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Retirement Discussions / Retirement
|Subject: Re: Cash Balance vs Pension annuity||Date: 7/9/2001 12:27 AM|
|Author: MDGrabhorn||Number: 116 of 294|
>>I currently have the option of taking my 32 year pension as an annuity (with or without survivor benefits) or as a cash balance lump sum that I could combine with my 401k. <<
In order to answer your question, I need to make some assumptions.
1. You are age 53 with 32 years of service with your current employer.
2. Your employer has offered you the choice (opportunity as your employer may call it) of remaining under the old pension plan or going under the new cash balance pension plan.
3. You intend to retire in 2 years, or at some point after.
If these assumptions are correct, read on.
The cash balance amount you are referring to is most likely your accrued benefit under the current pension plan discounted to a present value, in order to determine your minimum benefit under the new plan. This cash balance is NOT an amount that will suddenly be added to your 401(k) account balance.
Cash balance plans are typically not beneficial to employees over age 40 who have more than 10 years of service. These new plans favor younger employees with less service.
In your case, if you switch to the cash balance plan, you are NOT likely to accrue any additional benefits under the cash balance plan for several years. The reason is new formula under the cash balance plan (usu. a % of annual income, compounded at a low interest rate) will not yield as much as you have already accrued under the old plan for several years.
I realize this is tedious and confusing. Trust me. The actuaries who came up with this plan design (one of whom is the subject of a GAO investigation by Sen. Harkin) did not want it to be easy to understand.
Back to the subject. If you remain under the older traditional plan, I assume is based on years of service and final average wages, you will continue to accrue benefits. Even if you have maxed out on the years of service, your average wages should increase, thereby generating a higher benefit.
One thing you will need to find out. Does your old pension plan allow you to take a lump sum at retirement? Does your old pension plan provide for any early retirement subsidies (ie. full benefits at age 60)? Subsidies are usually eliminated in a cash balance plan.
You asked if you should take a monthly annuity under the old plan or the new combo (cash balance/401(k)) plan. This statement presumes you do not currently have a 401(k) plan. However, you have indicated you already have a 401(k). I assume the reason you made this comment was based on the materials given you by your employer. This is a common ploy to convince employees to switch to a cash balance plan. The employers compare the old pension to the new cash balance/401(k) plan. Yet the comparison conveniently washes over who contributes to the plans. The employer is 100% liable to ensure you receive the benefits under the old plan. However, under the combo plan the employer is responsible for a much smaller contribution to the cash balance plan and you are 100% responsible for the 401(k) plan.
Sure, the employer may match the 401(k) plan, and may have even offered to sweeten the match if you switch over. However, this increased match is most likely not guaranteed, or may be reduced by some formula (company profit goals). Take a look at the WSJ for some articles on this very issue.
If you are still with me, be aware that both your old pension plan and a cash balance pension plan must offer you the option of a monthly annuity income and survivor benefits for your spouse. If that is the direction you are leaning then you need to run those numbers for each plan (exclusive of your 401(k)).
>>Maybe I should take all this to a local CFP which I have not done yet. <<
I am somewhat biased here. But yes, find someone local to you who can walk you through this scenario and evaluate all of your options for you.
Find someone who is FEE ONLY though and who is experienced in this area.
Best of luck to you.
P.S. If you cant find someone local, drop me an email at my website.
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