand

Post by Dottie57 » Tue Jul 10, 2018 3:04 pm

I plopped the amount inro immediateannuities.com for single life. Amount is 383 a month. Play with the idea of purchasing an immediate annuity or a deferred one. I think this would generate more income.

Purchasing a SPDA give about 600 a month.
Last edited by Dottie57 on Tue Jul 10, 2018 3:05 pm, edited 1 time in total.

Silk McCue
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Re: Dad asked for my help on pension decision that I do not understand

Post by Silk McCue » Tue Jul 10, 2018 3:05 pm

Delamer post some good questions while I was researching this information and covered other issues that I now do not need to address.

Given that you dad is single you are down to 3 options on the pension. You made no mention of a COLA so I assumed there is none. Cash up front, Single Life Annuity or Single Life Deferred Annuity. You made no mention of a COLA so I assumed there is none. I quickly ran numbers on https://www.immediateannuities.com/ for a 68 yr old male residing in Florida with investment of $63,021. Result shows:

Immediate Life $383 monthly
Immediate Life with Cash refund $344 monthly.
Both are better than the company offering and the Cash Refund will leave money to the estate (if any) upon death).

I also ran a the same numbers but with a 5 year deferral to match his anticipated retirement.
5 year Deferred Annuity $604
5 year Deferred Annuity with Cash refund $518

Bottom line - it appears likely that you can beat the company's payout using other sources.

If he invested the lump sum and consistently generated a 3.5% return, the money would last for a but under 24 years (close enough for this discussion). That is based on their proposed payment of $331.32. Having a sense of what you might be able to generate by investing is important to know.

Cheers

Globalviewer58
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Re: Dad asked for my help on pension decision that I do not understand

Post by Globalviewer58 » Tue Jul 10, 2018 3:08 pm

Using your figure of $63,021 as the offered lump sum and comparing to the quote for a SPIA (Single Premium Immediate Annuity) at www.immediateannuities.com, he could receive a monthly payment of $387. So in that case it would be preferred to roll the lump sum over to a Rollover IRA or a 401K account.

It seems he does not need the monthly payment at this time based on his plan to work another 5 years. He could select a Target Retirement Date mutual fund for the investment inside the Rollover IRA or 401k.

gd
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Location: MA, USA

Re: Dad asked for my help on pension decision that I do not understand

Post by gd » Wed Jul 11, 2018 6:30 am

There is another factor which won't get much praise from others here, which is a psychological one-- checking the "pay me an annuity" box will settle the matter and provide a payment until death without further fuss. Lump sums, with or without SPIA, require more initiative and knowledge. People here feed on that stuff, but lots of others just let things slide. He *can* do that stuff, but will he or you? If you gave *rollover and SPIA later" advice to my (not yet!) widowed spouse, for example, it would just never happen. The fact that you are posting here in response to his request for advice indicates probably yes. It's just one of the factors to consider.

mouses
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Re: Dad asked for my help on pension decision that I do not understand

Post by mouses » Wed Jul 11, 2018 6:43 am

Annuities make me nervous, because they depend on the insurance company staying in business, Or is that wrong? Is there some other guarantee?

Silk McCue
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Re: Dad asked for my help on pension decision that I do not understand

Post by Silk McCue » Wed Jul 11, 2018 6:46 am

gd wrote:
Wed Jul 11, 2018 6:30 am
There is another factor which won't get much praise from others here, which is a psychological one-- checking the "pay me an annuity" box will settle the matter and provide a payment until death without further fuss. Lump sums, with or without SPIA, require more initiative and knowledge. People here feed on that stuff, but lots of others just let things slide. He *can* do that stuff, but will he or you? If you gave *rollover and SPIA later" advice to my (not yet!) widowed spouse, for example, it would just never happen. The fact that you are posting here in response to his request for advice indicates probably yes. It's just one of the factors to consider.
I'm all for simplicity, but the effort necessary to get a higher payback for life with an added option of choosing to leave the unused balance as an inheritance in the event of an untimely early death is worth the tiny amount of investigation and effort necessary to purchase a superior SPIA.

