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Howdy!
I have a pension plan from an old employer and I'm wondering if I should keep it in place (Wachovia) or should I cash it out and invest those funds in an IRA (traditional).
I'm 52 and hope to retire at 65.
Please let me know what I should be considering here...
Thanks!
-Larry
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Howdy!
I have a pension plan from an old employer and I'm wondering if I should keep it in place (Wachovia) or should I cash it out and invest those funds in an IRA (traditional).
I'm 52 and hope to retire at 65.
Please let me know what I should be considering here...
Thanks!
-Larry

Personally, when I have had that situation, I have rolled the funds over to an IRA. Only exception is one which offers Fidelity Funds, and I like Contrafund and Low Priced Stock Fund.

If you are happy with the performance of your Wachovia, keep it. O/W, roll it over and manage it yourself.

cliff
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Cliff,
Thanks for your reply.
I'm unsure of how to measure the performance of the pension.
All I know is that by age so-and-so, I'll receive X dollars per month and that I can cash out now (approx $30,000).
However it may perform, I'm guaranteed a monthly check at retirement age. I don't think the monthy pay out will increase or decrease based on "performance".
Perhaps, I need to investigate the pension plan further...

Thanks!
-Larry
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I have a pension plan from an old employer and I'm wondering if I should keep it in place (Wachovia) or should I cash it out and invest those funds in an IRA (traditional).
I'm 52 and hope to retire at 65.
Please let me know what I should be considering here...
Thanks!


I guess this would depend on a lot issues I don't know enough about to comment on. On the other hand, unless it would torch my balance from taxes and fees, I would do whatever it takes to get away from Wachovia. First Union is the real name here, hiding behind it's new name of Wachovia, and First Union is the same old corrupt bank it's always been.
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I'm unsure of how to measure the performance of the pension.
All I know is that by age so-and-so, I'll receive X dollars per month and that I can cash out now (approx $30,000).

Oops! I didn't notice that it is a pension. For $30,000, I would just cash it out and roll into an IRA. The pension will be trivial.

cliff
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Jeez...

That's really interesting to know because I was an employee of CoreStates and First Union bought CoreStates.

I had assumed that "Wachovia" simply managed the old CoreState's pension plan.

Thanks for the enlightment!
-Larry
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Cliff,
You're right re the "pension will be trivial" part.
That's why I came to the crossroads re cashing out or leaving it in.
Thanks for nudging me towards the "cash it out" direction.
I live in a vacuum...
-Larry
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"I'm unsure of how to measure the performance of the pension.
All I know is that by age so-and-so, I'll receive X dollars per month and that I can cash out now (approx $30,000)." - lyates1

To me, that is the key here. If you know the monthly payout at age 65, you can pretty well figure out the yield on the account. If that yield is satisfactory, stick with the pension...if not, roll it over and start self-directing the funds.

Let's say the payout is $500/month at age 65. That is $6000/year 13 years from now. The series present value factor at 6% for 20 years (age 85) is 11.470...so your $6000/year is worth about $68,820 at age 65.

Now, we can work that number backwards to the present day. $68,820 in 13 years versus $30,000 today is a present value of 2.294. This equates to a compound yield of 6.59%. Thus, it seems to me that your pension would yield slightly better than 6% if you left it alone AND if it promised to pay you $500/month.

Based on all this, look at the monthly payout. If it is under $500/month, get it into your own IRA fast! If it is over $500/month, ask yourself what yield would satisfy you...I bet the answer is that you can do far better on your own if you try.

Let's do this thing the other way. Let's assume you can make 10% on your personal investments. $30,000 today at 10% will net 3.452 times your money in 13 years...or $103,560 at age 65. Then, at 10%, you can take out $12,164/year for 20 years or better than twice the pension plan amount. Or, at a SWR of 4%, you can take out $635/month and never touch your $103,560 of capital! You can leave over $200K behind for your heirs.

Such is the beauty of compound interest and having control over your own money.
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Gosh-Darnit!
Your truely beautiful reply bought tears to my eyes.
[I'd forgotten those formulae :-)]

Your analysis compels me to obtain a lump sum payment (actually $24,740.65) and invest it in my IRA.

God Bless You!!!
-Larry
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I just took a lump sum on my pension rather than opt for the monthly payments for several reasons.

1) Interest rates are low right now - what this means is the lump sum payout is generally higher than it will be if the interest rates rise (which they will do some day).

