Bob O'Brien
Head Instructor
bobrien@mywealth.com
The baby boom generation are gearing up for retirement and many of them are being forced to really think and make financial decisions that will be permanent and affect the rest of their lives. One of them is staying with their company’s pension plan or rolling this money over and managing it themselves, with a planner or broker in an IRA. When I was a financial planner at Ernst and Young this was one of the major questions people asked me all the time. They would have a choice to take (annuity) a fixed payment for their life (and their spouses) or take the money out of the company’s pension plan and do a rollover. Not all companies offer this choice, but when faced with this decision. I would tend to lean toward rolling that money out into an IRA.
First of all, your health is major concern because any type of annuity is a bet on your life and you will only get paid as long as you live. Annuities are the opposite of life insurance and they protect you against living to long and not running out of money. An insurance company will never ask you to get a physical for an annuity, but they will for life insurance in addition to your driving records, hobbies etc.!
Another major issue is the fact that your company may not be able to make good on their promise to pay you for life and could go bankrupt. This has happened in the past and unfortunately it will happen again. If you do not feel your company has sustainable health it’s a no brainer and get your money out of there. This can be a tough call even with a strong company because we live in a very dynamic economy where there are constantly seeing new competitors and innovations. When you retire at age 60 from a great company, you have to ask yourself "where will this company be in 15 years when you are 75?"
Inflation is another major concern, because most of these pensions do not come with a COLA. (cost of living adjustments). This is a real big issue when the Fed is practically giving money out for free and when we are highly likely to see high levels of inflation as part of the economic recovery. Sean has great blog that really explains this well http://www.mywealth.com/blog/post/get-ready-%E2%80%9Cfed-induced%E2%80%9D-period-inflation In 20 years a fixed pension (with no cola) and high inflation your pension will buy very little. Usually only the government pensions have cola’s and that’s why your property taxes are so high.
In summary, assuming if you are in your late 50’s early 60’s, this decision requires some real thought and number crunching. In many cases rolling the pension over into an IRA and looking to invest in a life cycle/age based 2010 fund will work out better. They are pretty safe and are decent hedges against inflation. Stay open to an annuity, but consider doing it at a later date with a AAA rated insurance company of your choice at age 70. You can get a physical before you take the annuity, because you want to beat the insurance company by outliving your life expectancy. At age 70 you will have a better idea as to your health, long term retirement strategy and estate planning goals.
Please feel free to e-mail me any questions in regards to this article bobrien@mywealth.com and post any comments at the bottom.
Bob O’Brien
Sr. Instructor
