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Investing/Strategies / Retirement Investing
|Subject: Re: Pension, annuity, or payout?||Date: 9/26/2012 1:03 PM|
|Author: BruceCM||Number: 70961 of 74759|
From your description, this sounds like a private employer (not government) with greater than 20 employees. Assuming this is not a family owned or church-based business, the pension plan is likely covered by ERISA and the accrued benefits are insured by the PBGC. If so, you need not worry that the employer will not be in business in the future. And the benefit amounts you are speaking of are well within the insured maximums.
The plan is right in saying all benefit options are actuarially equivalent....they are required to be by law. The only reason to begin benefits now is if you require the income. If you do not, I would not consider this option, as the benefit paid will be taxable to you as ordinary income while you are still working and likely would be taxed at a higher marginal tax rate than it will be if you withdraw it during retirement when, presumably, your marginal tax rate will be lower.
Taking the lump sum now is a good option ONLY if you have a disciplined investment approach, as another poster noted above. This is critical. For example, if we go through another 2008/2009 stock market, would you have the will to leave your investments alone? Or equally important, if the market 'takes off' and the S&P 500 index grows by 30%, will you leave your bond allocation alone and stay the course? This is easy to say, but due to human nature, very hard to do in practice.
Leaving the $$ in the pension plan will provide an automatice annual return equal to the 'discount rate' the plan uses in computing the present value of the accrued benefit payable at the plan's full retirement age (usually 65).
A word on the effects of inflation. This is not a factor here, as it will effect all 3 options equally...unless you were to take more investment risk with the lump sum option.
And assuming this is an ERISA plan, a qualified joint survivorship annuity must be offered to you, the spouse. The defult is 50%, although most plans now also will offer a 75% and 100% option. These options will actuarily decrease the retirement benefit. The election not to take the survivorship option can only be done by you, in writing.
One final point. The 'insurance' part of a life annuity from the plan is that the the former employee can never outlive the benefit. Like an insurance company sold life annuity, it must payout its benefit as long as the person lives. Counterbalancing this is the risk that any 'unused' benefit will be lost if the former employee dies early, assuming there is not a survivorship annuity option taken. So if he takes the benefit next month or waits until age 65....if after beginning the beneift he unexpectedly dies the next month, all remaining benefits will be lost. Of course, this benefit/risk is avoided by taking the lump sum.
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