Expert: Paul Henneman - 7/2/2007

Question
Dear Paul,

I just recently changes jobs and am unsure of how to handle my pension at my former employer.

I am considering these two options -- I take the lump sum payment amount of $16,743.27 and have a 100% direct rollover into my 401K or should I leave it and wait to collect the monthly benefit when I retire?

The monthly payout starting at age 65 would be $495.64 ($424,831.14). My concern is that since I am 38 years old  the pension may not exist if something happens to my former employer in the next 25+ years.

Thanks for your assistance,
Elizabeth

Answer
Elizabeth,
   Thank you for your question!
Ultimately the answer is one only you can provide, depending upon what kind of person you are and how you want to take risk.
   Yes, you are right to consider the problems of waiting for 25+ years for your pension.  And $495 a month won't exactly make you rich in retirment anyway. Keep in mind that you can take the pay out now, invest it, and in 25 years have perhaps over $200,000 that you would be in complete control of. If you set up this investment in an ROTH IRA account there would be significant tax advantages as well. The maximum contribution to an IRA is $4,000 a year, so you would have to invest the full amount over the course of 4 years or so. But the tax advantages are so signficant that it is likely worth it.
  Those numbers are based on an average stock market return, for the S&P500 index, commonly regarded as the most stable and basic index. There are mutual funds that track this overall index, such as the Vanguard S&P500 index fund (ticker symbol VFINX).
   If you invested $4,000 a year into a ROTH IRA for the next 25 years, you would have just over one half million dollars in your retirment account.
    I do recommend that you check with a tax or investment advisor about your specific circumstances. There are rules about qualifying for a ROTH IRA, if you don't qualify for that you can always get a standard IRA. The tax benefits are not as great, but still very significant.
   Part of this also depends upon any retirement options offered by your new employer. If you have access to a 401k plan, this would be great and represents additional investments you could make with great tax benefits. If your current employer does not offer retirement plans, then you may be able to deduct your IRA contributions at the end of the year, get a nice tax refund.  But you should consult a tax expert on this.  Also, if you do start a 401k with your current employer and you ever left the company, the 401k can be rolled over into an IRA account, so you would not have to make the tough type of decision you are now faced with regarding your pension plan.  You could take the 401k with you.
   The final answer also depends upon the specific company you have your current pension plan with. If it is a very large stable company, there would be less concern about the pension plan. If it is a smaller company, not doing well, or has a short history, the pension plan would be riskier.  But as you note, even with a large company it is hard to imagine what the state of affairs will be in 25 years.

I hope this helps to at least give you some points to think about, and some options to investigate regarding alternative investments that you would have complete control over and would not be tied to employment at a specific company.

Please do not hesitate to follow up with me if I can provide any additional service,

Best Regards,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com