Financial Updates With Erin Kennedy & Peter Richon | Should You Take that Pension Buy Out Now?

We want you to plan for success planning matters radio topic today comes in by now and some your clients. I'm glad were talking about it. Rising interest rates will cause lump-sum pension bias to be significantly lower in 2023. A lot of pre-retirees wondering if they should be considering it early retirement. So first how to interest rates affect those lump-sum offers will yeah interest rates on the rise has impacted many different aspects of the economy in our financial situation, but one thing that people don't really I think have a full grasp on is how rising interest rates could impact pensions and so don't affect a lot of people a lot of people are not in a company that offers a pension any longer. Shifted that responsibility onto our own shoulders with 401(k)s, but for those among us that still do have a pension on the table so to speak. This is a big big factor that we need to understand and consider that as interest rates go up the lump sum that may be offered in a pension income from your company probably will be set to decrease. And that's because companies look at replacing the income and so just for ease of math in round numbers. Let's say that a company had offered to replace 50% of my $80,000 a year. Annual salary so they're going to give me $40,000 a year in retirement well when interest rates are at 4% that would be $1 million equivalent portfolio value or lump sum that is likely on the table interest rate rise to 5%. The company no longer needs that million dollars to generate the $40,000 of income. Now, instead they only need $800,000 to generate the same $40,000 income so as interest rates have been low for a historic period of time here. Those lump-sum have actually risen, but as we are seeing interest rates reverse course and begin to rise as we have seen this year. The lump sum that is being offered to individuals into the coming year will likely be decreased and we need to get the word out about this so those individuals are aware of that potential and likely might break down some of the considerations, but first I think the question that everybody has title IX right is if I were considering the pension buyout for 2023.

Should I be moving my retirement to this year instead.

Well, that's a little bit of a double-edged sword. Two sides to that point.

On one hand, the pension lump-sum may be lower if you do wait and delay into 2023 or beyond. But on the other hand, whatever personal savings that you have a supplement that pension is probably invested inside of your 401(k) has already lost value in the neighborhood of 20 to 25% where market indices are right now. Now we got a little bit more control over that 401(k). So potentially we were proactive or could do some things where if markets turnaround that bounces back but I think you gotta consider both sides of that. You can't just rush out and say oh no my pensions going to be less let me go ahead and retire because if markets are down simultaneously we gotta generate that income from somewhere.

I think that no financial decision can be considered in a vacuum in isolation, just like Social Security or Roth conversions. You gotta look at the rest of the context of your financial picture] and I only wish it were simpler.

I know it's not so lump-sum as you mentioning shouldn't be the only factor when I am considering my retirement date so what else then should I be considering in first on your list here is tax planning. Yet tax planning is big. It's not what you have is what you get to keep that lump sum from the pension.

The lump sum she got in your 401(k) although that is yet to be taxed money and we do have some opportunities to proactively control that tax liability you know there's a number of different types of risks to retirement. A risk is anything outside of your control that can impact and determine your outcome. Well, there are steps that you can take to mitigate and control certain risks tax risk and tax planning is one of the big major steps that we all should consider carefully when retiring and that order, I apologize first on your list with income planning income planning is big and and pensions are absolutely part of income planning.

Do I take the income that my company is offering and guaranteeing to me for the duration of my lifetime in retirement. Do I take a a spousal benefit from that pension hundred percent spousal income 50% reduction 75. Do I have a bump up option where if my spouse does not outlive me that I bumped back up to my original amount or do I take that lump sum rate that's part of income planning.

But again, along with Social Security along with your personal savings and investments. You gotta look at filling the income gap. What are your expenses what are your sources of guaranteed income through that pension or social security and how much is your portfolio going to be responsible for generating and in recent years.

What we have found is that we can actually go out in many cases, and generate an woodland income to what a lot of pensions have been offering that was not the case for many years, companies were tending to offer significantly higher income, but in recent years that has has come down to a place where you could roll out that lump sum privately take control of your money have access to it and still find ways to generate that same equivalent income on a pretty guaranteed basis.

I hastily talked income planning. I think you hit on spousal income dependent say it was raining is that we need to know about that category. Specifically, I think there's a little bit more to that when looking at the pension options that top line of income.

The one that gives us the maximum amount of income for life. Obviously looks the most attractive but often times is for single life only and if you predecease your spouse if you're married that income disappears and when you make that decision on a pension. That's kind of a final decision.

