Lump Sum vs Pension - what is right for you? (Bloomberg)

You've Been Offered a Ton of Money. Should You Take It?

If a former employer tempts you with a lump sum for your pension, consider these four points before you jump.
 Suzanne Woolley
 WealthWatch
October 22, 2015 — 7:00 AM EDT

It's like the famous marshmallow tests done at Stanford University decades ago, when researchers gave some kids marshmallows and told them if they waited 15 minutes to eat them they'd get a second one.  The kids who delayed gratification went on to have better lives, judged by a variety of measures, than the kids who didn't.  
When it comes to your pension, you are the kid. The marshmallow is a big chunk of money.
The test: Within 30 to 90 days, choose to take your pension all at once, as a lump sum based on the present value of your future pension benefit, or wait and have the money trickle in on a monthly basis over the course of your retirement.
If you're lucky enough to have been in a traditional, defined-benefit pension plan at some point, it's a choice you may have to make in the next couple of months.
Before 2012, when legislative changes  made offering lump sums more attractive to companies, the offers weren't common. Activity revved up in 2013 and 2014, and there's been a dramatic uptick this year, said Matt McDaniel, who leads Mercer’s U.S. defined-benefits risk practice. The end of the year tends to be particularly busy, he said, with offers going out on Nov. 1 or Dec. 1.

Employers have a big financial motivation to offer lump sums. Pension costs are rising as workers live longer, and companies would love to get those long-term liabilities off their balance sheets. They'd also like to stop paying rising amounts to the Pension Benefit Guaranty Corp. (PBGC), a federal agency that functions as a backstop for pensions at insolvent companies. Since 2007, the PBGC's per-person flat premiums for single-employer pension plans have risen from $31 to $57. In 2016, they'll be $64.

The argument for accepting a lump sum offer is much, much weaker. As the General Accounting Office put it in a report issued in January, "participants potentially face a reduction in their retirement assets when they accept a lump sum offer." Yet about 40 to 60 percent of those offered lump sums take them, said McDaniel.

That may be because they don't have enough information to make a good decision. The GAO report notes that the 11 information packets from plan sponsors to plan participants it reviewed "consistently lacked key information needed to make an informed decision or were otherwise unclear."
Should you accept a lump sum offer? It depends on:

Your health 
If your close relatives tend to live into their hundreds, the lifetime annuity that a defined benefit pension plan provides is extremely valuable. If you have significant health problems, smoke, and close relatives died or had serious health problems fairly young, the benefit may not be as valuable. Statistically. To be frank.
The Social Security Administration's life expectancy calculator provides a longevity benchmark. It shows a life span of 84.4 for a man who is 65 today; for women it's 86.7. For a more nuanced estimate, David Littell, director of the retirement income planning program at the nonprofit American College of Financial Services, likes www.livingto100.com. (Helpful hint: Have your cholesterol numbers handy.)
Your alternatives
If you're tempted to take the lump sum and buy an annuity on your own, think twice. For starters, you won't get the lower institutional pricing your plan gets. And if you're a woman, you'll pay a higher price, because in your defined-benefit plan annuity pricing must be gender-neutral; outside of the plans, women pay more for annuities, because they live longer. (That same logic means women pay less for life insurance.) Then there's the task of vetting an annuity provider.
The best way to determine the value of a lump sum offer is to compare it with a commercially available product. You'll probably find that the lump sum isn't enough to buy an annuity outside of the pension plan that provides the same monthly benefit,  Littell said, particularly if your plan offers cost-of-living increases.
Littell went to immediateannuities.com, a consumer website that provides annuity quotes from major insurers, and looked for the lowest price on a deferred single-life annuity (with no death benefit) with a benefit of $500 a month and payments to start at age 65. The result: At age 50, it would take $51,000 for a woman to buy that annuity, compared with $47,500 for a man. A couple would pay $60,000.
If the woman is offered a lump sum of, say, $50,000, it might seem a wash. But if her company subsidizes early retirements and her plan includes features such as a cost-of-living adjustment, or if her lump sum offer is $40,000, that argues for staying in the plan.
Your investing expertise
If you've had long-term success in investing your own money, taking a lump sum may make sense. To earn a decent return, you'll probably have to leave the pension in equities for a few decades, which means coping with market swings.
"In times of volatility, like we had this summer, there's something to be said about that guaranteed check you know will show up in your mailbox every 30 days," said Matthew Sommer, director of retirement strategy for Janus Capital Group.
Also, an annuity's guaranteed income simplifies financial management, which is especially valuable later in life, when people are less likely to be capable of managing money.
Your cash needs
When the offer is between $10,000 and $50,000, the majority of people accepting it just cash it out, said McDaniel.3 That means paying income tax, and a 10 percent penalty if you cash out before age 59 1/2.
Cashing out early is a cardinal sin of personal finance. Tax-deferred investment vehicles let the earnings on money compound, year after year. Also, income from cashing out could push you into a higher tax bracket. 
Littell, who isn't a fan of the lump sum, points out that one good use of it would be to defer tapping Social Security until you're old enough to get the maximum benefit. And when the cash is in your investment account, you can leave it to children, other heirs, or charity.

