Should I take my pension now?

#1

About 10 years ago, my company stopped contributing to our pension and started contributing to our 401k instead. However, the funds in the pension would remain in the account, with a guaranteed 6% rate of return until retirement. But, now we are being offered a one time opportunity to withdraw the funds in one of 3 ways.

  1. Cash it out (with a possible penalty + taxes) and invest ourselves. We invest in TD Index Funds today.
  2. Roll the whole thing over to an IRA or 401k
  3. Partially roll it over, and take the remaining in cash to invest or add to our EF( again w/ taxes + penalties on the cash).

Also, we have the option of leaving it right where it is.

More information:
Right now I am 53 and my husband is 60. We plan on him retiring in the next 5 to 7 years.

The amount in the account is $91,500.

We also have $885k in 401ks, to which we contribute an additional $2450 every two weeks…and will continue to do so until we retire.
There is also $579k in his pension, plus 6 months of expenses in an EF.

We keep our expenses low and our only debt is a small mortgage, which we are on track to pay off in the next four years.

Right now we are at Coast FI.

So, I am wondering if we should leave my pension where it is, or pull it out to invest more aggressively. Thoughts?

1 Like
#2

Companies are offering lump sum payments as part of their strategy to derisk their liability. In other words, the options they’re offering is to their best interest.

Your best interest is to decide what’s best for you, and you’re doing the right thing by asking questions. I would not recommend cashing out (option 1) because there will be a lot of taxes that you will have to pay, and because you’re still relatively too young to use that retirement money.

Check if your company is giving educational webinars or information on what to consider when making this decision. Good companies would have educational materials for you.

A few questions to consider:

  1. How much monthly benefit will you get if you leave the money in the pension plan for when you expect to terminate employment and at your Normal Retirement Date (unreduced pension benefit)? They are obligated to give you those projections if you ask.
  2. Do you have medical issues or do you expect to live a long life into your 90s ish?

For questions 1 and 2, generally, if a person knows they’re dying soon, cashing out is better so that they can pass on that money to their children or anybody else they want. If a person expects to live a long long life and wants a guaranteed stream of income until their death, then they would prefer having the pension be paid as a monthly annuity. Finding out how much monthly annuity you will receive will help you decide if such monthly amount would be worth it to leave money in the pension plan.

  1. Are you and your spouse comfortable managing your own money? Generally, if a person is not familiar with investing by themselves, and they don’t have self-control on spending - cashing out or rolling over to a self-managed IRA would not be recommended. But if the person knows what to do with the money appropriately, then rolling over to IRA is good.

  2. Do you like the investment options in your 401k? If it has low fees and good options, rolling over to 401k is fine. If you don’t like the investment options in your 401k or fees are higher than if you were to self-manage, and you understand how/what to invest, then roll it over to IRA.

  3. Is 100% of the lump sum payment taxable? Did you contribute any percentage of your own money when the pension plan was open? If you (not the company) did contribute the pension, then that piece of the lump sum may be non-taxable - verify that with the plan admin - and you can roll that into Roth IRA.

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#3

If it were me I would definitely roll it over in its entirety. You can probably get a 6% guarantee by buying some kind of insurance product in your IRA, but I would never do that because the market has averaged about 10% for the last 100 years. Every pension I’ve ever looked into has much slower growth and higher fees than you’ll enjoy in your own account.

Take a look at my calculator below and explore the difference between 6% and 10% returns!

#4

By “every pension” that you’ve looked into. Did you mean defined contribution pension (e.g., 401k) - not defined benefit pension, right?