Cheers

grok87
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Re: Dad asked for my help on pension decision that I do not understand

Post by grok87 » Wed Jul 11, 2018 6:56 am

Haven’t looked at the numbers in detail yet.

But just want to say the lump sum is almost always a TERRIBLE deal.

See this thread for example

viewtopic.php?f=10&t=218067

Unless there is very strong evidence otherwise I would go with the annuity/pension option.

Cheers,
Grok
Keep calm and Boglehead on. KCBO.

Sportswhiz00
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Re: Dad asked for my help on pension decision that I do not understand

Post by Sportswhiz00 » Wed Jul 11, 2018 6:58 am

mouses wrote:
Wed Jul 11, 2018 6:43 am
Annuities make me nervous, because they depend on the insurance company staying in business, Or is that wrong? Is there some other guarantee?
Most state insurance agencies have funds that cover insolvency up to a dollar amount. For example in Illinois you are protected for an an annuity up to $250,000. so there is zero risk up to that amount. Beyond that, insurance companies are highly regulated and so the risk of a highly rated company not being able to claims is low. I’m not saying I’d put put my entire life savings into an annuity with one company, but for a smaller chuk of portfolio I wouldn’t view solvency as a risk worth worrying about it. (The risk isn’t really all that different from buying life insurance with a company — you are banking on the company being able to pay out of you for 20 or 30 years down the road.) Of course that assumes that it makes sense from a $ perspective to actually buy the annuity, which is an entirely separate question from yours.

rantk81
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Re: Dad asked for my help on pension decision that I do not understand

Post by rantk81 » Wed Jul 11, 2018 7:04 am

Sportswhiz00 wrote:
Wed Jul 11, 2018 6:58 am
mouses wrote:
Wed Jul 11, 2018 6:43 am
Annuities make me nervous, because they depend on the insurance company staying in business, Or is that wrong? Is there some other guarantee?
Most state insurance agencies have funds that cover insolvency up to a dollar amount. For example in Illinois you are protected for an an annuity up to $250,000. so there is zero risk up to that amount.
As an Illinois resident, I wouldn't be so quick to assume that a private insurance company would be less likely to be solvent than the state of Illinois. :D

Sportswhiz00
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Re: Dad asked for my help on pension decision that I do not understand

Post by Sportswhiz00 » Wed Jul 11, 2018 7:18 am

rantk81 wrote:
Wed Jul 11, 2018 7:04 am
Sportswhiz00 wrote:
Wed Jul 11, 2018 6:58 am
mouses wrote:
Wed Jul 11, 2018 6:43 am

As an Illinois resident, I wouldn't be so quick to assume that a private insurance company would be less likely to be solvent than the state of Illinois. :D
Haha.i know that was, largely, in jest, but for the benefit of the others these state funds are generally separate associates that are funded by contributions from the insurance companies themselves — its not just a promise from the state.

Sportswhiz00
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Re: Dad asked for my help on pension decision that I do not understand

Post by Sportswhiz00 » Wed Jul 11, 2018 7:19 am

rantk81 wrote:
Wed Jul 11, 2018 7:04 am
Sportswhiz00 wrote:
Wed Jul 11, 2018 6:58 am
mouses wrote:
Wed Jul 11, 2018 6:43 am

As an Illinois resident, I wouldn't be so quick to assume that a private insurance company would be less likely to be solvent than the state of Illinois. :D
Haha.i know that was, largely, in jest, but for the benefit of the others these state funds are generally separate associations that are funded by contributions from the insurance companies themselves — its not just a promise from the state.

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dwickenh
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Re: Dad asked for my help on pension decision that I do not understand

Post by dwickenh » Wed Jul 11, 2018 7:24 am

rantk81 wrote:
Wed Jul 11, 2018 7:04 am
Sportswhiz00 wrote:
Wed Jul 11, 2018 6:58 am
mouses wrote:
Wed Jul 11, 2018 6:43 am
Annuities make me nervous, because they depend on the insurance company staying in business, Or is that wrong? Is there some other guarantee?
Most state insurance agencies have funds that cover insolvency up to a dollar amount. For example in Illinois you are protected for an an annuity up to $250,000. so there is zero risk up to that amount.
As an Illinois resident, I wouldn't be so quick to assume that a private insurance company would be less likely to be solvent than the state of Illinois. :D
Amen to that!
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

capjak
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Re: Dad asked for my help on pension decision that I do not understand

