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School Me On Pensions

Old 09-03-19, 07:39 AM
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School Me On Pensions

The first company i worked at offered a pension when I started; I worked there for close to 20 years, becoming fully vested. I received a notice recently that the company is going to offer to buy them out for a lump sum in a couple months.

Does anyone have an experience with this? I have no idea what to expect in terms of taxes/fees if I were to accept. I know the offer will include all the details but the notice got me curious and I won't have the full paperwork for a while.

At 39yo, is this something I should consider, assuming I wouldn't blow all the money and would try to invest/turn it into more for retirement?
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Old 09-03-19, 07:58 AM
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Re: School Me On Pensions

Depending on amount, you might want to discuss with a financial advisor.

typically moving money from one retirement account to another retirement account won’t be taxed. At this time anyway.

I assume this was was a non-contribution pension? Meaning you didn’t put money in your company was doing this? Likely based on some form of years of service and your salary. If so and they hand you a check, that would almost assuredly be considered income and taxed. Likely heavy.

Companies use do do pensions all the time. Now extremely rare (and costly to the company which is why they want to buy you out).

You may even be able to ask them. But I’m pretty sure you are going to need to move that directly to another retirement account in order to avoid paying taxes now.
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Old 09-03-19, 08:02 AM
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Re: School Me On Pensions

Thanks for the info. Yeah, this was non-contribution.

Do you know if the taxes would be as regular income or would it have penalties like pulling from a 401k early? I wasn't sure since it's the company offering to pay out early, rather than me requesting.
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Old 09-03-19, 08:37 AM
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Re: School Me On Pensions

Originally Posted by Noonan View Post
Thanks for the info. Yeah, this was non-contribution.

Do you know if the taxes would be as regular income or would it have penalties like pulling from a 401k early? I wasn't sure since it's the company offering to pay out early, rather than me requesting.
Yes, you would very likely get hit with that 10%. You company may agree to cover that, but unlikely.

There are exceptions. I’d have to look, but you can avoid the penalty if you need the money for like avoiding your home from being foreclosed.

Defined retirement plans get tax breaks for the contributor. This encourages saving for retirement. So if taken early the government wants those taxes back.

My somewhat educated guess is your best bet is to move it directly to another defined plan. I bet even a 401 would work. But if you wanted the money to pay cash for that new awesome C8 Corvette, your going to have to pay the penalty (and the taxes, and the taxes on the Vette)
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Old 09-03-19, 08:40 AM
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Re: School Me On Pensions

Interesting. A company I used to work for sent me a letter trying to get me to cash out. I wonder if there's been a change in the laws that makes it beneficial for them to thin out the number of pensioners.
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Old 09-03-19, 08:44 AM
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Re: School Me On Pensions

Originally Posted by Nick Danger View Post
Interesting. A company I used to work for sent me a letter trying to get me to cash out. I wonder if there's been a change in the laws that makes it beneficial for them to thin out the number of pensioners.
I assumed it was just the company looking to get out of the obligation early. They stopped offering pensions well over 10 years ago. Considering how young I was when I started with them, I'm probably one of the youngest people they'll be offering the payout to. From speaking with some other former colleagues, it seems that the folks who are close to retirement age already are not receiving the offer.
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Old 09-03-19, 08:48 AM
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Re: School Me On Pensions

Originally Posted by Nick Danger View Post
Interesting. A company I used to work for sent me a letter trying to get me to cash out. I wonder if there's been a change in the laws that makes it beneficial for them to thin out the number of pensioners.
Not that Iím aware of. These are just really expensive for the company. And usually locked in amounts to the employee. Many argued it was the real downfall of legacy auto makers (some were claiming at one time GM was paying more for retired workers than active ones). Almost all companies are moving to employee contribution plans (with some matching by the company usually tied to how well the company is doing).

Im pretty fortunate in my company still does both (a true pension + a good 401k plan that they match up to a small amount).

The tax breaks given to companies just isnít worth it any more (that is the argument, not saying agree).
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Old 09-03-19, 09:36 AM
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Re: School Me On Pensions

My dad, who's now 93, has been drawing a pension from AK Steel, which is the current iteration of Armco Steel, from which he was forced into retirement at age 56 in 1982. AK Steel is among the only steel companies in the United States that has honored its obligations to its retirees. A lot of them have bailed on them.

