Option to Take Early Pension?

**sirraf69** · 07-21-2014, 06:27 PM

So would you go IRA or just pay the taxes and play the market? I understand there are risks and I am looking at this money as something to build on, not a nest egg.

**~bs** · 07-22-2014, 02:17 AM

Originally posted by sirraf69 View Post

The company I had worked for for a short period is giving me an option to take my pension in a lump sum. The amount is around $21k before taxes. I estimate after taxes I would get approximately $15k. I can also leave the pension alone and at retirement age(62) I would receive $480 per month. I am considering taking the lump sum and investing in the stock market. Is this a good idea, or should I leave the money alone? Thanks for any input/advice.

Different factors to consider. Is the $480 inflation adjusted? How long is it from now? What is the status of your company's penion fund, stable? How much of your money did you personally put into it?

$480 really isn't bad... the average SS payment is something like $1200. I'd take that money for the 30 years in retirement, but that's just me. There's risks towards leaving it in a pension fund, but there's definite risks in investing in the stock market as well. I'm guessing the bulk of your retirement money is going to come from stocks/bonds/mutual funds, so why not leave it in the pension fund as a means of diversification?

I personally believe in the "stool with many legs" approach to investing. For me, it means:

real estate - (primary or rental residence)
investments - 401k, ROTH, SEP IRA
inflation hedge - commodities
annuity - pension & social security

Because this is what I believe, to me putting all your eggs in one basket (the stock market in a 401k or investment account) when you have to opportunity to do other wise with low up front cost is foolish. I'd rather take $175k in payments over 30 years (not inflation adjusted) over 15k now invested for xx amount of years.

**bjl584** · 07-22-2014, 03:30 AM

I'd take the lump sum and roll it into an IRA. If you invest it right it will pay a lot more than $480 a month when it comes time to retire. It will also give you possession of the money today in the event that the company reneges on its pension obligations.

**feh** · 07-22-2014, 05:10 AM

Originally posted by sirraf69 View Post

The company I had worked for for a short period is giving me an option to take my pension in a lump sum. The amount is around $21k before taxes. I estimate after taxes I would get approximately $15k. I can also leave the pension alone and at retirement age(62) I would receive $480 per month. I am considering taking the lump sum and investing in the stock market. Is this a good idea, or should I leave the money alone? Thanks for any input/advice.

Impossible to say without knowing your age.

**sirraf69** · 07-22-2014, 10:23 AM

Thanks for all the replies. I just turned 45. The pension from my previous company was completely company funded and it is not inflation adjusted. To draw 30 years would put me at 92(starting at 62). I hope to live that long, but that is also a gamble.

I work for a different company now with a different pension and 401k. I also have a 401k with my previous company. I have a small credit card debt of $3200. I am considering getting the lump sum, paying off the credit card and then rolling the rest into a Roth IRA. Would that be a wise decision?

**bjl584** · 07-22-2014, 11:16 AM

Originally posted by sirraf69 View Post

I have a small credit card debt of $3200. I am considering getting the lump sum, paying off the credit card and then rolling the rest into a Roth IRA. Would that be a wise decision?

There are tax consequences up front for rolling a pension into a Roth IRA. You may want to roll it into a traditional IRA and pay the taxes as you take distributions. You'll have to do the math and figure out which option is better.

**sirraf69** · 07-22-2014, 11:38 AM

If I go into traditional IRA, would I be able to withold an amount to pay off the credit card? I was assuming I would have to roll the entire lump sum if I did.

**Petunia 100** · 07-22-2014, 12:40 PM

Originally posted by sirraf69 View Post

If I go into traditional IRA, would I be able to withold an amount to pay off the credit card? I was assuming I would have to roll the entire lump sum if I did.

You can withdraw any amount you please, subject to tax and penalty. If you are in the 25% tax bracket, that is a loss of 35%. If your state has an income tax, you will lose even more. My state has a penalty as well as a tax.

What is the interest rate on your credit card debt? Less than 40ish percent? If yes, then it seems counterproductive to withdraw from IRA to pay it off. A better strategy is to create a budget and pay the debt down as quickly as possible.

You may want to look into a balance transfer. For example, Chase Slate is currently offering 0% for 15 months with no balance transfer fees.

I wouldn't roll it to an IRA at all without first calculating the present value of my pension. Have you done that?

**sirraf69** · 07-22-2014, 01:27 PM

I have calculated by assuming I start receiving payments at 62 and living to 85. That amounts to a little over $132,000. The amount I would receive is if I do not have spouse beneficiary. Sorry, I don't know the proper terminology. What I mean is when I die, my wife receives nothing.