2) If I were to depart from this world, the monthly pension will go away. But if I take the lump sum and put in an IRA, my heirs will inherit the money. Or I could give this to the charity of my choice.

3) I did the calculation that is similar to the one in an earlier poste and found out that I would need to earn about 6% Cumulative Annual Growth Rate in my IRA to equate to the monthly pension payout and not wittle down the principal. This seemed ok (I could buy a 30-year bond at 6% - although this is probably not a good idea in todays market).

4) The monthly pension is not inflation protected. If I were to invest the IRA funds in inflation rate protected bonds (TIPS), I might be better off.

5) As I understand it, the USGov is after companies who don't provide the facts on the lump sum payout versus the monthly pension. There is risk associated with the lump sum in that one could invest poorly or the market could go poorly. Be very careful here - because one's retirement fund risk is magnified.

Happy New Year,
Jim
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Thanks Jim,

This pension is from a job I left in 1992 with 9 years vested.
I'm convinced the LUMP SUM is the way to go.
Now, I'll just have to make sure I find the appropriate way to invest it...rather than expecting the $300 monthly payout :-)
-Larry
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1) Interest rates are low right now - what this means is the lump sum payout is generally higher than it will be if the interest rates rise (which they will do some day).--Jim

Could you please explain this one better for me? I do not understand.

Thanks!!
sharon
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<<Let's assume you can make 10% on your personal investments. $30,000 today at 10% will net 3.452 times your money in 13 years...or $103,560 at age 65. Then, at 10%, you can take out $12,164/year for 20 years or better than twice the pension plan amount.<<

In this day and age, I think that it would be very dangerous to assume a sustained and/or average annual 10% return until retirement followed by a sustained and/or average return following retirement.

Thorough review of the pension plan terms is crucial before a decision is made to roll over.

Nobody - not the canniest of investment professionals - can honestly pretend that a 10% return over the next 20 years is a sure thing.

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<<Let's assume you can make 10% on your personal investments. $30,000 today at 10% will net 3.452 times your money in 13 years...or $103,560 at age 65. Then, at 10%, you can take out $12,164/year for 20 years or better than twice the pension plan amount.<<

I wouldn't count on 10%. I retired in 2000 and took a lump sum pension. I planned on a conservative 8% return. In 2000 my portfolio dropped 8%; in 2001 it dropped 8% again; in 2002 it dropped almost 20%. Good news is I'm up 32% in 2003 and 2004 looks pretty good. Better news is that I had ample reserves to weather the down market. But even my apparently conservative 8% expectation looks questionable for the balance of this decade, and I certainly wouldn't base my financial projections on earning 10%.
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1) Interest rates are low right now - what this means is the lump sum payout is generally higher than it will be if the interest rates rise (which they will do some day).--Jim Could you please explain this one better for me? I do not understand. Thanks!! sharon

Generally, a pension first calculates the monthly payments based number of years of service and other factors.

Then the pension fund determines the "lump sum payout" based upon the current 10-year interest rate and interest rate projects, plus a person's life projections - so that the "lump sum payout" represents the "present value" of the string of future monthly pension payments.

Now think of it in reverse. If I start with a fixed "present value" the interest payments would be larger if the interest rate is larger. But since the payments are FIXED, it would take a greater "present value" for lower interest rates.

It sort of is like the value of a bond increases if the interest rates decrease.


Jim
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Author: lyates1 Date: 12/30/03 2:40 PM Number: 38306
I have a pension plan from an old employer and I'm wondering if I should keep it in place (Wachovia) or should I cash it out and invest those funds in an IRA (traditional).
I'm 52 and hope to retire at 65.
Please let me know what I should be considering here...


I just went through this myself. I really like the security of pension income for life, but the thought of inflation cutting the value of the payments by 2/3 by the time I die was the stumbling block.

I finally opted for the lump sum, partly because of http://www.webannuities.com . If I ever decide I really want the pension after all, I'll just make my own pension with an immediate annuity. I compared the payments with what I would have gotten via my company pension, and they were almost identical. Also, by making an immediate annuity, I can make it for whatever amount I want; ie, only a portion of my lump sum if I want to.

One thing that still bothers me is the liability risk difference between a pension and a lump sum. In the event of a law suit, it would seem to me that the pension income would be less vulnerable than the lump sum.

Russ
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