Scott and Pat provide a caller with options for pension money he didn’t know existed.
Pat: We're going to talk to Richard in Danville, California. Richard, thanks for joining us.
Richard: Thank you.
Scott: Hi, Richard.
Richard: Hi, how you guys doing?
Scott: Actually, quite well today.
Pat: What can we do for you?
Richard: Well, okay, my wife and I, we're 60 years old and our current assets are ... we’ve got $320,000 in a 401K. My IRA is $95,000 and slowly growing. I've got a small Roth IRA, $12,000. Got a savings account with about $40,000 and my home is paid off and it’s valued at around $900,000.
Richard: The reason I'm calling is that I just got a notice from PG&E that I can start receiving my pension payments either in one lump sum, or I can roll it over to a Roth IRA or traditional IRA or I can take a monthly annuity payment.
Pat: All right, so let me ask you a couple of questions. What is the monthly annuity payment?
Scott: Did you leave PG&E years ago? Do you have some sort of deferred pension, payable at age 60?
Richard: Yeah, well, I left a long time ago.
Scott: Yeah, so you're not a traditional...you're not a normal retiree because I don't think this is available for a normal retiree.
Pat: A normal retiree at PG&E does not have a lump sum option. My guess is you have a deferred vested pension. You left some time before the age of 50 is my guess.
Pat: Okay, so what is the monthly pension that they're offering to you?
Richard: Okay, they had many options...
Pat: Give me the joint and survivor, the highest one that provides some benefit to your wife. It's called the joint and survivor. It's probably the second one.
Richard: Yeah, it's the joint and survivor annuity benefit. It's $649.79.
Pat: And so then the non-joint and survivor is probably about $715 or so?
Richard: Something like that, yeah.
Scott: Okay, and then how much is the lump sum?
Richard: The lump sum is $102,826.03.
Pat: And how long can you defer this monthly pension for? You can push this off until you're age 65 or 70, is that correct?
Pat: And what's the latest you can push it off until?
Scott: Probably 65.
Richard: I do believe 65 is the max.
Scott: Okay. Are you retired today?
Richard: No, I think I've got about a couple more years before I go.
Pat: Got it. What are you inclined to do? What do you think's the right thing to do?
Richard: Well, I was thinking of taking the lump sum and using it to pay off a rental house that I still owe about $140,000 on.
Pat: And what's the interest rate on the rental house?
Richard: It's about, I think about 3%, 3.5%.
Pat: Okay. What's your health like? Are you in good health?
Richard: So far, so good.
Pat: You haven't had like six heart attacks, anything like that?
Richard: No, but my joints are starting to...
Scott: Ah, you're 60. I've got a bad knee.
Pat: All right. So, assuming you're in good health and assuming you have a normal life expectancy, I would like you to defer taking the monthly pension as long as they'll possibly let you and that's till age 65. And let me tell you why. And then let me tell you why, if you go talk to another advisor, they're going to probably give you some different advice. So the upside in this is that the rate of return on that money, if I took $102,000 right now and I put it in an account and you lived a normal life expectancy and your normal life expectancy, age 60, according to the IRS is 25 years, then that $102,000 would have to earn about 6% per year in order to provide an income of $650 a month. Right?
Pat: So that is risk-free. Assuming you have a normal life expectancy.
Scott: Now if you live longer, that's even better.
Pat: Then it's even better. If you live shorter, but because...that's why you use the joint and survivor because that is actually the one you're going to take is the joint and survivor benefit. Most likely, you might want to take one that provides, like, an 80% benefit to you and an 80% benefit to your wife, the same benefit to your wife at your age. So they gave you a bunch of different options, correct?
Pat: So the reason you're going to take that is because it's a 6% rate of return. That's why you're going to defer the monthly pension until age 65.
Scott: And you'd be better off, if you want that rental paid off, just say, "Well, I'll take these dollars." You can make the rental payments while you're still working. So I'm with Pat. You're still working, not retired. I would defer this because it's a 6% growth there. But when you do retire, if you want to take it at that time, then just half of those dollars pay the mortgage. Because if you take a lump sum and try to use it to pay off the mortgage, it's all going to be taxed to you. It'll be another, adding $102,000 on to the other income you have.
Pat: So that's why that is...
Scott: They tax like a fat cat.
Pat: But the real number...we call it the hurdle rate is, what kind of rate of return would I have to get on that $102,000 in order to match the same pension as you're going to get. And it's 6%, and that is a guaranteed 6% with a normal life expectancy. No one's going to be able to...If someone promises you that, an advisor or a so-called advisor, run away. There's no way in the world anyone can guarantee you a 6%.
Scott: Not in today's market.
Pat: Not in today's market. So I appreciate the call.