Post by capjak » Wed Jul 11, 2018 7:34 am

dwickenh wrote:
Wed Jul 11, 2018 7:24 am
rantk81 wrote:
Wed Jul 11, 2018 7:04 am
Sportswhiz00 wrote:
Wed Jul 11, 2018 6:58 am
mouses wrote:
Wed Jul 11, 2018 6:43 am
Annuities make me nervous, because they depend on the insurance company staying in business, Or is that wrong? Is there some other guarantee?
Most state insurance agencies have funds that cover insolvency up to a dollar amount. For example in Illinois you are protected for an an annuity up to $250,000. so there is zero risk up to that amount.
As an Illinois resident, I wouldn't be so quick to assume that a private insurance company would be less likely to be solvent than the state of Illinois. :D
Amen to that!
My understanding as an Illinois resident is the the insurance funds are separate from the state.

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dodecahedron
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Re: Dad asked for my help on pension decision that I do not understand

Post by dodecahedron » Wed Jul 11, 2018 7:41 am

mouses wrote:
Wed Jul 11, 2018 6:43 am
Annuities make me nervous, because they depend on the insurance company staying in business, Or is that wrong? Is there some other guarantee?
Employment-based annuities are different from retail annuities you purchase as an individual because federal ERISA (Employee Retirement Income Security Act) guarantees provide some backup. Retail annuities you purchase as an individual don't get ERISA protection but they do have some state insurance association backup (generally less secure-feeling than ERISA.) Neither is 100% comparable to FDIC insurance.

For the OP, assuming that he plans to use Medicare for heath insurance after retirement, another consideration for your dad in managing income flows are IRMAA surcharges on his Medicare premiums.

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dodecahedron
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Re: Dad asked for my help on pension decision that I do not understand

Post by dodecahedron » Wed Jul 11, 2018 7:45 am

capjak wrote:
Wed Jul 11, 2018 7:34 am
dwickenh wrote:
Wed Jul 11, 2018 7:24 am
rantk81 wrote:
Wed Jul 11, 2018 7:04 am
Sportswhiz00 wrote:
Wed Jul 11, 2018 6:58 am
mouses wrote:
Wed Jul 11, 2018 6:43 am
Annuities make me nervous, because they depend on the insurance company staying in business, Or is that wrong? Is there some other guarantee?
Most state insurance agencies have funds that cover insolvency up to a dollar amount. For example in Illinois you are protected for an an annuity up to $250,000. so there is zero risk up to that amount.
As an Illinois resident, I wouldn't be so quick to assume that a private insurance company would be less likely to be solvent than the state of Illinois. :D
Amen to that!
My understanding as an Illinois resident is the the insurance funds are separate from the state.
I don't know specifically about Illinois, but in general, state insurance guarantee funds are indeed separate from the state's assets. The backup for a privately purchased annuity is definitely NOT the "full faith and credit" of the state where you purchased the annuity. But as I mentioned above, employers can't just unload their employer obligations onto an insurance company and tell their former employees "Good luck"--there are continuing ERISA protections.

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dwickenh
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Re: Dad asked for my help on pension decision that I do not understand

Post by dwickenh » Wed Jul 11, 2018 7:48 am

capjak wrote:
Wed Jul 11, 2018 7:34 am
dwickenh wrote:
Wed Jul 11, 2018 7:24 am
rantk81 wrote:
Wed Jul 11, 2018 7:04 am
Sportswhiz00 wrote:
Wed Jul 11, 2018 6:58 am
mouses wrote:
Wed Jul 11, 2018 6:43 am
Annuities make me nervous, because they depend on the insurance company staying in business, Or is that wrong? Is there some other guarantee?
Most state insurance agencies have funds that cover insolvency up to a dollar amount. For example in Illinois you are protected for an an annuity up to $250,000. so there is zero risk up to that amount.
As an Illinois resident, I wouldn't be so quick to assume that a private insurance company would be less likely to be solvent than the state of Illinois. :D
Amen to that!
My understanding as an Illinois resident is the the insurance funds are separate from the state.
And we won't raise your taxes either.......
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

