FINANCIALLY
Speaking
Pensions : Deal or No Deal ?
by
Jeffrey M . Orth , ChFC , CASL Investment Advisor Representative of HTK
Jeffrey M . Orth is a Chartered Financial Consultant , a Certified Advisor in Senior Living , and an Investment Advisor Representative , with over 10 years experience as a business and personal planning , insurance , and wealth management specialist Jeff is available for group lectures and private consultations . Visit his website at www . ifitfinancial . com or call 408.842.2716 .
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Recently , I had a client who was close to retirement , come in and ask , “ Should I take my pension in monthly payments or roll the lump sum over to an IRA ?” It ’ s a common question and there can be a lot of money at stake . Choosing one option over the other can make a big difference , so it is important to weigh your options carefully . Here are some things to consider before you make your decision :
WILL THIS BE AN ‘ OUT of CONTROL ’ EXPERIENCE for ME ? Once you have submitted your request to receive monthly pension payments , there is no turning back . You can ’ t change the duration of payments , nor can you change the beneficiary calculations , and it is unlikely that you can get an advance on any of the future payments should you need it .
This can be a problem if you have a financial emergency or you identify a more attractive investment opportunity . If you were to die earlier than expected , the pension benefits might provide little or no money for your loved ones . A lump sum rolled over , could still have a decent remaining balance that could be dispersed according to your expressed wishes , in the event of your untimely passing .
HOW WILL MY PENSION MONEY BE INVESTED ? Often pension plan participants have no idea how their retirement money is invested . Since the pension manager is often managing the pension portfolio for thousands of plan participants , it is unlikely that the generic strategy used will line up with your needs and risk tolerance . A capable financial planner can design and manage a portfolio that is custom fit to your situation , while providing more flexibility and transparency than if the funds are left in the pension plan .
IS THE PENSION PLAN ADMINISTRATOR OVERLY OPTIMISTIC ? Fund administrators are required to report on how closely the assets in the fund are likely to meet future obligations , but an examination of the fund strength shouldn ’ t stop there . For example , does the projected rate of return stated seem high or unlikely , based on an investment mix that is largely conservative bonds and short term investments ?
ARE THE TERMS OF THE PAYOUT AGREEMENT GUARANTEED ? If there is a shortfall in returns or contributions , or if the pension recipients live longer than expected , the company may have the option to sacrifice payments to retirees , rather than pass the obligation on to the shareholders , employees or lenders . Be sure you are aware of all the consequences of choosing a lump sum payout .
SHOULD I MANAGE THE ACCOUNT MYSELF ? If you like the idea of guaranteed monthly income , but don ’ t want to accept the terms of your pension payout , you might consider rolling the lump sum into an immediate annuity or a deferred annuity with living benefits . These investment tools can provide you with guaranteed income .
Something to consider : If you get several annuity illustrations that show a lower payout than the pension option , you might want to ask yourself why those insurance companies , who are competing for your business , aren ’ t willing to offer what the pension plan is promising . Is your pension plan going to be able to deliver on its promise to provide unadjusted lifetime income ?
WOULD I LIKE TO DECIDE HOW I AM TAXED ? Payments from pension plans are generally fully taxable as ordinary income , while funds rolled over to an IRA present some opportunities to reduce your income tax obligation each year .
You may be able to exercise some control regarding your tax bracket by controlling how much money comes out of your IRA in a particular year .
WHEN WOULD I BE BETTER OFF KEEPING THE PENSION ? If you can say YES to the following questions , you may want to keep your pension :
• Do you think the pension will continue indefinitely , or at least as long as you need or want the income ?
• When it comes to managing the money for your specific goals and risk tolerance , do you think that the pension manager will do a better job than your investment advisor or you personally ?
• If you have a family emergency , do you have plenty of money / cash in other places to satisfy the anticipated need ?
• Are you unconcerned about how much you pay in income taxes each year ?
If the answer is ‘ yes ’ to any of these questions , you might be better sticking with the pension . If not , you may want to talk with a financial advisor while you still have options .
The author ’ s opinions , comments information , etc . are those solely of the speaker and are independent of , and do not represent , HTK , and should not be considered as specific investment or planning advice . Please consider your options based on your individual circumstances . Gilroy Today and other listed entities are independent of and un-affiliated with , HTK and Integrated Financial Benefits Network ( IFit ). Registered Representative of , and Securities and Investment Advisory Services offered through Hornor , Townsend & Kent , Inc . ( HTK ). Registered Investment Advisor . Member FINRA / SIPC , 16845 Von Karman Ave , Ste . 225 Irvine , CA 92606 ( 949 ) 754-1700 . I Fit is independent of HTK . CA Lic # 0C49291 ( Not an offer or solicitation in any state where representative is not properly licensed or registered .) Loans and other policy withdrawals will reduce the death benefit amount and may be subject to surrender charges and income taxes . All guarantees are based upon the claim-paying ability of the insurer . All guarantees are based upon the claim-paying ability of the issuer .
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