TP Employer options on retirement

[taxea]

Scenerio: TP turns 65 in 04/16. He has been on LTD since his injury in 12/97. This will cease on birthday.
Employer is offering a gross distribution of his retirement account
or $853 per month distribution starting on 4/2016.
This account is an employer contributed pension.
He also has an employer funded 401K. What are the pros and cons. He has until 10/2015 to give them an answer.

What do I advise him as pros and cons of his choices?

[kathyc2]

I'm not sure I totally understand your question, but I believe it's on taking pension vs lump sum and the LTD and 401K was just offered for reference of his total financial situation?

If a lump sum, he should be able to roll it into a qualified plan such as an IRA, so from the tax aspect it would not make a difference.

From more of a financial planning perspective of taking it as a pension:
Pros
- Amount is known and guaranteed for life.
- Amount is not subject to market fluctuations
Cons
- If he dies unexpectedly there is no money for spouse or heirs as their would be in an IRA
- May be possibility of default on pension
- If we get into high inflation (remember the 80's) the 853/mo may not be worth much in later years.

Generally what I do is set up a spreadsheet for the lump sum, and take what would have been the pension amount out as an yearly distribution to see how where the "break-even" age is. This will vary depended on expected rate of return, so I run it with the ability to change rate of return easily to see the new results.

[Lion]

Kathy gives good advice.

Can he structure his pension alternate ways? For instance, my hubby had about four choices from all pension to various lower percentages monthly to give me a percentage if he passes away before me. We chose one that lowers his current monthly pension an almost unnoticeable amount but gives me a 50% monthly amount if he passes away before me.

Does he need the pension and 401(k) and social security and everything now to live on? Does he have savings? Equity in his home? Is he planning on downsizing? Expensive foreign travel? If he tells you everything he knows about his retirement plans, you can lay out the ways to draw out his money to fund his lifestyle. Or, not fund his lifestyle and dial back on his plans!

[TAXNJ]

Tough call

Yes, as both reply posters provided some good ways to present the issue to client.

Have same issue with clients that are being an offer of a "buyout" of their pension (was a US company then bought by French company now being acquired by a Finland company) and have to make a choice by end of September.

Clients choice - stay in pension fund (if pension goes bad, government takes over but not giving same amount as currently getting). Take buyout and roll over to a low or high risk IRA plans (CDs; stock market, Annuities, etc.), and as mentioned prior, will it cover life style and life expectancy?

Tough call for the client

[taxea]

Thanks for the responses. They give me ways to research this further. I am waiting for the docs provided by the employer to see exactly what they are offering.

[mrbill]

One of the factors that is not being discussed, but which might be the most important, is the health of the participant. What is his Life expectancy ? Does a Life Annuity make any sense ? Does he have the ability to handle a lump sum payment ?