Are you "lucky"if you have a secure retirement?

[JDgreen227]

Prenups and marriage intrigue me. That 鍍rust thing, to me it comes down to reading people. And perhaps yourself. It is an interesting subject, and this may sound harsh, but what makes a marriage last? Is it perhaps that the relationship did not really get over some humps that were there in the beginning and were overlooked?

You see and hear people all the time getting married in what I consider very short times and of course in the very 澱est times when they meet the person.

I don稚 subscribe to that way of thinking. So, harsh as it sounds, what makes the 鍍rust between two people, that demands a prenup?

OFF TOPIC...and feel free to start a new thread. Thank you.

 

[Parkanzky]

The issue will be what will they replace it with. If they give you a reasonable contribution to your retirement fund you will probably come out ahead in the long run, especially if you have a few years for it to accumulate.

Right. If my company offered me a choice between the pension program (that they did away with ~15 years ago) or the contributions they make to my 401k, I'd choose the 401k without question. It would take an amazing pension or a terrible defined contribution benefit to make the pension a better deal over the course of a career, especially when you consider the tax advantages you get from a 401k.

Barring multiple serious misfortunes, my wife and I will retire with more than our current income and earlier than we'd have been able to collect pensions.

 

[JDgreen227]

Parkanzky, would you please enlighten us as to why you say a 401K has tax advantages over a pension? I was able to contribute to both a 401K and 457K during my career as well as earn a pension after being vested in for 30 years. Your post interests me because I was sure I had calculated the tax implications of all three before retiring. It may figure into my calculations that until very recently, most public sector pensions in Michigan were not subject to state income tax...a roughly $1250 a year savings for me.

Thanks for your input....I may learn something from you.

 

[riptides]

OFF TOPIC...and feel free to start a new thread. Thank you.

Sure Mr. Moderator.

 

[riptides]

The company I work for just announced that they are going to freeze the pensions for salary employees in 2017 or 18. I'm just a measly hourly employee and my pension is part of a union contract, I wonder what the big topic of discussion will be at the next contract negotiation?

This is a candidate for outside advice through a planner. Once you figure out what the defined benefit will look like on the pension, I would roll it through some reputable advisors and have them engage in their data modelling for what is best on the money. It could be within your circumstance that the option to leave the pension may be present in which case the lump sum could be transferred elsewhere, annuity, 401k, IRA, or just cash out with a tax hit. There are a lot of options that will come your way.

It may be an out of pocket cost for you, but the peace of mind is well worth it.

 

[Parkanzky]

Parkanzky, would you please enlighten us as to why you say a 401K has tax advantages over a pension? I was able to contribute to both a 401K and 457K during my career as well as earn a pension after being vested in for 30 years. Your post interests me because I was sure I had calculated the tax implications of all three before retiring. It may figure into my calculations that until very recently, most public sector pensions in Michigan were not subject to state income tax...a roughly $1250 a year savings for me.

Thanks for your input....I may learn something from you.

Actually, that's interesting news for me. The only place I'm aware of the tax implications of a pension are for Ohio (where I was raised and where my elderly mother is collecting hers). There, a pension is taxed as normal income by both the federal and the state revenue services. So it has no tax advantage at all. It sounds like you get a small advantage from the state here, which would change things.

The advantage to a traditional 401k is the well-known tax-deferral. All of your money grows tax-free for as long as it stays in your account.

However, the real advantage comes with a Roth 401k (which is less common but they're getting much more popular). Our employers offer one and we take full advantage of it. Here's how that pays off in the long-run for us.

We pay income taxes on our contributions now (ouch), but then that money grows over the next ~20 years and we can withdrawal it without any tax consequences the year we turn 59 1/2. So making the post-tax contribution now makes the money in our 401k more valuable when we hit retirement. Effectively, we get to contribute more because you can put in the same $18k/yr into either a traditional or Roth 401k. When you retire and pull the $18k out of the traditional account you'll pay taxes on it, while you can spend the entire $18k out of the Roth. That doesn't make a huge difference either way (Although most retirees will have fewer deductions when they're retired than when they're contributing to those accounts because they'll no longer have dependents, mortgages, etc. and their effective tax rate will be lower). But let's say that $18k grows at 5% for 20 years. You'll have about $50k in the account at the end of that period. With a traditional 401k, you'll pay income tax on the $50k when you pull it out. With a Roth 401k, that entire $50k is yours to spend tax-free because you paid taxes on the original $18k up-front. Couple that with a lower effective tax rate in retirement and the Roth is an awesome deal.