IowaFarmBoy
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Re: Dad asked for my help on pension decision that I do not understand

Post by IowaFarmBoy » Wed Jul 11, 2018 7:57 am

AirTimeMD wrote:
Tue Jul 10, 2018 2:19 pm

Immediate Annuity Payment-
-Elect to start monthly benefit payments effective September 2018
--Single Life Annuity - $331.32 month
--50% Joint and Survivor Annuity - $296.93 month + $148.47 month to your survivor after death for rest of their life
--75% Joint and Survivor Annuity - $282.27 month + $211.70 month provided after death for rest of survivor life
You said your father is single so he doesn't need to use a joint option but you may want to clarify how the survivor options actually works and determine whether you or someone else can be a joint annuitant. That may or may not be a desirable option depending on his financial situation and health.

My company has a pension plan with options that sound similar. I am allowed to use a spouse or dependent as a survivor. Since I am married, I've never dug into the definition of a "dependent" for the purposes of the pension plan- i.e. whether it requires actually dependency or just needs to be an heir.

EDIT: I took a look at our plan and their are dependency requirements that seem pretty similar (maybe the same) as for being able to claim someone as a dependent on your tax return. Not sure if dependents really matter on taxes anymore with the elimination of personal exemptions. So likely your father is only looking at the single life option if he annuitizes. (end of edit)

In our plan, the 50% option means that if I die first, my spouse gets a 50% benefit. If she dies first, I keep 100%. The 75% option means that whenever either of us dies, the survivor of the two of us gets 75%. Based on the wording you have above I suspect yours may work the same.

It's probably worth a call with your father to the HR department to make sure you understand the options.
Last edited by IowaFarmBoy on Fri Jul 13, 2018 5:19 pm, edited 1 time in total.

bradpevans
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Re: Dad asked for my help on pension decision that I do not understand

Post by bradpevans » Wed Jul 11, 2018 8:03 am

Silk McCue wrote:
Tue Jul 10, 2018 3:05 pm
Delamer post some good questions while I was researching this information and covered other issues that I now do not need to address.

Given that you dad is single you are down to 3 options on the pension. You made no mention of a COLA so I assumed there is none. Cash up front, Single Life Annuity or Single Life Deferred Annuity. You made no mention of a COLA so I assumed there is none. I quickly ran numbers on https://www.immediateannuities.com/ for a 68 yr old male residing in Florida with investment of $63,021. Result shows:

Immediate Life $383 monthly
Immediate Life with Cash refund $344 monthly.
Both are better than the company offering and the Cash Refund will leave money to the estate (if any) upon death).

I also ran a the same numbers but with a 5 year deferral to match his anticipated retirement.
5 year Deferred Annuity $604
5 year Deferred Annuity with Cash refund $518

Bottom line - it appears likely that you can beat the company's payout using other sources.

If he invested the lump sum and consistently generated a 3.5% return, the money would last for a but under 24 years (close enough for this discussion). That is based on their proposed payment of $331.32. Having a sense of what you might be able to generate by investing is important to know.

Cheers
Not disputing the numbers above but a question:
What is the tax impact of taking the lump sum and then buying the annuity?
If the 63,021 is "taxed down", then the comparison might not quite be apples to apples

A work pension/annuity is an employee benefit, so one would hope it is better
than could be purchased in the open market.

It has other upsides in that it is a steady stream of income for life (assuming solvency of course).

Can one "invest and do better" is quite different from "does one want to even try to invest and do better"

Silk McCue
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Re: Dad asked for my help on pension decision that I do not understand

Post by Silk McCue » Wed Jul 11, 2018 8:19 am

bradpevans wrote:
Wed Jul 11, 2018 8:03 am

Not disputing the numbers above but a question:
What is the tax impact of taking the lump sum and then buying the annuity?
If the 63,021 is "taxed down", then the comparison might not quite be apples to apples

A work pension/annuity is an employee benefit, so one would hope it is better
than could be purchased in the open market.

It has other upsides in that it is a steady stream of income for life (assuming solvency of course).

