October 13, 2017 - It doesn't come naturally for me to take issue with one of history's most prolific writers. But I recently went through a pension review process that exposes one area where a famous Irish author/poet/playwright's point of view can be challenged. At least partially.
"The only thing to do with good advice is to pass it on.
It is never of any use to oneself."
- Oscar Wilde -
Oscar Wilde's philosophy notwithstanding, I recently gave
myself some good retirement income advice which can only be viewed as useful. Very useful. Advice so good, in fact, I would be remiss if I failed to "pass it on" to others.
Maybe my story can help you, too.
In a world long ago and far away, long before I discovered my current life's passion of helping others secure their financial futures, I was a public schoolteacher and basketball coach. It was my first chosen profession out of college and what I thought I wanted to do for a living.
Like so many others with career wanderlust, though, I ultimately decided a change of scenery was in order and sought other opportunities in the business world. Not before logging 5.1 years of service credit in the State Teachers Retirement System (STRS), however. Just enough to qualify for a small pension.
Because my Final Average Salary (FAS) was so comparatively low and my service credit just above the minimum, my projected age 65 Single Life Annuity was only $1,303 per year.
In the ensuing years since I left teaching, because I could focus on other pension, 401(k) and SEP IRA opportunities as my career unfolded, my school pension wasn't anything I gave much thought to. In the back of my mind, while I knew it was there, I accepted it wasn't going to be the retirement income solution to all my dreams.
But while it's easy to be dismissive of a retirement projection that seems inconsequential compared to Social Security and other anticipated retirement cash flows, wise future retirees will always want to do everything they can to maximize their guaranteed future income and I'm no exception. "It all adds up," as they say.
So, I challenged myself to see if I could find a better option.
Turns out, after a little research, I walked away from my self-counseling session pleased with what I discovered.
Although I'd never do this with any client other than myself, I'm taking the liberty of sharing with you my own personal Annual Statement from my teaching days of yore. Here you can see the anticipated $1,303 per year beginning at age 65 and the account value of $40,484.91.
One's Account Withdrawal Value is the lump sum value of the pension which is available for immediate withdrawal without penalty after age 59 1/2. These funds can also be rolled over into another retirement account for individual investing purposes or converted to a fixed or indexed annuity outside of the plan.
This particular 401(a) plan never offered any alternative investment options. While all retirement plans have similar features, each one is unique and participants are bound by the law and the rules of the plan that govern the one they're in.
Putting on my Retirement Income Certified Professional® hat, I performed a comprehensive review of the guaranteed income solutions available to me as a licensed and appointed agent in order to perform a true "apples to apples" comparison.
Simply put: If I could find something commercially available for $40,484.91 that would pay MORE than $1,303 a year, why wouldn't I initiate a transfer?
That's when I got the pleasant surprise.
By rolling my account balance into an income annuity with guaranteed minimum withdrawal privileges, I discovered I could
more than double
my guaranteed minimum annual income to $2,669 per year for as long as I live. The contract, issued by a highly rated life insurance company, also carries the added bonus of a death benefit should I die prematurely. A feature my school pension lacked.
Do nothing and receive $1,303 a year for life.
If I die prematurely, my beneficiaries receive nothing.
Out of pocket cost to me = $0
Roll my balance into a life annuity that pays a guaranteed $2,669 a year for life.
If I die prematurely, my beneficiaries receive a death benefit.
Out of pocket cost to me = $0
I also considered an "apples to oranges" comparison, Option C, where I would roll my balance into an account of managed funds and deal with distributions later. But having already survived The Great Recession and with the stock market at an all-time high, I never seriously considered this alternative. If I were 30 or 40 years old maybe. But as one gets closer to retirement and the time horizon until withdrawal of assets decreases, conservation of funds becomes ever more crucial and a shift toward secure, guaranteed income ever more prudent.