Current Pension Topics
Don't Give Up Flexibility

By JOEL L. FRANK

Q.: My friend Ralph will be retiring on June 1 and needs to make a decision. He is age 60 and has a choice of a taking a partial lump-sum settlement of $176,922 from his former employer's pension plan. If he takes the lump sum, his annual pension will be reduced to $81,192. If he doesn't take the lump-sum, his pension will be $95,520. What advice would you give him?

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net.

T.R.

A.: My advice is for Ralph to be as flexible as he can with his money during retirement. The $14,328 ($95,520 minus $81,192) of annual income divided by $176,922 equals a fixed-income annuity rate of 8.1 percent. If he takes the annual income guarantee of $14,328, he has annuitized his capital of $176,922. This means that he has legally transferred his title (ownership) to the $176,922 to the Plan. In return, the Plan has legally agreed to pay him $14,328 a year for as long as he lives. All payments cease upon his death. There is no provision for a beneficiary. Once annuitized, Ralph has removed his $176,922 from the flexibility arena. It can never be part of his estate. I am, therefore, against taking the additional annual lifetime income of $14,328. Please note that the 8.1-percent annuity rate consists of a return of Ralph's principal of $176,922 plus a fixed rate of interest. The $14,328 is not 100 percent interest.

Flexibility requires Ralph to take the lump-sum settlement of $176,922 and roll it over (directly) to an IRA or other qualified plan. By so doing Ralph has immediately increased his wealth by $176,922. The next step is to see during the first year of his retirement if he can live the way he planned on living using just the reduced pension of $6,766 per month ($81,192 divided by 12). If he can, great! Just let the IRA grow. If he makes no withdrawals over the next 10 years, the account grows to about $350,000, assuming a return of 7 percent. At age 70-1/2 he must start Required Minimum Distributions (RMD). If on the other hand, he needs/wants "extra" money starting at age 60, he should first tap his after-tax savings and/or investment accounts. Once those accounts are near depletion, he simply goes to the IRA and withdraws the needed amount. These withdrawals should be tempered when he starts to receive his Social Security income. In order to be successful with the rollover route, your friend Ralph must be a prudent investor and never speculate! I would place the entire lump-sum in the appropriate Target Date fund with a no-load family of mutual funds and forget about it!

Should Ralph decide to embark at age 60 on a systematic withdrawal plan and draw $1,194 per month ($14,328 divided by 12), his money will last for about 29 years, assuming he earns 7 percent annually. Should he die before reaching age 89, the balance of his account goes to his heirs. Should he die after celebrating his 89th birthday, his heirs get nothing.