Can one "invest and do better" is quite different from "does one want to even try to invest and do better"
From the Original Post the lump sum can be rolled into an IRA. Given the fact that the market is offering a better annuity it would be a no brainer to do so if you wanted to annuitize.
Options:
Lump Sum Payment-
-Elect to receive a single lump sum payment of $63,021.57 paid in September 2018
-The lump sum payment may be taken as a taxable cash payment, or rolled over tax free to an IRA or another employer's retirement plan.

AirTimeMD
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Re: Dad asked for my help on pension decision that I do not understand

Post by AirTimeMD » Wed Jul 11, 2018 9:34 am

Hi All,

I have read all responses and continue to let them soak in. I will update this thread when I speak with him tomorrow and follow up if their are more questions.

I HAVE TO SAY - Thank you thank you thank you thank you. It's rare that I allow myself the vulnerability of admitting that I don't know diddly about an issue. Every single post on this thread was helpful, productive, and will ultimately enhance my education and allow me provide my father with valuable information.

I am so thankful for this community.

ATD

AirTimeMD
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Re: Dad asked for my help on pension decision that I do not understand

Post by AirTimeMD » Wed Jul 11, 2018 9:46 am

Question-

The paperwork never mentions Roth IRA but based on option 1, is he able to roll it over into a Traditional or Roth IRA?

I've never performed a rollover into an IRA. All I know is that at 30 I max 5500 a year into my IRA. Does he just elect to rollover and provide information to an existing Traditional/Roth IRA or how does this work?

ShowMeTheER
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Re: Dad asked for my help on pension decision that I do not understand

Post by ShowMeTheER » Wed Jul 11, 2018 9:48 am

Lump Sum - roll to IRA

Silk McCue
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Re: Dad asked for my help on pension decision that I do not understand

Post by Silk McCue » Wed Jul 11, 2018 10:12 am

AirTimeMD wrote:
Wed Jul 11, 2018 9:46 am
Question-

The paperwork never mentions Roth IRA but based on option 1, is he able to roll it over into a Traditional or Roth IRA?

I've never performed a rollover into an IRA. All I know is that at 30 I max 5500 a year into my IRA. Does he just elect to rollover and provide information to an existing Traditional/Roth IRA or how does this work?
I can't tell if he would be allowed to roll directly to a Roth IRA from the verbiage provided. If he did it would be a taxable event and an analysis would need to be performed on that. If not, once it was rolled to a Traditional IRA it could be subsequently converted to a Roth with taxes paid at that time. A thorough tax analysis would be needed to determine if and when a conversion would be appropriate to minimize the tax hit.

If he were to elect to roll to an IRA his company would provide him with paperwork to complete so that they would know how to specifically distribute the funds which can go to an existing IRA.

Cheers
Last edited by Silk McCue on Wed Jul 11, 2018 10:22 am, edited 1 time in total.

Sportswhiz00
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Re: Dad asked for my help on pension decision that I do not understand

Post by Sportswhiz00 » Wed Jul 11, 2018 10:16 am

If my parents had access to $66000, it would be gone within a year. the only thing keeping them afloat now are their annuities and SS.

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gasdoc
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Re: Dad asked for my help on pension decision that I do not understand

Post by gasdoc » Wed Jul 11, 2018 10:23 am

I would take the lump sum payout, and roll it over to a traditional IRA for now. Down the road, options are available to do Roth conversions and to buy annuities from a company you research and select.

gasdoc
Last edited by gasdoc on Wed Jul 11, 2018 11:31 am, edited 1 time in total.

grok87
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Re: Dad asked for my help on pension decision that I do not understand

Post by grok87 » Wed Jul 11, 2018 11:23 am

Silk McCue wrote:
Wed Jul 11, 2018 8:19 am
bradpevans wrote:
Wed Jul 11, 2018 8:03 am

Not disputing the numbers above but a question:
What is the tax impact of taking the lump sum and then buying the annuity?
If the 63,021 is "taxed down", then the comparison might not quite be apples to apples

A work pension/annuity is an employee benefit, so one would hope it is better
than could be purchased in the open market.

It has other upsides in that it is a steady stream of income for life (assuming solvency of course).

