Interesting push for pension over lump sum

S

Sj08

Joined
Jul 27, 2021
Messages
83
Location
North Dakota
I worked for the State for the last 16 years, and this spring after running the numbers, I felt that my lifetime goal of retiring early was finaly here, so May 1 was my last day, and just happened to be my 49th birthday.

I chose the lump sum because of my age and limited years worked I would not have recieved full pension benefits for 14 years, or option for reduced benefit in 9 years.

What I can't figure out is why I got a call, after filling out the paperwork to have the lump sum converted to an IRA at my brokerage, from a guy that works at the public retirement office, sounding like an experienced used car salesman living on commision, pushing hard for me to reconsider going with the pension. After being polite and listening to him for several minutes telling me how great the pension is, and how I could lose everything if I invest it on my own, I told him that I feel the lump sum is best for my situation and what I am going wit. He sounded very disgusted and quickly ended the call.

One of my coworkers previously worked at a different State agency, but same retirment system, for 8 years but said he didn't know any better when he left, and took the pension/lump sum as a non retirement cash payout and got hit with penalties and extra taxes. He regretted not doing more research on it.
Surprisingly, he did not get a call from the retirement office trying to "convince" him to do what's best.

Any thoughts/opinions on why I got this call, what's in it for this guy? Could he really be working on a commission?
 
The less folks taking pensions, lessens his chance of having a job.

Your coworker really blew it for not doing any research or talking to a tax professional.
 
One (reasonable) guess....

The actuarial value of your pension (aka state's total cost) depends on interest rates. When interest rates were essentially zero, the "net present value" (the amount that the state is on the hook) was higher then than today.

If your state's pension dept. think that interest rates will only go up for the foreseeable future, they want you to stay in the system (no lump sum). It'll cost the state less.

And/Or the state (or the employee) saw some research made by some financial company that x% of lump sum takers do worse than staying in the system.

Only you know your own circumstances. for some peeps, staying in the system is better, for others lump sum. No one right-wrong answer.
 
Slick3914 said:
The less folks taking pensions, lessens his chance of having a job.

Your coworker really blew it for not doing any research or talking to a tax professional.
Click to expand...
My understanding is they made it easier to avoid taxes/penalties. My former understanding was that as soon as your non-taxed account like an IRA hits your regular checking or savings account, it triggers a tax event. I've been told that they changed this and you have a short limited time to redeposit your IRA or pension money into another IRA account and avoid a tax event. My wife is taking a lump sum next year and we're setting things up with Schwab and opening an IRA account ahead of time to receive it. We'll let the professionals walk us through the transfer of the account from her employer to her IRA.
 
I think the reason is simpler than postulated above. Most states and local governments do not cost out the true expense of their pension plans. If you take it lump sum there is no way they can under report the expense. It would be a line item for the current year at actual cost, less prior years [under reported] allowances. They aren't able to pretend the future obligation is less than it actually is anymore.
Just a theory. You may be in the one state in the Union that actually accounts for their future obligations correctly.
 
I’d be curious if the guy actually works for the state or was just representing that he was and wants to get you to deposit your money so he makes a commission.

I’d be curious if you posted the numbers on the monthly pension payment and the lump sum.
 
Slick3914 said:
That is correct, you have 60 days to rollover into another qualified plan to avoid a taxable event. That rule has been in place for many years.
Click to expand...
I believe if you have a high dollar amount in your 401k, you can keep it in your company plan. If you have a smaller balance they will cash it out.
 
Sj08 said:
What I can't figure out is why I got a call, after filling out the paperwork to have the lump sum converted to an IRA at my brokerage, from a guy that works at the public retirement office, sounding like an experienced used car salesman living on commission, pushing hard for me to reconsider going with the pension.

Any thoughts/opinions on why I got this call, what's in it for this guy?
Click to expand...
Ask Grok if this kind of employee can get a commission.

I'm not yet old enough to collect SS. Yet I've paid in the max. If I crash my plane and my wife and I die tonight, all that "Investment" is gone. It does not go to my family or anyone I know.

Someone I know had his father retire at 60 (airline) die suddenly at age 61 (my exact age). He was able to inherit his father's retirement account, due to a series of family events that pushed the father into selecting a lump sum.

The bottom line is that quite a few working men die by age 65. A sufficient number of situations exist where retirement money is never paid out.
 
My Wife is entitled to a small pension by a major defence contractor. For years they encouraged a "cash out" instead of the pension.

When it was time for my wife to cash out or pension, the defense contractor removed the cash out option, pension only.

As @duck__dodgers posted, interest rates have a lot to do with organizations pushing a pension or a cash out.
 