The kicker is that the company's match still goes into a traditional 401k. What that means is that when we retire our 401ks will be made up of a mix between traditional and Roth 401k monies. So by deciding the mix of money we take out we can decide our taxable income every year in retirement! Say you need $125k of income this year. The 15% tax bracket for a married couple filing jointly stops at about $75k this year. So I'd pull $75k out of traditional 401k monies and the rest out of the Roth (tax-free). Our (federal) tax rate on the $75k would be under 15%, and the effective income tax on the whole pile of money would be pretty close to 10%.

The effective federal tax rate on a pension that pays $125k/yr would be about twice that.

Obviously, you pay some tax money up-front to get that benefit down the road, but it's still much less overall and most on this board appreciate making a sacrifice now for a bigger gain later.

 

[Capricious]

This is a candidate for outside advice through a planner. Once you figure out what the defined benefit will look like on the pension, I would roll it through some reputable advisors and have them engage in their data modelling for what is best on the money. It could be within your circumstance that the option to leave the pension may be present in which case the lump sum could be transferred elsewhere, annuity, 401k, IRA, or just cash out with a tax hit. There are a lot of options that will come your way.

It may be an out of pocket cost for you, but the peace of mind is well worth it.

This is all speculation at the moment, of course, but if a lump-sum "pay-out" of vested pension benefits is offered, I would decline, assuming I felt that the pension fund was financially sound.

Companies do not offer lump-sum pay-outs unless they think it is going to cost them less money that paying the prescribed benefits. Sure, no one knows how long one is going to live, nor can one predict future interest rates or rates of inflation; if one had that knowledge the decision would be easy. But I would agree with the actuaries that I would most likely collect more by sticking with the the monthly payments, and politely decline the pay-out, again assuming I thought the plan to be financially sound.

I would (and have) the 401K & IRA in ADDITION to the pension.

 

[riptides]

Here is something new to add to the mix.
The Achieving a Better Life Experience (ABLE) Act was signed into law on December 19, 2014 as part of the Tax Extenders Act.

The ABLE Act will ease the financial burden for individuals with disabilities by creating tax-free accounts that can be used to save for disability-related expenses.

https://www.congress.gov/bill/113th-congress/house-bill/647

 

[riptides]

This is all speculation at the moment, of course, but if a lump-sum "pay-out" of vested pension benefits is offered, I would decline, assuming I felt that the pension fund was financially sound.

Companies do not offer lump-sum pay-outs unless they think it is going to cost them less money that paying the prescribed benefits. Sure, no one knows how long one is going to live, nor can one predict future interest rates or rates of inflation; if one had that knowledge the decision would be easy. But I would agree with the actuaries that I would most likely collect more by sticking with the the monthly payments, and politely decline the pay-out, again assuming I thought the plan to be financially sound.

I would (and have) the 401K & IRA in ADDITION to the pension.

But the pension could be frozen. Would this not change the equation for closing it out and placing the money elsewhere? An annuity? Especially when the variable of company viability comes into the equation? - your financially sound statement.

 

[Capricious]

Yes, the benefits are frozen. But make a guess at how long you will live, make a guess at what future interest rates will be, and see what the present value of those future payments would be. I suspect that the lump sum offered will be less; sometimes it is substantially less.

Bottom line: the deal would not be offered if the company thought it would cost them more.

Yes, as I said, the soundness of the plan is a consideration.


As for an annuity, keeping the pension is, in effect, an annuity- a "guaranteed" future stream of payments for life. If the pension plan appears sound I see no reason to trade one annuity for another, especially in today's low interest rate environment. Those who signed-up for insurance company annuities a decade or two ago are reaping the benefits of plans that never anticipated interest rates would go this low. The insurance companies will not make that mistake again.