How Business Owners Can Take Control of Taxes, their Own Retirement ( WSJ)

MAY 11, 2010, 4:12 P.M. ET Retirement-Plan Options for Business Owners By BARBARA WELTMAN

Many small-business owners believe that their businesses will furnish a comfortable retirement for them. As golden years approach, they anticipate selling their nest egg and living off the proceeds.

This may account for the fact that retirement plans are severely underutilized by business owners. The Small Business Administration's Office of Advocacy reported that fewer than 2% of business owners had a Keogh (self-employed profit-sharing) plan, only 18% participated in a 401(k) plan, and more than nine million self-employed individuals do not have any retirement plan coverage.
Business owners who rely on the sale of their businesses for retirement income may be disappointed. Unfortunately, not all businesses can be sold at a profit, as evidenced by the thousands of companies forced to close during the recent recession (including many that had been operating profitably for decades).

Here's a better strategy for ensuring that you'll have sufficient retirement income to supplement Social Security benefits: Make annual contributions to a qualified retirement plan. It's a tax-advantaged savings method: contributions go into a qualified retirement plan on a tax-deductible basis; annual earnings are tax-deferred; and benefits are taxed only when and to the extent that distributions are made.

Choosing a Plan
A number of retirement plans can be used by small businesses. Keep in mind, if you want to use plans other than traditional or ROTH IRAs, you'll have to include any employees in the plan (with some exceptions).

Here are the best retirement-plan options:

SIMPLE-IRAs. This type of plan is limited to employers with 100 or fewer employees. Much like 401(k) plans, employees make salary reduction contributions to the SIMPLE-IRA and employers make certain mandatory (but modest) matching contributions.

SEPs. This option is for self-employed individuals as well as companies of any size. The plan is funded entirely by employer contributions.

401(k) plans. As in the case of large corporations, small businesses can allow employees to make pre-tax contributions to the plan; the employer can make matching contributions (and must do so if employees are automatically enrolled in the plan so that the plan is not considered discriminatory in favor of owners). A 401(k) plan can even be used by a self-employed individual who has no employees; the individual makes an "employee" contribution as well as any "employer" contribution.

Profit-sharing plans. These plans (often called "Keoghs" when used by self-employed individuals) allow employers to contribute a percentage of employee compensation to the plan. The same percentage used by the owner must be used for employees, so if the owner wants to contribute 10% of his earnings to the plan, he/she must contribute 10% of each participant's salary to the plan as well. The employer invests the contributions on behalf of participants whose retirement income depends on plan performance.

Defined benefit plans. These are pension plans that promise to pay a fixed amount when participants retire, regardless of how well (or poorly) the plan has performed.

Db(k) plans. This is a type of hybrid plan that debuted in 2010. It combines a small pension (funded by the employer) with a 401(k)-type feature (funded by employees with certain employer matching contributions). Because the IRS has yet to issue guidance, these plans are not yet commercially available, but hopefully will be a viable option for 2011.

Deciding Your Goals
Which plan you choose depends on your situation and what you hope to accomplish. Some factors to consider:

Contribution limits. The tax law sets limits on how much can be added annually to a particular type of plan. Owners with little or no staff who are primarily concerned with savings for their own retirement and maximizing tax deductions for contributions might want to use a 401(k) or defined benefit plan. The latter is especially useful for older professionals because sizable contributions are usually needed to meet promised pension targets.

Contribution costs. If the business is profitable and wants to benefit not only its owner but also its staff, contribution costs can be high; contributions within the limits allowed by law are tax deductible. Businesses that want to provide a plan for staff but can't afford sizable contributions might opt for plans that shift most of the cost to employees, such as SIMPLE-IRAs and 401(k)s.

