The sad commentary with our USA medical costs is if you want to leave your life’s assets to your family, the solution when you get that diagnosis might be take a backpack of beef jerky, a couple bottles of bourbon and wander off into the woods.
We are fortunate that Hawaii has a good senior health care system and hospice assistance. My wife has had her mom, a sister, a brother and a brother-in-law pass in the last several years. We provided hospice care in our house or theirs together with the health care system. Medical support including narcotic pain relief was handled by our family together with the health care system. We’re very lucky. Family support goes a long way towards a $million.
Yeah - there are defined benefit pensions (the traditional one based on average salary and years of service), which usually cannot be converted to a lump sum payout. Then there are others where the company contributes money (usually a % of your pay), it grows in some manner (interest, usually), and when you retire you can take it as a lump sum, or take it as an annuity, or some combination thereof. I hate, hate, HATE using the term “pension” for those.
I’ve got pretty much every permutation coming, when I retire. The one defined benefit plan will pay me 240 a month (I could have started taking it many years back, and gotten 50ish a month for life). I can designate that my husband receive a survivor benefit, which would reduce my 240 a month somewhat.
When the company terminated that plan, they went to a defined contribution plan that allowed me to designate investment choices. At retirement, I have to either convert that all to a lump sum, or to an annuity. Dunno if I could move it to an IRA at that point instead, as the lump sum would be taxable. I know I could do so right now; I looked into it years back, but it would have required my husband to sign off. He’d have had no problem doing so, but I just never got around to it, and it’s doing OK investment-wise. I could actually start taking that annuity right now; I looked into it a few years back but didn’t pursue it.
The company that acquired us had a defined benefit plan of the sort that accrued interest (at a level that generally underperformed the market, though we didn’t lose money when the market was down). They got away from that in favor of a 401(k) for a while, and just went back to that approach this year. In both cases, at retirement I can take a lump sum (taxable) or convert to an annuity (with survivor benefits if I choose). I’ll have to look into whether I could roll those into an IRA also.
This really is key.
Get rid of debt now, while you’re still working. It may be impractical for many people to get the mortgage paid off (we could not have managed it, even without family factors at play). Moving to a cheaper housing option, if necessary / possible. Set your own expectations for now and for the retirement years so that you can live within your means now (while saving, saving, saving) and then.
The 1M (or whatever) is to cover the gap between what you’d get from Social Security and other pensions, and what you truly need to live. My in-laws went into retirement with their SS and nothing else, aside from a very recent inheritance (I don’t know the amount, but I speculate it was several hundred thousand dollars). Then some bad decisions, and major medical bills, and they suddenly had NOTHING. They were not in an expensive area, but even if they’d had a paid-for condo, they would have had trouble affording the maintenance on a condo. The income from a 1M IRA, or even a 500K one, would have made an enormous difference to them. Given their issues, that might still have gotten wiped out, but it would have kept them going for far longer.
As a side note: IRA/401(k) money is much more protected from lawsuits and bankruptcies, than non-retirement funds. I believe money held in a 401(k) or similar plan is absolutely inviolate - creditors cannot seize it, even if you no longer work for the employer. Money in an IRA has varying levels of protection depending on your state, but IIRC even if some of it can be seized, likely at least some will be protected.
When you leave a company, you can move the money in that company 401k account to another 401k or to an IRA without tax consequences. You need to fill out the right forms and move it within certain time frames, but the plan manager should be able to help you with that.
401k money is more protected against law suits. If you are an obstetrician, or otherwise very likely to be sued, leave everything you can in 401ks. I chose to move it all to my IRA, because i have more investment options there, and also, there are administrative advantages to me to combine it with my IRA.
I looked for an option to take the 401k money as a pension, but my plan didn’t have that.
Please permit a vanishingly brief hijack: a business-owning friend-of-a-friend was the victim of a slip-and-fall scam by an employee on his very first day on the job. Advised to cut her losses, the owner wrote him a check for $10,000 with a release waiver and terminated him. One month later, he’d spent the entire settlement on lottery tickets, and showed up at her business begging for his job back. (Yeah, no.)
You almost certainly could liquidate it, and purchase an annuity; not sure whether there are tax protections if you do that, or if you’d take the whole tax hit right away (ouch!). Plus the annuity’s income would be vulnerable to lawsuits / bankruptcy.
One website claimed that 401(k) money moved to an IRA would have the same protection as if you’d left it in the 401(k). That was the first I’d heard of that, and I’d check it out before relying on it. Likely you’d want to avoid commingling it with other IRA funds, to be on the safe side.
I did that with some of the money. Pensions give no protection from inflation, so i wanted to keep some money in stocks.
I suspect i paid a higher commission than if I’d been able to do it within the options of a group plan.
I was able to purchase annuities within my IRA (they are one of the IRA’s investments.) The monthly payments are taxable income, but the transaction, turning cash into an annuity, was not a taxable event.
My Fidelity advisor told me that 401k plans have greater protection from lawsuits than IRA’s. But i am not at especially high risk of being sued, and carry insurance for the things mostly likely to lead to a suit (like an auto accident.) So i moved the money out of my annoying 401K.
That may not be necessary if your retirement home is a downsize/cheaper area. Right now if we sold our house and paid off the mortgage, we would have a little over 50% of the money (thanx equity) to buy our retirement home. And the way the housing market is growing where we live compared to our preferred city we should be able to use the equity to pay cash by the time we retire. So in a way, we are half-way to retirement.
