"Get Your Finances Ready for Retirement"-Cracking The Retirement Nest Egg
Monday, October 20, 2008SUSIE GHARIB: The recent turmoil in the markets is worrying many people about how to pay for their golden years. Some soon-to-be retirees are facing an even bigger question, what's the best way to go about cashing out pensions and 401k accounts. As we continue our series, "Get Your Finances Ready for Retirement," Connie Hicks looks at some options, including self-directed IRAs and lump sum payouts.
CONNIE HICKS, NIGHTLY BUSINESS REPORT CORRESPONDENT: After almost 35 years on the Phoenix fire department, Warren Brian is stepping into retirement. He is following in the footsteps of Boston resident Scott Fraser. He spent almost 25 years as a management consultant until he retired to realize his dream of sailing around the world with his wife Savia. Both men had jobs with pension plans, but they chose different paths. Fraser decided to take his pension payment in a single lump sum. Brian annuitized his pension payment. That means he will receive a monthly payout providing guaranteed income for life. Brian's financial planner, Michael Black, pointed out that Brian's monthly pension plan has a cost of living adjustment, a common feature in pensions from public sector jobs. He said that made the decision easy.
MICHAEL BLACK, CFP, MICHAEL PHILLIPS BLACK WEALTH MANAGEMENT: In Warren's case, the pension met his living needs. If the pension only covered a portion of his current living expenses, then you have to start looking at lump sum options.
HICKS: Fraser worked for a private firm. He and his advisor, Rick Miller, decided he would be better off taking a lump sum to avoid putting all his eggs in one basket.
RICK MILLER, CFP, SENSIBLE FINANCIAL PLANNING & WEALTH MANAGEMENT: In this case, a lot of Scott's assets and Savia's assets were linked to his employer and I was encouraging him to diversify his holdings so that not so many of his assets were linked to that one company.
HICKS: Another factor, Fraser's annual pay out was not adjusted for inflation but on an average of Treasury bond rates, which at the time of Fraser's retirement, was just 2 percent.
SCOTT FRASER, RETIREE: So Rick ran the numbers for us and he said we can do better than 2 percent in the market. We should take the capital, the cash, the lump sum. And so we did take the lump sum and we did do better than 2 percent.
HICKS: But Michael Black says a change in the law will make monthly payments more attractive.
BLACK: The tax reform act, the pension protection act tried to even the playing field and not use interest rates that were so low they were based on the 30-year Treasury. Now they're based on corporate rates which are higher, which means you get less if you look a lump sum.
HICKS: Unlike Warren Brian and Scott Fraser, most retirees will not be retiring with a pension. For the rest of us, it's most likely that the corporation retirement savings will be in the form of a 401k plan or something similar. And that's not guaranteed income for life. Still there are options regarding how to cash out of a 401k. One is to take funds out of the company's 401k plan when you retire and roll them into a self- directed IRA account. Bill Carey is in charge of Bank of America's retirement business. Depending on your circumstances, he says there could be advantages in doing an IRA rollover.
BILL CAREY, NAT'L EXEC, BUSINESS RETIREMENT SOLUTIONS, BANK OF AMERICA: IRAs may provide you with greater degree of flexibility depending on what you may want to do from estate planning and other types of personal objectives.
HICKS: On the other hand, you could keep your money in the company's 401k account and take money out periodically. Carey knows that could save you money in mutual fund management fees.
CAREY: You might get the buying power that a large employer has in terms of the investment vehicles (INAUDIBLE) and the cost of those vehicles.
HICKS: Whether you have a pension or a 401k, keep in mind that how you cash out could also have implications for your taxes and Social Security. So while it may not be a three-alarm fire, it's not a decision to take nightly. Connie Hicks, NIGHTLY BUSINESS REPORT, Phoenix.