Administrative burdens. Generally, the business must file an annual return for a qualified retirement plan, which usually entails additional accounting fees. However, no annual filing is required for SIMPLE-IRAs and SEPs, so these plans are the least burdensome from an administrative point of view.

Other costs. Expect to pay consulting fees if working with a benefits expert to select or design a custom plan. For defined benefit plans, you typically need to pay an actuary to determine your annual contribution (generally, that's the amount needed to meet the promised pension, given the expected retirement date, earnings in the plan, and other factors). Also, annual premiums must be paid to the Pension Benefit Guaranty Corporation for defined benefit plans, and there are bonding requirements.

Other Considerations
In addition to the personal goals of the owner, there are other compelling reasons to offer a retirement plan for staff.

Recruitment tool. Offering a retirement plan is a way for small businesses to compete with large corporations for talent in the jobs market.

Tax savings. Making contributions to a retirement plan may help to save more taxes than merely the savings resulting from the contributions. The deduction for employer contributions reduces income, which may help owners to avoid higher tax brackets as well as the additional Medicare taxes scheduled to take effect in 2013.

Flexible borrowing. Certain retirement plans, such as profit-sharing plans and 401(k) plans, can allow participants, including owners, to borrow from their accounts as needs arise.

Business owners can find more information about retirement plans in IRS Publication 560. As always, discuss the use of qualified retirement plans with your tax or financial advisor to determine the best plan to select.


About the Author
Barbara Weltman is an attorney who has written several books, including "J.K. Lasser's Small Business Taxes" and "The Complete Idiot's Guide to Starting a Home-Based Business." She publishes "Idea of the Day" and monthly e-newsletter "Big Ideas for Small Business" at www.barbaraweltman.com, and hosts the "Build Your Business" radio show.

FRS Florida Retirement System : Big Change in DROP (Palm Beach Post)

Lawmakers won't make state employees contribute to pension, but reduce early-out benefits
By Pat Beall
Palm Beach Post Staff Writer

Updated: 7:42 p.m. Monday, April 26, 2010

Posted: 6:02 p.m. Monday, April 26, 2010


State lawmakers jettisoned the idea of making employees start contributing to their pension, a proposal that had drawn united opposition from police, teachers, firefighters and thousands of other government employees.

However, lawmakers agreed to curb a popular early retirement program. The Deferred Retirement Option Program (DROP) allows workers to retire, but keep working for another five years. During that time, their pension is deposited in a tax-deferred retirement trust fund that earns 6.5 percent interest. After an employee gets out of the program, he can receive a lump-sum payment and start collecting retirement checks as well.

Lawmakers slashed the interest earned from 6.5 to 3 percent effective July 1, said Matt Puckett, deputy executive director for the Florida Police Benevolent Association. "What you will have is a rush on retirement and a lot of very angry people who cannot get (into the program) before July 1," predicted Puckett.

For the first time in more than a decade, the Florida Retirement System no longer has 100 percent of what is needed to pay all current and expected retiree benefits. Instead, it has about 88.5 cents for every dollar needed, according to the most recent annual report. But workers, said Puckett, "did not get us in the mess. It's not the fault of the police officer, so why are you punishing them?"

At one quarter of 1 percent of a worker's salary, the amount of money involved in retirement plan contributions was modest - $125 on a salary of $50,000 - but it would have marked the first time in about 30 years employees would have had to contribute.

Tweaking retirement contributions "wasn't about the money" lost by the Florida Retirement System's investments, said Doug Martin, legislative coordinator for the Florida chapter of the American Federation of State County and Municipal Employees AFL-CIO.

"It was setting up a way for them to jack up employee contributions. There's no doubt in anybody's mind that we would be seeing 1, 2, 3, 5 percent contributions within a year or two."

As for public criticism of pensions for government workers, "There are public employees who do make six figures but they are relatively few. Most do not," said Martin. In fact, workers who retired from Palm Beach County's participating employers averaged a pension of $17,732 last year, according to a Palm Beach Post investigation published Sunday. Half received less than $12,438.

An aide to State Sen. Mike Fasano, R-New Port Richey, said that Fasano, who has championed pension reform, was "disappointed" that the retirement contributions didn't get a green light, "given that it was such a small amount."

Find this article at:
http://www.palmbeachpost.com/news/state/lawmakers-wont-make-state-employees-contribute-to-pension-626531.html