According to news reports, Boeing sent a letter out to about 40,000 former employees, asking them if they would be willing to take their vested pension benefit as a lump sum payment, or monthly annuity in lieu of staying in the pension plan. Whether such an option is right for you or not depends on a variety of circumstances. It’s important to recognize that Boeing wouldn’t be making this offer if it wasn’t good for Boeing to get you out of the pension, so please take care to consider what is good for you before accepting their offer.
What’s at stake is that if you accept one of the payout options offered, you will be assuming the risk of future returns. With your money in the pension plan, Boeing bears that risk, but you have no influence or ability to change how much your payouts will be in the future. That choice is at the heart of the question you need to make before October 31 and let Boeing know your decision.
Pension annuity – cash flow considerations
Choosing a monthly annuity is basically choosing to accept a series of fixed payments for the remainder of your life, and may include options to pay out 1/2, 1/3 or nothing to your surviving spouse. Calculating the impact of the myriad options here is no easy task, and when you consider that people live much longer than they used to, you may need to forecast your cash flows for 30, 40 or 50 years depending on your age now and how long you and your spouse want to maintain a comfortable lifestyle. Add in the increased health care costs that come with living longer, and the possible cash flow impact of just one payout decision is monumental in your financial life.
Pension buyout tax consequences
Generally speaking, if you take a distribution from any retirement account, that amount would likely be fully taxable in the year the distribution is received. If you take a large lump sum without rolling it over to another qualified plan, the resulting tax bill could be catastrophic. The idea of the lump sum payout is not to have you take it all now, but to reinvest it outside the pension. Developing a plan to invest it in a diversified and risk-appropriate fashion is something many people need help with. Even harder is forecasting out the countless variables that life will throw at you. Many people unwittingly accept too much risk for their age and investment risk profile. Just as dangerous is the investor that doesn’t take enough risk, settling instead for low rates of return that are perceived as safe but which leave you exposed to inflation and the rising cost of health care with a portfolio that doesn’t keep up. Depending on your situation, it may be beneficial to leave the money with the pension plan or it may make sense to take Boeing’s offer.
Expert financial advice
Working with your CPA and your investment adviser to make sure you don’t have unintended consequences is always important, but if there was ever a time to make the call, this is it. We don’t make your investments for you, or make specific investment recommendations. Some CPAs do, but I see that as a conflict of interest. I prefer to be an impartial voice of reason for my clients in evaluating their portfolios and cash flows. I do work closely with your financial adviser to make sure you have one plan that is well understood and effectively implemented, and to monitor and minimize the tax consequences of future cash flows.
Just like the home handyman (or handywoman) that does many household repairs themselves, there are times when bringing in the expert just makes sense. I may fix certain things around the house, but when I have a broken pipe or an electrical short, the risk of making a mistake is too great to go it alone. Similarly with your financial world, this is one of those crossroads moments where it makes sense to consult with an expert to help you wrestle with the options – ultimately the decision will be yours, but working with your CPA can help bring the options into focus and make sure you don’t overlook an important factor.
The deadline for making the choice is October 31, less than a week away now. Call us today – 253.234.5732 – and we’ll get you in this week to make sure you get the info you need to make the decision that’s right for you. Our office in Kent serves Renton, Des Moines, Tukwila, Federal Way, Burien, and the Seattle area.