The way I understood with Roth IRA, I pay taxes up front and I could withdraw at any time up to my deposit without incurring penalties.

**Petunia 100** · 07-22-2014, 01:34 PM

Originally posted by sirraf69 View Post

I have calculated by assuming I start receiving payments at 62 and living to 85. That amounts to a little over $132,000. The amount I would receive is if I do not have spouse beneficiary. Sorry, I don't know the proper terminology. What I mean is when I die, my wife receives nothing.

The way I understood with Roth IRA, I pay taxes up front and I could withdraw at any time up to my deposit without incurring penalties.

What is the lump sum available now?

If you elect to roll these dollars to a Roth IRA, you will not be able to access the original rollover amount penalty free for 5 years.

Edit: I guess I should read the thread more carefully.

If you roll 21k into a traditional IRA right now, assuming it earns 7%, when you are age 62 you will have $66,335.12. (Of course, your actual return may be more or less than 7%). That amount will not provide $480 per month in perpetuity. Assuming a 4% withdrawal rate, it will provide only $221 per month.

Is the pension fund solvent? Is adding your wife as a beneficiary for a reduced amount an option?

You have to make a lot of assumptions either way, which may or may not prove to be accurate.

**sirraf69** · 07-22-2014, 01:41 PM

Lump sum now is $21000 and some change. Didn't know about the 5 year rule. I was thinking getting the lump sum, pay the taxes, pay off the debt, then roll into IRA. I could then focus adding the money spent on credit card payment to IRA.

Not far off topic, but I also have around $45,000 in previous company 401k that I could also roll over. Thoughts on that? Basically I'm just trying to do what's best with my money.

I can add my wife. It drops the annuity to almost half. I'm not sure about the pension being solvent. With companies anymore, nothing is guaranteed.

**Petunia 100** · 07-22-2014, 01:54 PM

Originally posted by sirraf69 View Post

Lump sum now is $21000 and some change. Didn't know about the 5 year rule. I was thinking getting the lump sum, pay the taxes, pay off the debt, then roll into IRA. I could then focus adding the money spent on credit card payment to IRA.

Not far off topic, but I also have around $45,000 in previous company 401k that I could also roll over. Thoughts on that? Basically I'm just trying to do what's best with my money.

Personally, I would not pay taxes and penalties to access money to pay a debt, only to redirect the debt payment dollars back into investing. You are incurring the tax and penalty for no good reason. The tax and penalty will cost you more than the credit card debt, so why pay it? Instead, I would look at financing my credit card debt as cheaply as possible, and pay it down as quickly as I could.

Unless your old 401k plan is exceptionally good, I would roll that money into my own IRA, with a custodian of my choice. Typically, 401k plans have excessive fees which eat into your account balance. This is not always true, but is true far too often. When you roll to an IRA, you put yourself in the driver's seat. You choose the custodian and you choose the investments. This gives you the ability to keep costs ultra low, so you keep more of your money for yourself.

Do you have a budget? Are there additional retirement assets? At age 45, you are heading into the home stretch. There is still time to build wealth, but there is no more time to delay until tomorrow. You and your wife should be focusing on building sufficient wealth to see you through your retirement years. I am 47, so I know the feeling.

**Petunia 100** · 07-22-2014, 01:55 PM

Originally posted by sirraf69 View Post

Lump sum now is $21000 and some change. Didn't know about the 5 year rule. I was thinking getting the lump sum, pay the taxes, pay off the debt, then roll into IRA. I could then focus adding the money spent on credit card payment to IRA.

Not far off topic, but I also have around $45,000 in previous company 401k that I could also roll over. Thoughts on that? Basically I'm just trying to do what's best with my money.

[B]I can add my wife. It drops the annuity to almost half. I'm not sure about the pension being solvent. With companies anymore, nothing is guaranteed.

Well that is true enough.

I think it is a close call either way as to which is better. If the pension were indexed to inflation, that would be a different story.

I think you're wanting to pay off the debt just to be done with it. I don't blame you at all, but you want to go about it in a smart way. You'd be better off stopping new retirement contributions for a time to focus on the credit card debt than you would be to cash out existing retirement money.

Anyway, that's my advice, best of luck to you no matter what you decide.

**sirraf69** · 07-22-2014, 02:06 PM

I can get the lump sum without penalties for this one time deal. I'll just have to pay the taxes. I do have other retirement avenues. The pension does not have inflation adjustments. I am in the home stretch, and it got here quicker than I would have liked. I should have thought more about retirement at 20. I'm trying to do what's best for me and my family.

Would you roll my 401k into Roth or traditional?

Option to Take Early Pension?