The
Big Question- Should I Take a Final Pension Loan?
Presented
By Joseph Cain
Finest
Financial Group
159 Route 304
Bardonia, NY 10954
877-FINEST3
Below is the annual cost per thousand dollars of shortage in your account. A
shortage is created by not contributing, taking loans during employment and/or
by taking a final pension loan.
Appointed After
8/19/85
Age
Cost
Age
Cost
40
57.82
40
78.44
41
58.58
41
79.03
42
59.38
42
79.64
43
60.23
43
80.31
44
61.12
44
81.02
45
62.07
45
81.78
46
63.07
46
82.60
47
64.13
47
83.48
48
65.24
48
84.43
49
66.43
49
85.46
50
67.69
50
86.57
51
69.02
51
87.79
52
70.43
52
89.11
53
71.93
52
90.56
54
73.52
54
92.10
55
75.21
55
93.76
56
77.01
56
95.52
57
78.92
57
97.41
58
80.96
58
99.44
59
83.13
59
101.64
60
85.43
60
104.04
61
87.90
61
106.66
62
90.53
62
109.52
63
93.34
63
112.66
For illustrative purposes only
For the purposes of this exercise, we will be taking a $100,000 final loan
creating a $100,000 shortage. If our
retiree is 40 yrs old and was appointed prior to
8/19/85
, he/she would have a reduction of $5782 annually. ($57.82 cost x 100 units of
$1,000) Had the member been appointed after
8/19/85
, the annual shortage would be $7844 or $78.44 cost x 100 units of $1,000). This
shortage is before federal taxes.
$5782 per year divided by 12 monthly payments = $481.83 month – 25% fed
tax = $361.37
Your pension is reduced by $361 per month and you put $100,000 into an IRA.
If you put the money under the mattress (not recommended) and simply withdrew
the $361 monthly to make up the difference, your money will last approximately
23 years. If however, you could earn the following rates of return, your IRA
will grow to the amount shown. Important consideration- If (when) you die, your
IRA goes to your chosen beneficiary. If you do not take a final loan but a take
a max pension and die, it’s over.
The math
40 yrs old. $100,000 into rollover IRA. Use the rate of return shown at left
to see what your account would be worth at age 60. We use age 60 for
illustrative purposes. You cannot withdraw money from an IRA until 59 ½.
(There are ways to withdraw penalty free and in some cases tax free, but
generally IRA money stays in your account until 59 ½) Also, using the interest
rates indicated, the amount at right is the amount you can withdraw from your
account starting at age 60 to replace the $361 per month reduction, without
touching principal.
Rate of
Ending
Monthly withdrawal
After 25 % Fed tax
Return
balance
after
age 60
4%
$219,112
$730
$548
5%
265,330
$1106
$829
6%
$320,713
$1604
$1203
7%
$386,968
$2257
$1693
8%
$466,096
$3107
$2330
9%
$560,441
$4203
$3152
So, our 40 year old, took a final loan of $100,000 which costs him/her $361
per month. That IRA was invested and received a rate of return of 7%. After 20
years, the IRA is worth $386,968. The client takes monthly after tax
distributions of $1693 to replace the $361 and when the client dies, the account
balance ($386,968) goes to the beneficiaries.
All of this assumes a constant rate of return which does not happen. Returns
will fluctuate. We are just trying to help you understand the concept.
Let’s go with someone older and hired after
8/19/1985
and therefore subject to the higher pension reduction rates.
Let’s use a member (gender neutral) age 46 hired after
8/19/85
. Each $1,000 shortage costs $82.60 so a $100,000 final loan costs $8260 per
year or $688 per month, minus taxes equals a cost of $516. We will use the same
criteria as above except this member only has 14 years until he/she reaches age
60.
The same $100,000 final pension loan is rolled over into an IRA.
Rate of
Ending
Monthly withdrawal
After 25% Fed tax
Return
balance
after age 60
4%
$173,168
$577
$433
5%
$197,993
$825
$619
6%
$226.090
$1130
$848
7%
$257,853
$1504
$1128
8%
$293,719
$1958
$1469
We are often asked “What if I take a max pension, no loan and invest the
extra ($361 or $516 in our example) into a Roth IRA”. The fact is that most
people lack the discipline to contribute consistently to a retirement vehicle
absent a payroll reduction program. But, some can, so let’s run the numbers.
Our first person left the $100,000 in the pension system and received the
extra $482 per month, paid the taxes and invests the remaining $361 into a tax
deferred account. After 20 years you would have accumulated the amounts at right
based on the interest rate at left. Please do not die before you have enough
time to save a bunch of money for your family.
$361 per month into a tax deferred account for 20 years results in:
4% = $132,405
5% = $148, 383
6% = $166,797
7% = $188,055
8% = $212,636
Our 46 year old investing $516 after tax dollars per month ends up with the
following after 14 years:
4% = $115,952
5% = $125,181
6% = $135,349
7% = $146,563
8% = $158,940
This does not help. If you were to die at any point in here, your
beneficiaries receive whatever you’ve accumulated to date. Obviously, a tax
deferred jump start is the way to go.
Having said all of that, if you are single with no children, or if for
whatever reason nobody is dependent upon you financially, take the money. Max
pension. No IRA, Spend it. When you die, it’s over. Have fun.
If you have questions, we would be happy to discuss this with you. Call us
toll free at 877-FINEST3
http://www.sidegig.com
© 1999 Sidegig.Com