The guy that called me was a State employee, I looked him up on the peoplesoft employee resource page, and he sent a letter directly from PERS (public employee retirement system), showing me the same thing I see when I log into my account, but highlighted the guaranteed amount. He liked to use the word guarantee alot when he talked on the phone.
I honestly didn't feel like he was looking out for my best interest, and like I mentioned earlier, no one contacted my coworker looking out for his best interest.

Someone asked about the numbers

Lump sum 60 days after last paycheck is issued $198,413

14.5 years from now, start receiving $2485 per month no spousel benefit, fixed amount, no inflation increase.
$2000 per month with spousel benefit

A lot can happen in 14 years. Cancer is very common on both my wife and my side, parents, grandparents aunts and uncles.
 
A quick google search tells me that ND state pension is only funded at 63%, and there ending it for new hires - there going 401K for all new hires. Much lower cost to the state.

So they didn't fund enough money into it - and they have no new bottom of the pyramid employees to fund the ponzi.

My guess is they don't want you to leave because you taking 100% of your money now makes it that much worse.
 
SC Maintenance said:
A quick google search tells me that ND state pension is only funded at 63%, and there ending it for new hires - there going 401K for all new hires. Much lower cost to the state.

So they didn't fund enough money into it - and they have no new bottom of the pyramid employees to fund the ponzi.

My guess is they don't want you to leave because you taking 100% of your money now makes it that much worse.
Click to expand...
Your guess makes sence. The way the guy was so pushy when he called, made it seem like he gained something from getting me to change my mind. Mabey just a dedicated employee looking out for the citizens of the State.
 
RhondaHonda said:
Maybe it’s because the state had a $1.9B unfunded pensions liability and it somehow is beneficial for them?

https://www.governor.nd.gov/news/bu...plan-protect-taxpayers-19b-unfunded-liability
Click to expand...

If friend stays in the system, it's"account magic" and can is kicked until retirement age...as ND probably does not have a state law that the system is xx% funded.

If friend (just to make up a number) takes a lump sum, the state has to cut a $100,000 check. Regardless of political party, guess which choice the treasurer-comptroller-governor prefers....

As for that employee...who knows, maybe his performance evaluation is based on how many flips he can get. even if he has civil service protection, mayve the best flipper in the office gets a bigger space or a lighter workload.
 
A lot of the remaining pension plans, for private companies and state/local governments alike, are shaky. To get out from under the bookkeeping and legal requirements, many employers are turning over the funds to insurance companies, which essentially turn them into annuities. The employer typically does this as part of killing the pension benefit for new employees.

One big difference is that employer pension plans are guaranteed by the federal government, but after they become annuities, they aren't protected at all. Also, the insurance company is free to change terms and reduce your monthly payments in ways the employers are not.

Financial advisors have been recommending taking the lump sum if offered. To avoid taxes, the lump sum can be transferred directly from the employer pension fund into an individual retirement account (IRA) or 401(k). You can decide how it's invested there. If you get a check cut to you for those funds, they are fully taxable as income, so avoid that. Any check should be made payable to the retirement account you choose, not to you.

Use due diligence and, if necessary, talk to a fiduciary (type of financial advisor) for more info and advice. A fiduciary legally has to have your best interests in mind and cannot sell you junk financial products designed to net him/her a big commission. If it tells you anything, Britain banned commission-based compensation for financial advisors over 10 years ago. Instead, clients pay fees.

When I left my employer in 2023, I took the pension benefit as a lump sum and had it deposited directly into an IRA. My employer had stopped the benefit for new employees hired after the end of 2013, so the writing was on the wall.
 
>>>>One big difference is that employer pension plans are guaranteed by the federal government, but

Only a portion... I don't know the exact number.

ask google, search for: pension benefit guaranty corp, max benefit protected
 
Sj08 said:
The guy that called me was a State employee, I looked him up on the peoplesoft employee resource page, and he sent a letter directly from PERS (public employee retirement system), showing me the same thing I see when I log into my account, but highlighted the guaranteed amount. He liked to use the word guarantee alot when he talked on the phone.
I honestly didn't feel like he was looking out for my best interest, and like I mentioned earlier, no one contacted my coworker looking out for his best interest.

Someone asked about the numbers

Lump sum 60 days after last paycheck is issued $198,413

14.5 years from now, start receiving $2485 per month no spousel benefit, fixed amount, no inflation increase.
$2000 per month with spousel benefit

A lot can happen in 14 years. Cancer is very common on both my wife and my side, parents, grandparents aunts and uncles.
Click to expand...
Plugged in your scenario and you need to earn 4.16% on the lump sum if you live to 80. It had you getting the lump sum at 50 as that is the youngest this calculator would let me select.
IMG_9259.webp
 
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