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pension

Level payment pension plan option

What is the level payment pension payout option? How does it work?

Pension Payout: Annuitize or Rollover (Cash)?

If you happen to be in one of those jobs (there can only be a handful left at this point, right?) that has a traditional pension plan, you may be faced with an important decision. When you’re ready to retire (did I just hear angels singing?) – you have to decide if you’ll take annuitized payments, or if you cash out the plan and roll it over to an IRA. These “traditional” pension plans are referred to as defined benefit (or DB) plans – meaning that your benefit is defined as a determined amount. This benefit is usually based on a combination of your longevity in the job, plus your ending salary. You’re probably familiar with these computations: an example is a pension that is 2% per year of employment, multiplied by the average of your final five years of salary. So if you worked at a job for 25 […]

Defined Benefit Pensions

A defined benefit pension is a type of retirement plan that your employer may offer as the only plan offered, or in conjunction with a 401(k) plan. If you have access to a defined benefit pension or are currently participating in one, you are in rare company as these types of plans are becoming few and far between. Defined benefit pensions are different from 401(k)-type plans (called defined contribution plans) in several ways. One of the biggest differences is the fact that the employer is responsible for the funding of the plan in addition to accepting all the investment risk of the plan’s assets. With a 401(k)-type plan, the employee is responsible for funding and the risk in the investment portfolio. Many defined benefit pensions are also backed by the Pension Benefit Guarantee Corporation (PBGC), which protects your pension up to a certain amount in event of plan termination. Another […]

Don’t Dismiss That “Small” Pension

Frequently, I’ll meet with clients to go over a retirement plan. As is typical, we look at current investments, account balances, Social Security, etc. Often these conversations revolve around distributions from retirement plans and cash flow planning to reduce the probability of portfolio failure, and ensuring an income stream that is congruent with the clients’ retirement goals. Sometimes clients will also have small pensions from their current or former employer and they will tell me that they are small, trivial, or not worth considering. Whenever I hear those words or something similar, I try to explain to the clients that however small or trivial, it’s still a guaranteed income stream that will last the rest of their lives in many cases. For example, I have seen clients think that a $150 monthly pension wasn’t a big deal. But when I present to them that there’s an amount for a “date […]

Ready, Set, Go! When To Start A Pension Payout?

The question comes up often: I’m ready to retire at age 55, and I can begin collecting my pension right away. Should I? The amount of the pension increases to almost double if I wait to start collecting at age 62, and two-and-a-half times if I wait until age 65. What’s the best way to do this? Obviously, there are a lot of factors that will go into the answer to such a question, so right off, it’s hard to say for sure, but here are the basics of making this decision: These types of pensions are based on the employer’s assumption about your life expectancy. If you live to exactly the expected age, the cost to the employer will be roughly the same no matter which option you choose. You just need to do the math – bigger payments later are made for (expected) fewer years. It goes without […]

Should You Delay Retirement?

The question of delaying retirement may arise as you get closer to your “goal year” of when you want to retire. For some individuals’ fortunate enough to be covered under a company or state pension, it can be tempting to retire as soon as possible and collect the pension benefit. The same may be true for folks wanting to start taking Social Security at age 62. Before making the decision to retire or retire early an individual should consider the effects on delaying retirement and continuing to work. This is assuming that they can accrue extra pension benefits for the extra years of service. For Social Security, this would be delaying past an individual’s normal retirement age as long as to age 70. For example, let’s say an individual has the opportunity to be eligible to retire at age 55 and receive a pension of $5,500 per month. However, if […]

Book Review – Pension Finance

M. Barton Waring does an excellent job in his book Pension Finance. The book essentially covers what’s wrong with the way conventional accountants and actuaries think using conventional math and accounting practices to justify the payments (or lack thereof) funding corporate and municipal pensions. A concept talked about at length in the book is the idea of long-term average returns and how many pension actuaries rely on them to determine funding. Mr. Waring would argue that there is too much reliance on the long term average returns thus allowing pension actuaries to fund their pensions with less money due to assuming higher rates of return. Instead, one of the areas that may help the crippling pension system in the US is to get realistic about long term returns and use a combination of a smaller returns, and bigger contributions (among others). The book is heavy on the analytic side (great […]