Can one "invest and do better" is quite different from "does one want to even try to invest and do better"
From the Original Post the lump sum can be rolled into an IRA. Given the fact that the market is offering a better annuity it would be a no brainer to do so if you wanted to annuitize.
Options:
Lump Sum Payment-
-Elect to receive a single lump sum payment of $63,021.57 paid in September 2018
-The lump sum payment may be taken as a taxable cash payment, or rolled over tax free to an IRA or another employer's retirement plan.
I very much doubt the lump sum could purchase an annuity that is better than just staying in the employer-plan-annuity. Probably the employer-plan annuity is inflation indexed or there is something else we don’t understand.

To repeat, 99% of the time it is a mistake to take the lump sum.
Keep calm and Boglehead on. KCBO.

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gasdoc
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Re: Dad asked for my help on pension decision that I do not understand

Post by gasdoc » Wed Jul 11, 2018 11:36 am

grok87 wrote:
Wed Jul 11, 2018 11:23 am
Silk McCue wrote:
Wed Jul 11, 2018 8:19 am
bradpevans wrote:
Wed Jul 11, 2018 8:03 am

Not disputing the numbers above but a question:
What is the tax impact of taking the lump sum and then buying the annuity?
If the 63,021 is "taxed down", then the comparison might not quite be apples to apples

A work pension/annuity is an employee benefit, so one would hope it is better
than could be purchased in the open market.

It has other upsides in that it is a steady stream of income for life (assuming solvency of course).

Can one "invest and do better" is quite different from "does one want to even try to invest and do better"
From the Original Post the lump sum can be rolled into an IRA. Given the fact that the market is offering a better annuity it would be a no brainer to do so if you wanted to annuitize.
Options:
Lump Sum Payment-
-Elect to receive a single lump sum payment of $63,021.57 paid in September 2018
-The lump sum payment may be taken as a taxable cash payment, or rolled over tax free to an IRA or another employer's retirement plan.
I very much doubt the lump sum could purchase an annuity that is better than just staying in the employer-plan-annuity. Probably the employer-plan annuity is inflation indexed or there is something else we don’t understand.

To repeat, 99% of the time it is a mistake to take the lump sum.

"To repeat, 99% of the time it is a mistake to take the lump sum."

This is not common knowledge- what is the rationale for this generalization? All things being equal, I would prefer to have the funds under my control. I know he is not always on target, but Dave Ramsey does always recommend taking the payout. Thanks!

gasdoc

gasdoc

doc4sleep
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Re: Dad asked for my help on pension decision that I do not understand

Post by doc4sleep » Wed Jul 11, 2018 11:39 am

Lots of good discussion here but for me it boils down to 2 things.

1. I like control of the lump sum to use or invest in low cost index funds and not have the worry of pension insolvency issues.

2. When I die my heirs get the money rather than the pension fund keeping the money.

JoeRetire
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Re: Dad asked for my help on pension decision that I do not understand

Post by JoeRetire » Wed Jul 11, 2018 11:42 am

grok87 wrote:
Wed Jul 11, 2018 6:56 am
Haven’t looked at the numbers in detail yet.

But just want to say the lump sum is almost always a TERRIBLE deal.

See this thread for example

viewtopic.php?f=10&t=218067

Unless there is very strong evidence otherwise I would go with the annuity/pension option.
Relying solely on a rule of thumb like "the lump sum is almost always a TERRIBLE deal" is a TERRIBLE idea.

Very strong evidence may very well exist in the numbers. It might make sense to actually look at them before taking this advice. Because, math...

If dad needs help with financial decisions, and you aren't able to provide that help yourself, it might mean that an hour or two with a fee-only fiduciary financial adviser could be money well spent.

rgs92
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Re: Dad asked for my help on pension decision that I do not understand

Post by rgs92 » Wed Jul 11, 2018 11:51 am

I always recommend the single life annuity on these things. Do check on the value of commercial one as others have done on this thread.
But for simplicity (which it seems like your dad needs, and this is not a tremendous amount of money), I would just take the immediate SLA offered.
Last edited by rgs92 on Wed Jul 11, 2018 11:53 am, edited 1 time in total.

