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What to do with pension plan after leaving job?

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Hi guys. I have a small pension plan from my last job that I've more or less ignored. I am currently in my early 30s and here are the options:

  1. Taking a lump sum of $7,897 (which I would roll to IRA/401k)
  2. Single Life Annuity: $29.82/month
  3. 5 Year Certain and Life: $29.81/month
  4. 5 Year Certain and Life with a 3% Increasing Annuity    $16.76/month
  5. Single Life Option with a 3% Increasing Annuity    $16.76/month

From what I've read in the plan documents, I can start taking the annuity options immediately, though I'm not sure if $30/month makes any difference. Also options 3 and 4 apply to surviving beneficiary..I'm single so I assume this isn't necessarily applicable to me at moment. I'm pretty lost as to how should I go about analyzing this, so any help would be appreciated!

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rated:
I have no money advice for you, but if the pension fund company is making an offer to you with an expiration date printed in writing, do not let a phone rep tell you that the offer expiration date does not apply under specific conditions, if they cannot show you the specific conditions in writing.

Even when the phone conversation is recorded, it might get the phone rep fired but it will not move your date.

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CNCL said:   Hi guys. I have a small pension plan from my last job that I've more or less ignored. I am currently in my early 30s and here are the options:

  1. Taking a lump sum of $7,897 (which I would roll to IRA/401k)
  2. Single Life Annuity: $29.82/month
  3. 5 Year Certain and Life: $29.81/month
  4. 5 Year Certain and Life with a 3% Increasing Annuity    $16.76/month
  5. Single Life Option with a 3% Increasing Annuity    $16.76/month

From what I've read in the plan documents, I can start taking the annuity options immediately, though I'm not sure if $30/month makes any difference. Also options 3 and 4 apply to surviving beneficiary..I'm single so I assume this isn't necessarily applicable to me at moment. I'm pretty lost as to how should I go about analyzing this, so any help would be appreciated!

  Assuming a life expectancy of 80 years, $29.82/mo for the next 50 years with a present value of $7897 gives an annual rate of return of 3.88% Go with the lump sum, roll it into an IRA and invest it for the long term.

rated:
Roll it into an IRA or your current 401k if you have one.

As far as I know you will pay a penalty to the IRS for early withdrawal at any age under 62 if you take any proceeds. I think it is 20%. Even though this place isn't telling you that, when you file your taxes each year you will have to report it and pay 20% on it. This company will send you a form (5329?) every year.

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Although the math says lump sum, I like having income streams for life. I'd take the 30 bucks a month in perpetuity. 

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Fwuser12 has the right answer.

Roll the lump sum into an IRA.

With interest rates as low as they are you won't get a good return on an annuity.

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Keyboard said:   Although the math says lump sum, I like having income streams for life. I'd take the 30 bucks a month in perpetuity. 

If I was in the OP's position I would take the cash and keep it invested in an IRA. At $30 a month it would take about 22 years just to get back the $7,900. With even conservative investments the OP should be able to multiple his $7,900. Even if he was only able to triple his $7,900 in 22 years, to equal the same with an annuity, he would have to collect for 66 years. Good news for companies that sell annuities, not so good for people who buy them.

I'm not even considering inflation, but that makes matters worse.

rated:
Hey guys, thanks for all the inputs. I have another question. Is pension lump sum payout considered pre-tax money? I ask because I've been doing the back door Roth converting from traditional (I'm over Roth IRA income limit). Since I have no pre-tax money in any of my IRA accounts, this works to my advantage due to the pro-rata rule. Would I still be able to do this? If not, any way I can go around this? Thanks!

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I would take the annuity and buy Miller High Life every month. Sit back and enjoy the high life on easy street.

But in the real world, lump sum and roll it over is the right choice.

rated:
CNCL said:   Hey guys, thanks for all the inputs. I have another question. Is pension lump sum payout considered pre-tax money? I ask because I've been doing the back door Roth converting from traditional (I'm over Roth IRA income limit). Since I have no pre-tax money in any of my IRA accounts, this works to my advantage due to the pro-rata rule. Would I still be able to do this? If not, any way I can go around this? Thanks!
  Most likely it is pre-tax money. Check with plan administrator.
If you roll it into an IRA, it will affect your backdoor Roth. In particular you will owe some tax when you do the Roth conversion for the backdoor contribution. One way to get around it is to roll it over into a 401k instead of an IRA. Depends on whether your 401k plan allows it.

rated:
H&B.

rated:
Keyboard said:   Although the math says lump sum, I like having income streams for life. I'd take the 30 bucks a month in perpetuity. 
Even ignoring fwuser12's fine advice above, I would go with a lump sum. In my book, simplicity in one's finances is something to value.

I know that after a few years, I would hate to have one more dang account to track...for the rest of my life.

rated:
Keyboard said:   Although the math says lump sum, I like having income streams for life. I'd take the 30 bucks a month in perpetuity
  
Sounds like Mr. Wonderful is surfing FW today.

But back to the point, lump sum.  Just not to have to account for paying the extra 10% tax every year on your $360 in earnings would be worth the lump sum to me.

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