By CD Moriarty
My husband and I are 65 years old. He’s retired with a monthly pension of $1,800, and when he dies, I will be collecting the same amount for life. My husband and I will start to collect Social Security benefits Jan. 1, 2022, when each of us will collect $2,600 a month.
We have total assets of over $3 million, including Roth IRAs, traditional IRAs and two properties. One of them is for rent, with a monthly profit of $1,800. We have no debt and no long-term care insurance.
I am going to retire in March 2021. When I retire, I have two choices: 1. Collect a monthly pension of $1,913, with my husband continuing to collect the same amount upon my death. 2. Take a lump sum of $444,760.
Could you please provide advice on the pros and cons? Which would you recommend?— Pension Patty
Dear Pension Patty:
The decision comes down to how much you need, how much risk you want to tolerate, and how many income sources you can draw from over time.
To answer the pro-and-con question: With a lump sum, you would gain flexibility on what to do with the money, including leaving it to heirs, but acquire risk, as the stock market can post big declines from time to time. Taking the pension means you and your spouse would get guaranteed income for life. (The payment is backed by your company and the Pension Benefit Guaranty Corp., a U.S. government agency. The downside risk is that the pension income disappears when both of you pass away.
Look beyond the pros and cons. The best possible solution is based on where your other assets are invested, your risk tolerance and what your overall goals are. Think about the following points more closely:
1. Pension: Also called a defined benefit plan, a pension typically has several options. These include lump sum, full pension payout or shared amount for the surviving spouse, as your husband opted with his pension.
Lump sum withdrawals do not mean you take it from retirement all at once — that would be an unnecessary tax hit. If you are thinking a lump sum would be nice to buy a second home and take that trip around the world, consult your accountant first. The ensuing taxes would complicate the decision.
A rollover IRA is the place to put that lump sum. Beware of making this decision with an investment adviser, who makes money from assets under management, typically 1% a year. He or she would most likely suggest you take the money to make more money by investing with them. You want to make an objective decision. So choose an objective certified financial planner, or CFP, to help you.
2. Social Security: You mention you will both start collecting Social Security in 2022 from your separate earnings records. Sounds like you qualify to collect full retirement benefits in 2022. This falls into “just because you can, does not mean you should.” Each year you wait, until age 70, your Social Security check grows by 8% — an incredible gain, given today’s market. The Social Security administrators who are trained to help you often recommend you take it right away. However, they have little information on your finances and are not qualified to evaluate your overall needs.
3. Investment: Investments by nature are risky, as volatility is part of the stock market. Most of your current investments are in real estate and investment accounts, including IRAs. Any regular monthly payments offset that risk. Retirement is a time to revisit your investment strategy. You want to be more conservatively invested to ride out the whims of the stock market and plan for the required minimum distribution (RMD) at age 72.
4. Expenses: A key ingredient to retirement is how much you spend. Though you mention assets and income, you do not share any expense information. Low expenses mean more flexibility. If your regular recurring pension you currently collect covers your base expenses then you have some room to take on more risk. If your expenses are high due to health or quality of life choices, then a having enough guaranteed monthly income is more important.
Without knowing more about your situation, there is not a recommendation. Please consider the most important points above and then spend time and money on an objective CFP analysis. As a CFP for decades, I know that the expense of looking at your whole picture can save you costly mistakes and make your life easier. There are several sources to find investment professionals who will analyze your retirement approach and make recommendations for a flat fee or hourly rate. The place to begin your search for a certified professional is at the CFP Board .
The one-time evaluation will certainly be less than handing over the pension withdrawal to investment professional who charges an annual fee. A qualified CFP would consider additional options for a financially successful retirement, such as a Roth conversion, delayed Social Security and an improved investment strategy. When you build a relationship, this partner will be someone you can go to for information as your retirement life evolves and changes. You need a whole retirement plan, which includes many details.
You and your husband have done well in acquiring assets. Retirement is new to you, and it will last decades. Now is the time to organize how best to handle that money for a fun and fabulous retirement.
Peace and prosperity to you,