JoeRetire
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Re: Dad asked for my help on pension decision that I do not understand

Post by JoeRetire » Wed Jul 11, 2018 11:52 am

rgs92 wrote:
Wed Jul 11, 2018 11:51 am
the $383 / month annuity is a great deal. I would get that one. It's about $40-50 month more than a commercial SPIA; (I'm estimating here).
What $383/month annuity are we talking about here?

rgs92
Posts: 1992
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Re: Dad asked for my help on pension decision that I do not understand

Post by rgs92 » Wed Jul 11, 2018 11:54 am

My mistake; another poster said he found this on immediate annuities. I edited my post to correct this but you beat me to it with your question. Sorry.

JoeRetire
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Re: Dad asked for my help on pension decision that I do not understand

Post by JoeRetire » Wed Jul 11, 2018 11:56 am

rgs92 wrote:
Wed Jul 11, 2018 11:54 am
My mistake; another poster said he found this on immediate annuities. I edited my post to correct this but you beat me to it with your question. Sorry.
Wow, now I'm really confused.

$383/month is a great deal, but dad should take $331/month instead?

Silk McCue
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Re: Dad asked for my help on pension decision that I do not understand

Post by Silk McCue » Wed Jul 11, 2018 12:56 pm

grok87 wrote:
Wed Jul 11, 2018 11:23 am
Silk McCue wrote:
Wed Jul 11, 2018 8:19 am
bradpevans wrote:
Wed Jul 11, 2018 8:03 am

Not disputing the numbers above but a question:
What is the tax impact of taking the lump sum and then buying the annuity?
If the 63,021 is "taxed down", then the comparison might not quite be apples to apples

A work pension/annuity is an employee benefit, so one would hope it is better
than could be purchased in the open market.

It has other upsides in that it is a steady stream of income for life (assuming solvency of course).

Can one "invest and do better" is quite different from "does one want to even try to invest and do better"
From the Original Post the lump sum can be rolled into an IRA. Given the fact that the market is offering a better annuity it would be a no brainer to do so if you wanted to annuitize.
Options:
Lump Sum Payment-
-Elect to receive a single lump sum payment of $63,021.57 paid in September 2018
-The lump sum payment may be taken as a taxable cash payment, or rolled over tax free to an IRA or another employer's retirement plan.
I very much doubt the lump sum could purchase an annuity that is better than just staying in the employer-plan-annuity. Probably the employer-plan annuity is inflation indexed or there is something else we don’t understand.

To repeat, 99% of the time it is a mistake to take the lump sum.
With all due respect you are wrong. Multiple people, including me have already run numbers at immediateannuities.com that show they can do better outside of the company plan. Please re-read from the top of the thread to see where there were many of us that did this. We don't need to guess at this as we have the facts.

Cheers

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Earl Lemongrab
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Re: Dad asked for my help on pension decision that I do not understand

Post by Earl Lemongrab » Wed Jul 11, 2018 1:21 pm

grok87 wrote:
Wed Jul 11, 2018 11:23 am
I very much doubt the lump sum could purchase an annuity that is better than just staying in the employer-plan-annuity. Probably the employer-plan annuity is inflation indexed or there is something else we don’t understand.

To repeat, 99% of the time it is a mistake to take the lump sum.
People upthread have already "run the numbers" and the company annuity is NOT a good deal.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

billfromct
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Re: Dad asked for my help on pension decision that I do not understand

Post by billfromct » Wed Jul 11, 2018 1:32 pm

I had a similar decision a year or 2 ago.

Being single (a widower) I decided to roll the company discontinued pension into my rollover IRA because:
-had no spouse to get her part of the joint pension
-should I pass away, my kids would get the larger amount of money left in my rollover IRA
-I was collecting SS survivor benefits (like the op's father) & will start collecting my own higher SS benefits at age 70 so I didn't need another annuity type retirement plan

If your father does choose to take the lump sum rollover, since he is planning to work 5 more years (to age 73), he should roll over the pension into his work 401k/403b so he will not have to take RMDs (required minimum distributions) from his IRA at age 70.5.

