Current Pension Topics
The Case Against Annuitizing

By JOEL L. FRANK

Q.: I will be retiring shortly (age 62) and need to make a decision on taking a pension loan/rollover. The loan amount is $75,000 (principal), so I will be reducing my lifetime pension by about $7,500 per year for life. If I do not take the loan/rollover amount, I will get back my principal from the retirement system in about 10 years ($7,500 x 10). This sounds like a pretty good bet. Why are you so against annuitizing your principal?

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

S.A.

A.: Your reasoning is wrong because you fail to take into account the fact that the $75,000 is earning interest. If you put the $75,000 in a shoebox and withdrew $7,500 per year, you would recover the $75,000 in 10 years and then have an empty shoebox. Shoeboxes do not pay interest, while retirement systems do. Each annual pension payment of $7,500 you receive will consist of an interest portion and a return of principal portion. Thus, it will take much longer than 10 years to recover your principal of $75,000.

The $75,000 will be fully recovered over your life expectancy, which is about 20-25 years, even though the $7,500 annual pension payment is guaranteed for the remainder of your life, which may be longer or shorter than 20-25 years. Only time will tell, and that is why I am opposed to annuitizing. I have, as yet, not been told how much longer I will live. Have you? You may also want to ask yourself the following: Should I sell the mutual fund, worth $75,000, that I have had for the last 20 years and purchase an annual pension (annuity) for $7,500 from a life insurance company?

Please note you cannot defer your decision on the $75,000 loan amount. The distribution decision must be made at retirement. You either annuitize it with the retirement system and begin receiving the $7,500 per year immediately, or withdraw it in a lump sum. If you are uncomfortable with being forced to annuitize it now, then logic dictates you withdraw it in a lump-sum and roll it over to an appropriate retirement investment.

Having said all that, I would effectuate a direct rollover contribution of the $75,000 to an eligible retirement account administered by the Deferred Compensation Plan of the City of New York. Your money is now in the boat called "flexibility." Flexibility allows you to: 1. Make withdrawals at will; 2. Grow your investment over time; 3. Make no withdrawals until age 70-1/2 when Required Minimum Distributions (RMD) must commence; 4. Change your beneficiary and investment at your discretion.