The calculation I always used. I take the amount I have (let’s say $1M - fortunately I have more). I anticipate an average return of 8% in an S&P index fund (30 year average is closer to 10%). So I make $80,000, I remove 3% ($30,000), leave $50,000 to grow and cover future inflation.
Next year I have 1,050,000. I earn 8% - $84,000. I get to spend $31,500, leaving $52,500 in growth in investments.
Some years I’ll come up short and have to take out money and see my investment portfolio decrease. Some years I’ll come out ahead and the stock market will do well. To adjust for this volatility, you keep at least a years worth of spending in liquid funds. But Monte Carlos with this approach generally have you with money at the end.
Ideally, I won’t run out of money until my husband or I reach the nursing home.
Not a good comparison, since person 1 is unlikely to have $1 million without an IRA build up with employer contributions, while person 2 with no pension will have, all things being equal, more savings. Income from these savings can replace a lot of the pension money, very possibly more than replace it. Anyone with a shot at actually saving $1 M will probably have a reasonably good Social Security payout, especially if they wait.
In my case, though, it IS a defined benefit plan and there IS an option to take it as a lump sum. The advantage to the company is that they get rid of you and don’t have to administer the benefit for years/decades. There is a risk to you, of course - they’re very up front that you’ll have to sign a document listing out the risks/benefits of doing that.
As I said - I have spoken to a professional financial planner about this. I don’t have to make a decision for a few more years but at some point I’ll have to make that choice.
My thought (still not committed, subject to change) was to take the lump sum and use it to get housing so that I would be debt/mortgage free in old age, which is, I suppose, re-investing it.
Or in my case, it’s BOTH. My pension is a “hybrid” plan, consisting of a traditional defined benefit pension, which will be a monthly payment calculated based on highest 5 years of salary times years worked, and also a defined contribution account, which is basically a 401(k) in everything but name. I have various investment options within it, and at retirement I can take it as a lump sum, roll it over into another account, convert it to an annuity, or leave it where it is and take withdrawals as I need them. In about ten years time, I’ll have to start making those decisions.
That pension, by the way, is the only reason that I have anything like a decent retirement awaiting me. In my twenties, I didn’t even think about retirement savings. When I was about 30, I got a job working for the state, and was enrolled in both parts of that hybrid pension plan automatically. Thus I was saving for retirement without even really being aware of it. It wasn’t until much later, in my mid-forties, that I actually started getting serious about saving, opening an IRA and that kind of thing. It was quite a pleasant surprise to see that, thanks to being a public employee, I already had close to $100,000 saved without even knowing it had happened.
Mine does (or will). It has a capped COLA with a COLA bank. To be sure it won’t fully protect against rampant multi-year inflation as the cap isn’t very high (currently 3%, I think), but it’s better than a poke in the eye with a sharp stick.
The COLA bank mitigates - if the local CPI-W is 3.2% one year and 2.5% the next, you’ll get 3% year one and 2.7% year two. But obviously depending on timing you can end up permanently behind the 8-ball with several years of double-digit inflation. Of course most folks end up permanently behind the 8-ball after several years of double-digit inflation, as most folks aren’t savvy investors or investors at all.
401Ks are specifically protected by ERISA like traditional pensions, so under normal circumstances are usually immune from creditors and civil suits. This is why O.J. Simpson’s NFL pension couldn’t be touched after the Goldman family won their civil suit.
Yep, location. Around my neck of the woods, a 2 bedroom apartment averages around $2000 (USD) per month. Some utilities included, but not all (eg. internet). A 1 br is $1600/month. So that’s $1000 - $1600 before looking at any other expenses. Many folks share a 1br.
Our defined benefit plan does have a cash out option. In fact, I thought that this was the modern preference for companies, in order to get out of the pension business. I’ll note that employees hired since the mid-aughts don’t get pensions.
Unfortunately with interest rates where the are, the lump sum isn’t looking as good as it was before 2023 started. But I have a couple of years before I need to worry about it.
Absolutely! And this is why relocating to a lower-cost area, or downsizing where you are, is a very reasonable thing to do.
A friend sold her 2BR condo last year, about 20 miles away from us; if we sold this house, we could come pretty close to paying cash for such a place. Moving slightly further out, but still in the same general metro area, we definitely could pay cash for a condo.
We absolutely could pay cash for a house in the town my daughter lives in. But there are other issues there, as transportation (essentially no taxi service, limited buses, one train going through each day, and twice-daily inter-city bus route), medical (a decent hospital, but for really major stuff you need to drive 70 miles or more), shopping (any clothing you can’t get at WalMart or TJ Maxx requires a minimum hour or more drive). Basically, where she lives, if you can’t drive, you can’t go anywhere.
Not to mention, a move (aside from downsizing in your own general area) likely has issues of being further away from family / support systems (I started a thread about the topic, a while back).
I stand corrected! I just looked at my own stuff, and they do say I could get a one-time payout It amounts to roughly 12x my annual pension amount.
I do not know if that could be rolled into an IRA - having to take the tax hit on that much money would be ouch-inducing.
There are also likely some requirements involving the spouse needing to approve such a distribution. For funsies I looked at the monthly, if we go with a 100% joint and survivor, and the amount isn’t that much less (likely since my husband and I are the same age, and statistically speaking I should outlive him).
You can roll the payout into an IRA most times without tax consequences. Your plan should tell you that or any brokerage. The required minimum withdrawal (is taxable) starts at age 72 (73 depending on birthday).
Yes, it is.
On the other hand, if by doing that (tax hit included) I can get into a house designed to age-in-place without needing to acquire debt (and a mortgage is debt) and just have to worry about maintenance, property taxes, and insurance going forward that might still be my best option.