Many company 401k plans do not require RMDs from a 401k if over 70 & still working; not sure if this can be done with 403b plans.

bill

Beehave
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Re: Dad asked for my help on pension decision that I do not understand

Post by Beehave » Wed Jul 11, 2018 5:01 pm

My advice (having read about half of the replies):

Note: I'm no accountant or lawyer. So please check out the viability of my suggestion with Vanguard (or whoever) and also with any comments by others.

- Monthly income in retirement is a blessing. The annuity is much better than the cash.
- There is no need to take the annuity right away.
- There is no need to pay taxes right away.
- Deposit the lump sum in Dad's 401k. If there's a stable value fund, park most or all of it there or in (very) short-term bonds.
- If possible transfer the money into a Vanguard IRA if better money market or ultra-short bond funds are available (Dad is 68 so he should be able to move the funds).
- If Dad cannot move the money while employed, do it after he retires, being careful to have the move to Vanguard done in a direct transfer.
- When Dad retires in 5 years, exchange the $70,000 within the Vanguard IRA for a QLAC annuity. Dad will be 5 years older and he will get a much higher monthly payout and will only pay taxes on the amount he withdraws each year. So he can use this for his RMDs (the required withdrawals from IRAs and 401Ks after age 70 and 1/2.)

Since neither OP nor OP's Dad is a sophisticated investor, this minimizes risk, involves Vanguard which is a not-for-profit (and in my experience VERY trustworthy in advising about annuities - - including advising me, based on my then current circumstances, not to buy an annuity from them several years ago!).

Note that if the money can be moved out of the 401K and into Vanguard in September 2018, a QLC annuity starting in 2023 can be purchased in September 2018. Get advice from someone competent (again - my suggestion Vanguard or, possibly from the expert at immediateannuities.com) as to exactly how to proceed. But since Dad may want to retire in less than 5 years and since interest rates may go up, there's good reason to wait until Dad actually is retiring to spring for the QLAC. Based on the immediateannuities.com estimator, an annuity starting at age 73 purchased today with $63K would provide about $600 a month payout.

One other thing. If it's me acting or advising for my Dad, I would not decrease the monthly annuity payout to ensure there's a legacy if he dies early. I'd dedicate the annuity as fully as possible to longevity insurance for Dad to ensure his independence and well-being for as long as possible. I would think of this as his insurance, not mine.

Best wishes!

TBillT
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Re: Dad asked for my help on pension decision that I do not understand

Post by TBillT » Wed Jul 11, 2018 11:50 pm

Lump sum to Rollover IRA sounds good now that you can get 3% CD's without too much trouble (via Fidelity/Vanguard brokerage accounts, etc), not to mention money market funds approaching 2% and heading higher as the Fed ticks up quarterly on the short term interest rates.

The problem since 2008 has been zero returns in CD's and money funds, so income-orientated investors had to go with riskier stuff like bonds and bond funds and so on. Now we are finally emerging from that complex quagmire, and I am selling some bond funds to just go to CD and money funds. Of course, if you want to be riskier you have stocks and balanced funds and the 3-Fund portfolio option.

Also I took the lump figuring Social Security to be my monthly "annuity" payment when the time comes.

Dottie57
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Re: Dad asked for my help on pension decision that I do not understand

Post by Dottie57 » Thu Jul 12, 2018 12:45 am

JoeRetire wrote:
Wed Jul 11, 2018 11:56 am
rgs92 wrote:
Wed Jul 11, 2018 11:54 am
My mistake; another poster said he found this on immediate annuities. I edited my post to correct this but you beat me to it with your question. Sorry.
Wow, now I'm really confused.

$383/month is a great deal, but dad should take $331/month instead?
If dad takes the lump sum he can purchace a single premium annuity. This is a simple uncomplicated annuity. You give the insurance company a chunk of money and they pay you a monthly amount for life. It is a way of insuring money is available for life.

Go to immediateannuities.com. And input your dad’s info, (age, amount, when to start receiving $). You can get a list of companies, their stability rating, amount they offer for the amount you pay.

Note that if you defer start of payments until dad retires (73?). The payments will be bigger -in 500s - if he purchases an annuity (SPIA. Single premium immediate annuity).

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