The lump sum kind of evaporates. I mean if you pass away early and there is a residual amount. It might go back to the company to pay other workers who are outliving life expectancies.

It's not your money any longer. It's your stream of income that you're entitled to. But in less you have chosen some type of spousal survivorship income option that can disappear or be reduced along with other sources of income they can disappear or be reduced in retirement namely Social Security if you got a married couple than both of them typically are entitled to their own separate stream of Social Security income. But one person only receives one Social Security check.

So when one of a married couple passes away you might have a reduction in pension and Social Security simultaneously and compounded by the fact that that survivor goes from married filing jointly to now single head of household. So there income decreases in their tax rate bracket may increase okay so I think the other question a lot of people are wondering how are these rising interest rates going to affect me if I've chosen monthly annuity payment from your pension right yet, it won't that's that's the thing is that the company has been calculating and promising you a certain amount of paycheck replacement in the form of that pension. And that's the number they're shooting for. That's the number that has been promised which is why as interest rates are rising, the lump sum option kind of the alternative is being reduced, but the amount of income that they are promising to replace unless there's some type of renegotiations and restructuring of the pension which you have it, but that's not connected to this interest rate conversation right. The fact is that companies have a huge liability when they are funding a lifetime of income for their retired workers. It has put some companies behind financially and they have gone through some negotiations and restructuring of the pension saying hey if you want to receive pensions at all, collectively, your all going to have to accept a reduced amount that does happen that's not necessarily connected to this interest rate conversation. If anything, higher interest rates should make company pensions a little bit more solvent and state testing of this continued conversation. I want to backtrack just a little bit for another consideration here that you mentioned and that legacy planning. What does that mean specifically right yet again with pensions when you make that decision. A lot of times if you choose the income stream legacy is evaporated.

What could have been that legacy taking those assets into your personal control and then if you don't spend them over your lifetime. If they grow. If you don't withdraw them for income. They pass along to next-generation beneficiaries. That is typically gone. There are some options that you can choose.

This is why every pension decision needs to be very carefully considered and work through. Hopefully, with a goal oriented investment, financial and retirement planning professional to help you evaluate this but Social Security and pensions do have an impact on legacy. We don't think of them in that way, but the more that you can get from your pension and/or Social Security.

Then the more you can protect your personal wealth and assets and hopefully grow and preserve that to pass along as a legacy so we can, we need to think of that, not only in terms of our spouse that spousal income dependency, but also what impact it has generational course and as he mentioned, none of this can happen in a vacuum so we have to remind everyone that retiring into a bear market presents its own kind. The rest we talk before you mediator about the sequence of returns, resting, and we are in a bear market right now and we haven't seen sequence of returns risk for quite some time. We talked a lot about it over the last 14 years or so since the great recession. The fact that if you retire into a bear market or a declining market or stock market losses it can make the trajectory of your retirement a little more difficult, and not as optimal. And so we are seeing market losses this year and this is why we've got to consider both the market environment along with the potential impact of these rising interest rates on the lump sum from the pension and the article that we we cited for this discussion actually kind of promoted that people should step up their retirement date and retire early because of the rising interest rates in the lump sum impact. But when you look at everything together. Maybe that's the case if we were only looking at the pension, but we also have to look at our investments. On the other and what is happened to them and I think that most individuals would find it difficult to retire into the market environment that were currently experiencing in, and many that I talked to her even considering delaying until the market bounces back or stabilize my perhaps the article is just trying to have a catchy headline that yeah yeah that happens does happen, but that's why we break it down Peter and that's my having you as a great resource. This is really helpful since nobody has questions again about determining these factors because there's so many considerations with the best way to reach you yet give us a call Rochon planning 919-300-5886 919-300-5886. Go online with Rich on planning.com is what it looks like Rich Hahn planning.com is my last neighbor Sean. You can also email me Peter at Rochon planning that I think him absolutely effective planning matters radio the content of this radio shows provided is not a solicitation or recommendation of any investment strategy you were encouraging investment tax or legal advice from an independent professional advisor in any investment and/or investment strategies mentioned involve risk and possible loss of principal binary services offered through virtual capital management is a registered investment advisor. Fiduciary duty extends only to investment advisory advice but does not extend to other activities such as insurance or broker-dealer services advisory clients are charged accordingly fever as a management belligerent product pay a commission which may result in a conflict of interest regarding compensation