Defined contribution plans such as the 401k overtook defined benefit plans (true pensions) beginning in the 1980s because it shifted the responsibility for saving to the employee. I haven't had a true pension account in forever, can't remember the last one, and up until my late thirties I never spent more than two or three years with an employer anyway so I was never vested in them. I've been with my current employer 12 years and hope to retire from there if things work out.
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Old 09-03-19, 10:46 AM
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Re: School Me On Pensions

I worked for a company that went belly up. Everybody was cashed out receiving a check for value of 401K. No penalty. Received a W-2 for the amount and it was taxed as regular wages.
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Old 09-03-19, 11:04 AM
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Re: School Me On Pensions

Originally Posted by Sdallnct View Post


Not that I’m aware of. These are just really expensive for the company. And usually locked in amounts to the employee. Many argued it was the real downfall of legacy auto makers (some were claiming at one time GM was paying more for retired workers than active ones). Almost all companies are moving to employee contribution plans (with some matching by the company usually tied to how well the company is doing).

Im pretty fortunate in my company still does both (a true pension + a good 401k plan that they match up to a small amount).

The tax breaks given to companies just isn’t worth it any more (that is the argument, not saying agree).

Perhaps. But the flip side is that during contract negotiations the employees accepted lower pay in the present in exchange for a pension in the future. A lot of employees ended up with lower pay then and no pension when they retired.
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Old 09-03-19, 11:31 AM
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Re: School Me On Pensions

Figure out how much you get with pension, at what age and how long you expect to live. Then see what the buyout is. It'll obviously be less, but if you think you can match those payouts by rolling it into a 401(k) or the like and watching it grow, that is how you figure out if it is worth it.

I'm in a law enforcement pension and the buyout would have to be pretty substantial to give it up. I'll max it out at 55 yrs old, and can even DROP up to 5 years. Plus my wife can get my pension if I ever die, so wouldn't make much sense to take a buy out.

Last edited by Deftones; 09-03-19 at 11:41 AM.
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Old 09-03-19, 12:05 PM
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Re: School Me On Pensions

Originally Posted by rw2516 View Post
I worked for a company that went belly up. Everybody was cashed out receiving a check for value of 401K. No penalty. Received a W-2 for the amount and it was taxed as regular wages.
That seems odd for a 401K, since the money is already in the account, and they are typically held by a third party.
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Old 09-03-19, 12:40 PM
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Re: School Me On Pensions

Originally Posted by Nick Danger View Post
Perhaps. But the flip side is that during contract negotiations the employees accepted lower pay in the present in exchange for a pension in the future. A lot of employees ended up with lower pay then and no pension when they retired.
Again, Iím want making the argument it was right or wrong. Iím just saying that was an argument being made. And the cost of such plans is high. Which is why very few offer it today. Yet, wages are not going up.
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Old 09-03-19, 12:42 PM
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Re: School Me On Pensions

Originally Posted by rw2516 View Post
I worked for a company that went belly up. Everybody was cashed out receiving a check for value of 401K. No penalty. Received a W-2 for the amount and it was taxed as regular wages.
Are you sure it wasnít some sort of stock option they cashed you out on?

Originally Posted by Groucho View Post
That seems odd for a 401K, since the money is already in the account, and they are typically held by a third party.
It is odd. There would be no reason to ďcash outĒ just because the company went out of business.
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Old 09-03-19, 03:52 PM
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Re: School Me On Pensions

Maybe it wasn't 401K. I never paid much attention it. All I know is the company would contribute to it. I never signed up for it. Didn't come out of paycheck. Company went out of business, I got a check, then a W-2.
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Old 09-09-19, 07:24 AM
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Re: School Me On Pensions

So I got the offer and it appears to be trash. All numbers being pre-taxes, the payout amounts to basically 4 years worth of the monthly payout at retirement.

All pensions run until you pass, correct? Maybe if I turned around and bought gold with it, it MAY appreciate enough over the next 17 years to match?
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Old 09-09-19, 08:03 AM
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Re: School Me On Pensions

Wow, that absolutely stinks.

Would you get to build it if you rolled it into another retirement account? And are they looking tobhave to not pay this in the future somehow? If the combo is yes, take the buyout to roll it.

I know when I withdrew some retirement from my first job for our house down payment, a dormant account I hadn't rolled into a other one, we took an early withdrawal fee and had higher taxes that year. Our lender said there are three ways most people afford a down payment:
1. Save for it. Tried, but not enough.
2. Gift from relative. Not how our families work.
3. Retirement withdrawal. Bingo.
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Old 09-09-19, 08:10 AM
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Re: School Me On Pensions

Originally Posted by story View Post
Wow, that absolutely stinks.

Would you get to build it if you rolled it into another retirement account? And are they looking tobhave to not pay this in the future somehow? If the combo is yes, take the buyout to roll it.

I know when I withdrew some retirement from my first job for our house down payment, a dormant account I hadn't rolled into a other one, we took an early withdrawal fee and had higher taxes that year. Our lender said there are three ways most people afford a down payment:
1. Save for it. Tried, but not enough.
2. Gift from relative. Not how our families work.
3. Retirement withdrawal. Bingo.

I can take the buyout and roll it over without penalty but it'll still be the value they listed, just without all the taxes. And yeah, it appears the company is just looking to get out of the obligation of paying years from now.

It's not much (this was my first job so I wasn't exactly raking in a salary for most of those years); part of me just wants to take it, let it get taxed and pay off my debt and car. That alone would save me close to 1k a month. Or, like I said, take it and buy up some gold coins to put in a safety deposit box for a couple of decades.
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Old 09-09-19, 08:16 AM
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Re: School Me On Pensions

Originally Posted by Noonan View Post
So I got the offer and it appears to be trash. All numbers being pre-taxes, the payout amounts to basically 4 years worth of the monthly payout at retirement.
That's typical. When IBM took advantage of ERISA to convert their defined benefits pension plan to a cash-balance plan, they pulled billions out of the pension lockbox account for general company use and employees received a fraction of what they would've received under the old plan.

If you have the option to take the buyout or keep the pension plan, I recommend looking into what the pension will pay out when you start to collect and see if that is something you're comfortable with or if you think you'd be able to take the buy out and invest it for a greater return.

I didn't have the option to keep the old pension plan, but I did have the option to take the lump sum or start receiving monthly payouts. I decided to collect early and collect often. 9 years in, I'm glad that I did.


Originally Posted by Noonan View Post
All pensions run until you pass, correct? Maybe if I turned around and bought gold with it, it MAY appreciate enough over the next 17 years to match?
That is generally true... and some pension programs have survivor benefits too.
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Old 09-09-19, 08:21 AM
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Re: School Me On Pensions

Originally Posted by sracer View Post
If you have the option to take the buyout or keep the pension plan, I recommend looking into what the pension will pay out when you start to collect and see if that is something you're comfortable with or if you think you'd be able to take the buy out and invest it for a greater return.
It's not too much. If I were to wait, the monthly would be under 1k pre taxes. Better than nothing at that age but certainly not enough to live off of.

Originally Posted by sracer View Post
I didn't have the option to keep the old pension plan, but I did have the option to take the lump sum or start receiving monthly payouts. I decided to collect early and collect often. 9 years in, I'm glad that I did.
I have the choice to start the payout monthly now as well. That option is under $100 a month.
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Old 09-10-19, 06:33 AM
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Re: School Me On Pensions

::walks in::

PENSIONS.

::walks out::
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Old 09-13-19, 06:37 AM
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Re: School Me On Pensions

The only thing I know about Pensions is that there's a 99% chance that no one supposed to get one will actually get it.
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Old 09-13-19, 07:04 AM
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Re: School Me On Pensions

Originally Posted by Shannon Nutt View Post
The only thing I know about Pensions is that there's a 99% chance that no one supposed to get one will actually get it.
How so?

I'll be honest, the cash is starting to get tempting.
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Old 09-13-19, 08:29 AM
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Re: School Me On Pensions

Originally Posted by Shannon Nutt View Post
The only thing I know about Pensions is that there's a 99% chance that no one supposed to get one will actually get it.
Thats not true at all. 99% of true retirement plans are backed by the federal government.

And if your thinking “but Enron”. People who worked at Enron who put their retirement in Enron stock or stock options lost everything. That’s different than what we are talking about. I do feel for those folks, but it is dangerous to put 100% of your money in a single stock. No matter its history.

Now of course a 401k can fluctuate in value. But hopefully, it is diverse enough, and you started long enough ago to ride that out. And as you get close to retirement, move it to safer options.
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Old 09-13-19, 08:40 AM
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Re: School Me On Pensions

Originally Posted by Noonan View Post
I can take the buyout and roll it over without penalty but it'll still be the value they listed, just without all the taxes. And yeah, it appears the company is just looking to get out of the obligation of paying years from now.

It's not much (this was my first job so I wasn't exactly raking in a salary for most of those years); part of me just wants to take it, let it get taxed and pay off my debt and car. That alone would save me close to 1k a month. Or, like I said, take it and buy up some gold coins to put in a safety deposit box for a couple of decades.
You can do the math. If your interest on debt is a lot higher than the tax and penalty (doubtful) it might be a smart move. Maybe.

If itís a true pension (non-contribution), then you got the money for ďfreeĒ. So itís easy to think ďif I get anything now, itís a good thingĒ. But before you do that, Iíd suggest you look at an on-line calculator of what the value could be at your retirement age. That is the value you could have and are cashing out. Not to mention paying all that tax and penalty.
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